Do You Have to Pay Taxes on Reward Money?
Understand the tax implications of receiving reward money. This guide explains how the IRS views such income and what's needed for accurate tax filing.
Receiving reward money often feels like a welcome surprise, but it comes with tax implications. The Internal Revenue Service (IRS) considers reward money to be taxable income. This means that whether you find a lost pet for a cash reward, win a local contest, or receive money for a tip to law enforcement, you are required to report that amount. The IRS’s broad definition of income is the basis for why most rewards are subject to federal, and often state, income tax.
The General Rule of Taxability for Reward Money
The basis for taxing reward money is Section 61 of the Internal Revenue Code, which defines gross income as “all income from whatever source derived.” This means nearly everything of value you receive, including prizes and awards, is considered income. The source of the reward, whether from a private individual, a company, or a government entity, does not alter its taxability.
This rule applies to both cash and non-cash rewards. If you receive property or services as a reward, you must include its fair market value (FMV) in your income. For example, if you win a car, you must report its FMV at the time you receive it. This can create a situation where you owe a significant amount of tax without having received the cash to pay for it.
Reward money is taxed at your ordinary income tax rate, which is based on your total taxable income for the year. The reward is added to your other income, like wages, and taxed according to the standard federal income tax brackets. A substantial reward could push you into a higher tax bracket, increasing the percentage of your total income paid in taxes.
Exceptions for Certain Awards
While rewards are taxable, a few narrow exceptions exist. These apply in highly specific circumstances, such as for certain achievement awards like the Nobel Prize or the Pulitzer Prize. For an award like this to be excluded from income, the recipient must meet strict criteria outlined by the IRS.
To qualify, the recipient must not have taken any specific action to enter the contest and cannot be required to render substantial future services. The recipient must also assign the prize money directly to a governmental unit or a qualified charitable organization before using or benefiting from it. If all these conditions are met, the prize money can be excluded from the recipient’s gross income.
Another exception applies to certain employee achievement awards for length of service or safety. These awards must be tangible personal property, not cash or cash equivalents. The exclusion is subject to dollar limits, up to $400 for one employee or up to $1,600 for all awards to an employee under a qualified plan, with any excess amount being taxable.
Tax Forms Associated with Reward Money
If you receive reward money of $600 or more, the payer is required to report it to you and the IRS. You will receive a Form 1099-MISC, Miscellaneous Information, the most common form for prizes and awards from non-employers. The amount of the reward will be shown in Box 3, labeled “Other income.”
Receiving a Form 1099-MISC means the IRS has been notified of the payment you received. The form includes information for both you and the payer. You must report this income on your tax return, as the IRS matches the payer’s information with your filing.
In some situations, other forms are used. If the reward is for services, you might receive a Form 1099-NEC, Nonemployee Compensation. An award from your employer that is not an excludable achievement award will likely be included in your wages on Form W-2.
Reporting Reward Income on Your Tax Return
To report reward income, transfer the amount from Box 3 of your Form 1099-MISC to the “Other income” line on Schedule 1 of Form 1040. You should also list the type of income, such as “Prize from contest,” next to the amount.
The total from the “Other income” line on Schedule 1 is carried over to the main Form 1040. This amount is added to your other income sources, such as wages, to calculate your adjusted gross income (AGI).
If you receive a substantial reward with no taxes withheld, you may need to make estimated tax payments. The U.S. tax system is pay-as-you-go, and a large amount of untaxed income can lead to an unexpected tax bill and underpayment penalties. Making quarterly estimated payments helps cover the tax liability on the reward and avoids a large payment when you file.