Legal Issues of Online Raffles for Nonprofit Fundraising

By Lee Hall, J.D.

Legal Issues of Online Raffles for Nonprofit Fundraising

By Lee Hall, J.D.

A raffle can generate buzz and revenue for a charity. It can draw from an especially large pool of ticket buyers if it's accessible online. Here's the rub: once your charity announces a raffle, your nonprofit faces legal compliance issues. Understanding the rules and the potential risks involved will protect your nonprofit from such issues.

Woman looking at laptop that says "charity" on it

State and Federal Levels of Regulation

Most states have anti-gambling provisions, but some make exceptions for charitable raffles. That said, the raffle must follow strict rules to qualify. Your charity might need a permit or a dedicated bank account for game proceeds. Your state might limit the permissible uses for the proceeds. You might even trigger certain state laws pertaining to employees involved in the fundraising or need to submit an application including the results of a criminal history check on key people in your charity. Your state-specific association of nonprofits can shed light on state requirements.

As for the federal rules, organizations exempt under section 501 of the Internal Revenue Code should review comprehensive guidance from the Internal Revenue Service (IRS) on games. Ensure your nonprofit's board looks it over it before running games through any channel. Your charity also needs an employer identification number (EIN) to deposit the taxes we'll discuss below.

Federal Tax Forms for Raffle Winnings

First, note that people who donate prizes to a tax-exempt charity may take a deduction for the interest in pieces of property but not services. The donor may base the write-off only on the taxpayer's basis in the property—not fair-market value.

Prize winners may not consider their game costs tax-deductible. They are effectively paying money in exchange for donated goods.

Form W-2G

Nonprofit entities must report raffle prizes of at least 300 times the price of the winning wager if the prize value is more than $600 (less the amount paid for the ticket).

The charity must withhold 25 percent from the winnings if the total exceeds $5,000. Unless the charity pays its taxes and covers the winner's taxes as well, the winner must pay the charity 25 percent of the fair-market value of any non-cash prize (less the amount paid for the ticket).

Use Certain Gambling Winnings (Form W-2G) to show the prize value and tax paid. File Form W-2G by the last day of February of the following year, and issue Form W-2G to prize recipients by January 31.

If the charity does not obtain the winner's tax ID (e.g., Social Security number) on a taxable raffle prize, it must withhold 28 percent of its raffle income as backup withholding.

Form 945

A nonprofit must report and remit the income it withholds using Annual Return of Withheld Federal Income Tax (Form 945) by January 31 of the next year. This is separate from the payroll withholding form. Mark the Form 945 box on your tax deposit coupon.

Form 5754

A raffle winner should fill out Statement by Person(s) Receiving Gambling Winnings (Form 5754), identifying who will take the winnings and how much each will receive if the recipient will share or transfer the winnings. The nonprofit files Form W-2G using this information and retains Form 5754 for four years.

Even though many nonprofits are tax-exempt, income from a raffle is taxable because the activity itself is not related to the nonprofit's purpose. The IRS provides detailed, must-read instructions to guide the filing of the above forms for this taxable income.

Knowing the Rules

The Federal Trade Commission has intervened in sweepstakes targeting people considered vulnerable (e.g., elderly people) or involving some element of trickery. Use caution when your donor/player base may have a vulnerability. Always make every element of your game transparent.

Some lawyers advise nonprofits to draft detailed game terms and even have winners sign liability releases, tax rule sheets, and affidavits of eligibility. Online platforms could ultimately facilitate this sort of agreement making.

For now, running a charity raffle is complicated, and your nonprofit must ensure only eligible people (such as state residents) participate. Online activity exposes any errors to a wide audience. It is important to know the rules, and seek legal expertise when needed.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.