Businesses often use contests, awards, and promotional giveaways to attract customers and reward employees or partners. While these incentives can boost engagement and brand loyalty, they can also trigger IRS 1099 reporting requirements. Failing to report correctly can lead to penalties and unhappy recipients at tax time.
When Prizes and Awards Are Taxable
The IRS considers most prizes and awards taxable income to the recipient — whether they are cash, gift cards, merchandise, or travel. The general rule:
- If the fair market value (FMV) of a prize or award is $600 or more in a calendar year, you may need to issue a Form 1099-MISC to the recipient.
- For non-cash prizes, the FMV is used to determine reportable income.
Common Examples That May Require 1099 Reporting
- Cash Prizes – Contest winnings, sweepstakes, or incentive bonuses.
- Merchandise or Equipment – Electronics, appliances, or branded gear given as part of a promotion.
- Travel Packages – Vacation getaways, cruises, or hotel stays awarded through contests.
- Gift Cards or Certificates – Treated the same as cash for IRS purposes.
How to Determine the Reportable Value
- Cash Prizes: Report the exact amount awarded.
- Non-Cash Items: Use the FMV on the date the prize is awarded.
- Discounted Items: If given at a reduced price, report the difference between FMV and what the recipient paid.
Collecting Recipient Information
To file a 1099, you need the recipient’s legal name, address, and taxpayer identification number (TIN).
- Form W-9 – Request before awarding the prize to avoid delays.
- Without a TIN, you may be required to withhold 24% for IRS backup withholding.
Special Cases
- Employee Awards – Prizes given to employees are generally reported on Form W-2 and subject to payroll taxes, not on a 1099.
- Charitable Organizations – If a prize is awarded to a tax-exempt nonprofit, reporting rules may differ, but documentation should still be kept.
- Multiple Prizes in a Year – The $600 threshold is cumulative; smaller awards add up.