Grossing Up the Prize

Big prizes are exciting and can drive significant traffic to your promotion, helping you meet your KPIs. However, some winners may struggle to accept a large and expensive prize, like a trip to Paris or a new car, due to the tax implications of accepting such a prize.

The winner may not even be aware that the $50,000 car they thought they won isn’t really free to them – they actually have to pay both federal and (if applicable) state income taxes on it. So instead of receiving a free car, they could now have a tax bill of $17,000 (if they are in California) if they decide to keep the car. Suddenly, the excitement dissipates.

To address this concern, consider “grossing up the prize” if your budget allows. This involves providing additional funds to cover the taxes, making the prize more manageable for the winner. While there's no legal obligation for sponsors to do this, it can significantly enhance the winner's experience with your brand. By alleviating the financial burden of taxes, you create a more positive and memorable winning experience, avoiding the shock of a hefty tax bill later on.

Benefits for your Brand

Grossing up the prize offers several important benefits for your brand, including:

Grossing up prizes in a sweepstakes demonstrates a brand’s understanding and empathy for its consumers, fostering a sense of appreciation and trust. By contributing towards the tax burden of their prize, the brand creates a positive experience that resonates, encouraging future engagement. This thoughtful gesture reinforces the brand’s reputation as generous and customer-focused, leading to increased brand loyalty.

Prizes are more likely to be awarded to your initial winner so you can announce your winners in a timely manner, fulfill your prizes swiftly, and avoid delays related to alternate selection.

Entrants and winners are put on notice that a tax bill will be coming, which eliminates any surprise or disappointment that might arise from unexpected tax obligations. (Of course they are told this, but sometimes they only hear or read what they choose.)

By planning ahead and considering this, you can tailor your prize to your overall prize budget and offer winners a great package.

Approaches for Determining the Amount

How much do we need to offer? Great question! The good news is that there is not a specific amount mandated. Most winners will be appreciative of anything that is provided. At Realtime Media we are here to help you explore your options and provide guidance. Just ask us!

Here are some examples to illustrate different approaches:

Round Numbers:

Some sponsors like the whole prize package to come out to an even number, so they could give away a car valued at $48,000 and a check for $20,000 that may be used toward taxes – total Approximate Retail Value (“ARV”): $68,000.

Specific Budget:

Others may have a specific budget and may be deciding whether to offer a more value-priced trip for four people with no gross up for taxes or a more luxury trip for two people and back out a certain amount that may be used toward taxes, for the same overall investment in prizing.

Tax Impact Estimation:

Still others may want to really try to estimate the actual tax impact on the winner and cover as much as they can, within their budget.

There are formulas that can help with this, though they involve estimates and assumptions involved, given everyone’s financial situation is different. One simple method is to calculate 30% of the prize value. For example, if the prize is worth $10,000, a $3,000 gross-up check can be added for a total prize value of $13,000.

[Prize value] x .30 = Amount of Gross Up Check.

Prize + amount of check = total prize value.

There are methods that also factor in the taxes on the gross up.

The more complex and accurate formula takes into consideration that the winner will ALSO be taxed on the check / gross-up portion of the prize. Using the same theoretical $10,000 prize as above, we divide by .7 to get the total ARV of the prize. This assumes the same estimated 30% range.

Step 1. Calculate the total value of the prize:

[Prize Value] / .7 = TOTAL ARV of the prize

$10,000 / .7 = $14,285.71

The total value of the prize using this formula comes out to $14,285.71. To get the amount of the gross-up check, you need to subtract out the original prize value. With this calculation, the prize is $10,000 and the check is for $4,285.71 (or any close number that the sponsor wants to offer).

Step 2. Calculate the gross-up check:

[Gross-up Check] = [Total ARV of the prize] – [Prize Value]

$4,285.71 = $14,285.71 - $10,000

The reason the check is higher in this case than in the example above is that the formula accounts for the taxes on the gross-up and provides the most generous estimate of the amount to include. By grossing up the prize value, the prize itself is adjusted to cover the tax liability; the winner doesn’t have to pay taxes out of their own pocket.

Let us help you ideate great prizes and where desired and appropriate, assist you in “doing the math” to help determine whether to add funds for the winner to lighten their tax burden when accepting your prize and how to think about what the “just right” amount to offer may be.

Did You Know?

Here’s a little more about taxes and prizes:

Almost all promotion prizes are subject to taxation, even if they are very small, such as a $10 t-shirt. Winners are responsible for reporting winnings to the IRS as Miscellaneous Income.

If a winner is from the U.S. [if not, there are more nuanced rules] and if the prize is valued at $600 or more, the Sponsor is required to collect the winner’s social security number, to issue a 1099 related to the prize, and to report the prize value to the IRS. If Realtime Media is the Administrator of your promotion, we can likely help you with some or all of these responsibilities.

Conclusion

Grossing up a prize to provide extra funds that a winner may use toward the taxes that will come due on their prize from your contest or sweepstakes is a thoughtful and helpful way to encourage prize acceptance and make your winner feel well cared for. While you need not offer anything toward taxes, if you’d like to discuss options for doing so, Realtime Media can help!