Keep 1099 reporting requirements in mind when awarding prizes
Many businesses engage in special sweepstakes or other forms of promotion marketing to create more visibility to their brands. While this is a great way to improve lead generation and conversion, companies must consider the tax information reporting obligations.
This is not only important so businesses avoid IRS penalties by submitting the appropriate forms, but also so companies can maintain their reputation, as indicated by Verrill Dana LLP, a law firm. If the value of the prize meets or exceeds $600, the business must issue a 1099-MISC form to the winner during the following tax season so the recipients can pay tax on the item. While this may seem simple enough, the company must consider what those taxes amount to when selecting prizes.
The source cited the example of a family winning home improvements. The renovations amounted to $529,000, according to Brett Beveridge, a senior counsel for Turner Broadcasting System. Given the value of the prize, the family couldn't pay the tax bill, and the business received a lot of negative publicity as a result of the situation.
Avoiding a public relations fiasco
Because of situations like the one referenced above, companies like Apple and NASCAR have strict rules about companies giving their products away as gifts, Verrill Dana explained. While NASCAR permits its tickets to serve as prizes in only certain cases, Apple does not allow this for its iPads and iPods.
Beveridge noted companies may be tempted to give away prizes with higher value because they believe these items will make the promotion more successful. However, more affordable prizes are a better route, as businesses can also suffer negative publicity if winners refuse the prizes because of the high tax bill. To help prevent PR debacles, the expert said companies should clearly note the tax reporting requirements of accepting prizes with the other contest rules.
"Get the winner's information up front," Beveridge wrote. "Make sure the contest rules clearly state that the winner is responsible for all taxes. Before the prize is awarded, have the winner sign a statement agreeing to any liability for any taxes and have the winner provide his or her full name, address and Social Security number."
Not only does this help businesses prevent any reputational damage, but it also ensures they have the right tax information when filling out the 1099-MISC form to send to winners.
For more information on Form 1099-MISC, check out our education section.