Hosting an engaging raffle creates excitement that can be very lucrative for organizations. However, organizing a charity raffle isn’t always as simple as picking a prize and selling tickets. In the United States, 501c3 raffle rules and the varying charity raffle laws by state and locality demand careful attention. This guide will help organizations untangle the web of regulations, offer best practices, and optimize your nonprofit’s raffle fundraising success.
Please note that DoJiggy cannot offer professional legal advice. This blog content is for informational purposes only. Organizations should check with their State Attorney General’s office or tax professional to verify their eligibility to run fundraising raffles.
What We’ll Cover:
- Understanding 501c3 Raffle Rules
- 501c3 Raffle Rules: Unpacking the Details
- What Are the IRS Rules for Raffle Prizes?
- Withholding Tax on Raffle Prizes
- Is a Raffle Ticket Purchase Considered a Charitable Donation?
- Tax Implications for Your Generous Prize Donors
- Charity Raffle Laws by State
- Fundraising Raffle Best Practices for 501c3 Organizations
Understanding 501c3 Raffle Rules
In the US, the world of raffles falls under the umbrella of gambling and, as such, requires careful regulation. While not everyone is authorized to host raffles, they are permitted for qualified 501(c) nonprofit organizations. Here are the details:
- Who’s allowed to host a raffle? Only organizations with an established 501(c) nonprofit status may run raffles. This distinction is crucial in maintaining the charitable integrity of raffles.
- Where do the funds go? Every cent raised from a raffle must be sent directly to the hosting 501(c) organization, ensuring the funds are used for charitable purposes and that winnings are taxed appropriately.
- Who’s in charge here? While individuals may help to promote or sell tickets, the sponsoring organization must take the wheel and ensure the raffle fundraiser complies with all legal requirements.
501c3 Raffle Rules: Unpacking the Details
Organizing a charity raffle is a dance that comes with a specific set of steps. These rules must be adhered to for legal compliance:
- The event’s proceeds must solely be used for charitable purposes. This ensures the raffle aligns with the organization’s mission and benefits the intended cause.
- All winnings must be taxed appropriately. This means following IRS guidelines to avoid potential legal issues down the line.
- Detailed records of the income generated and the use of the funds are a must. Keeping precise records not only helps with legal compliance but also can improve future raffles based on past performance.
What Are the IRS Rules for Raffle Prizes?
Awarding a prize in a raffle isn’t the end of the journey. You may need to fill out IRS Form W-2G: Certain Gambling Winnings for each prize awarded. The purpose of this form is to report gambling winnings and any federal income tax withheld on those winnings. The requirements for reporting and withholding depend on the type of gaming, the amount of the gambling winnings, and generally the ratio of the winnings to the wager (which is the raffle ticket price).
Here’s when you need to get the IRS involved:
- The payout is at least 300 times the raffle ticket price. Things can get tricky here, so keeping accurate records is crucial.
- If the prize you award from a raffle is worth more than $600, and the cost of tickets was less than 1/300th of the prize’s value, then the group that ran the raffle needs to tell the IRS about the winnings by filling out a W-2 G form.
If your raffle tickets cost $50, and you award a car worth $20,000, the organization has to report this to the IRS on Form W-2G. This is because the car is worth more than 300 times the ticket price, and its value is more than $600.
So, the two things to check to determine your reporting requirements are:
- Is the prize worth more than $600?
- Is it worth more than 300 times the ticket price?
If the answer to both is yes, the organization must use a W-2G form to report it to the IRS.
Withholding Tax on Raffle Prizes
If you award winnings exceeding $5,000, the IRS requires you to withhold 25% of the winnings. This amount must be reported on Form W-2G. Remember that your organization may be held responsible for the tax if you fail to withhold correctly. This point is particularly important when running 50/50 raffles, as these can result in significant cash prizes.
Is a Raffle Ticket Purchase Considered a Charitable Donation?
What about the tax implications for your supporters? A tricky issue is whether a raffle ticket purchase is considered a charitable donation. Unfortunately, the IRS says no. Given the noble intent behind charity raffles, this might seem counterintuitive, but ticket purchases can’t be written off as charitable donations because there’s a chance of winning a prize with the purchase.
Some organizations ask supporters to consider an additional donation when purchasing raffle tickets. If no goods or services are received in exchange for the donation, this would naturally be tax deductible.
Tax Implications for Your Generous Prize Donors
Sponsors and local businesses often donate charity raffle prizes, allowing organizations to utilize more of the raffle proceeds. When an individual or business donates a prize for a raffle, the donation’s value is usually considered a tax-deductible contribution. The exact tax implications can vary based on the donor’s tax situation and the prize’s value, so it’s always advisable to consult a tax professional.
Check out our guide on the 30+ Best Raffle Prize Ideas (and How to Get Them Donated)
Charity Raffle Laws by State
Every state, county, and locality may have its own charity raffle laws that vary widely. Some states may permit charity raffles without reservation, while others impose stringent restrictions. Several states prohibit online charity raffles entirely. Many states require specific licensing; in others, only certain types of nonprofits may host raffles. Before you kickstart your raffle planning, it’s crucial to familiarize yourself with your state’s unique regulations to ensure compliance.
Read more on US raffle laws by state.
If your organization is not eligible to run a raffle, you can consider a charity sweepstakes.
Fundraising Raffle Best Practices for 501c3 Organizations
With proper planning, attention to the rules, and a bit of creativity, your nonprofit raffle can be an exciting, impactful event.
Now that we’ve gotten through the legalities and tax implications, let’s dive into some best practices to make your organization’s raffle a smashing success:
- Clear Communication: Clearly communicate the terms of your raffle, including prize details, drawing date, and ticket price. Transparency fosters trust and encourages participation.
- Prize Appeal: The more enticing the prizes, the more tickets your group will sell. Cash prizes are always a hit, but unique or creative prizes that resonate with your audience can be just as successful.
- Promote Widely: Use a raffle website and take your charity raffle online. Leverage all channels – social media, emails, newsletters, press releases, word-of-mouth – to promote your raffle. The wider your reach, the larger your potential participant pool.
- Show Gratitude: A simple thank you can go a long way. Always remember to thank your participants, prize donors, volunteers, and everyone who helps make your event possible.
Fundraising raffles can be a thrilling way to raise funds and engage your community. But, they also require careful planning and a thorough understanding of the 501c3 raffle rules. Stay informed, plan carefully, and consult legal experts to ensure a smooth and successful raffle event. Remember, at the end of the day, the goal is to have fun while raising funds for your cause!