Are taxes withheld, that are identified on the W2-G, benefit the "Payer" or the "Winner" as it relates to the overall taxable income, when filing taxes?

[bigherm8h]

I won a car in a raffle.  The payer wants me to pay 25% of the value in federal taxes withtheld.  How does this benefit me?

[AmyC]

Don't pay them but do pay the IRS. You must list all prizes as income along with any taxes paid on your return. If you won a car, the value of the car will go on your return as income. You certainly must pay taxes on the value of the car. Depending on your tax income bracket after adding the value of the car, you need for the tax due to be less than $1,000 to avoid penalties.

If 2021 won the car, all you can do is add the car to your income and pay the tax bill.

If 2022 won the car,  you should determine your tax liability and make estimated payments.

1. Please use Tax bracket calculator to determine how much you will owe in taxes after adding the value of the car 
2. Make estimated payments, see Form 1040-ES, Estimated Tax for Individuals.

[bigherm8h]

Okay, a W2-G was completed for income earned for 2022.  The value of vehicle is shown.  The taxes withtheld is shown.  Since it is non-cash winnings, does the Payer remit payment (the taxes withtheld) to the IRS?  I am being told by the Payer that the winner remits the payment of taxes withheld to them.  I assumed they would need to submit that payment to the IRS.

[DawnC]

The W-2G says 2022, not 2021?   Did you win it from a tax-exempt organization?   If so, they would collect the tax and remit the withholding and then report it to you on a W2-G.   Then you get credit for the withholding when you file your tax return.  

If you won the raffle conducted by organizations exempt under section 501 of the Internal Revenue Code.    A tax-exempt organization that sponsors raffles may be required to secure information about the winner(s) and file reports on the prizes with the Internal Revenue Service. The organization may also be required to withhold and remit federal income taxes on prizes.

For noncash prizes, the winner must pay the organization 25% of the fair market value of the prize minus the amount of the wager.   

Example 3: Jason purchased a $1 ticket for a raffle conducted by X, an exempt organization. On October 31, 2004, the drawing was held and Jason won a car worth $10,000 (fair market value). Because the prize exceeds $5,000 and the fair market value of the car is $10,000, the tax on the fair market value of the prize is $2,499.75 [($10,000 minus $1 ticket cost) x 25%)]. Jason must pay $2,499.75 to X to remit to the IRS on his (Jason’s) behalf. X would indicate the fair market value of the prize ($10,000) in box 1 and the amount of the withholding tax paid ($2,499.75) in box 2 on Form W-2G.

From:  Tax-Exempt Organizations and Raffle Prizes - Reporting Requirements and Federal Income Tax Withholdi...

[Opus 17 · Accepted solution]

@bigherm8h 

If you have a W-2G with a withholding amount shown, that means that that amount has been sent to the IRS in your name. The IRS gets a copy of the W2-G and the organization must also furnish a form W3-G to the IRS, which is a summary of all the W-Gs that they have issued throughout the year.

You will enter the W2G as shown. The value of the winnings, in this case a car, will be added to your taxable income, and you will get credit for the withholding. If the withholding was not enough, the extra tax will be subtracted from your refund or added to the tax you owe. If the withholding was more than your tax, the extra will be added back to your refund.

[bigherm8h]

Thank you for putting it in plain language.  I read the IRS literature and it left out those little details.  Much appreciated.

[bigherm8h]

Yes, it is for 2022.  I am not sure of their tax exemption status.  They are a local volunteer Fire Department.  All of their raffle literature indicated winners were responsible for all taxes for prizes over $5000.  I just assumed paid the IRS vs. the Payer (raffle organization).

On a related note.  The IRS website says the tax withheld for winnings is 24% not 25%.  Can you confirm?  In my case, the Payer withheld exactly 25%.

Any issues for me paying in more taxes than required???

[Opus 17]

@bigherm8h 

The mandatory withholding rate used to be 25%. I suspect (I did not verify this) that when the tax reform act of 2017 reduced the marginal tax rates, the IRS reduced the mandatory withholding amount to 24% at the same time.  (The tax rate that most middle-class taxpayers pay was reduced from 25% to 22% or 24%.)  If the organization‘s accountant is not up to speed and withheld extra money, that just means that you are giving the IRS a small interest free loan until tax season. It does not change the tax that you will eventually owe on the prize, and whatever amount was withheld is credited to you on your tax return.