Raffles are a great way to raise money for your non-profit. Selling the chance of winning a big prize pulls people into your donor base who may not otherwise be able to afford auction items.
Due to raffles’ proximity to gambling, however, fundraising raffles are subject to state and federal gaming regulations. Don’t let this scare you – thousands of non-profits run legal raffles every year. Just make sure you cross your t’s and dot your i’s.
Consult Your Lawyer
We’ll take this time to remind you that we do not provide legal advice. We recommend you procure legal assistance with your raffle. Gaming laws differ from state to state, and we obviously can’t cover every nuance here. Though it may raise the overhead of your event, a legal representative will minimize your exposure to legal risk.
Raffle vs. Sweepstakes
A raffle is generally defined as any scheme by which one or more prizes are distributed among persons who have paid or promised consideration for a chance to win such prize. The key phrase here is “paid or promised consideration.” The fact that participants must pay something to enter subjects raffles to gaming laws. Some non-profits avoid these laws by running a free-to-enter sweepstakes with a suggested donation.
Gaming license requirements vary by state and municipality. The retail value of the prize, ticket distribution scheme and the overall number of raffles you run each year can impact your need for a license. If you run just a few raffles each year, check to see if your state offers a special limited license which has lower fees and less stringent reporting requirements.
Many states outline basic laws for raffles and leave it to municipalities to draft their own ordinances. As such, it is possible you will apply for your license with your local government rather than the state government. For example, in Georgia, non-profits apply for their license with the county sheriff.
Applications are usually straightforward and fairly inexpensive (around $100). To get approved, your organization may have to meet minimum requirements like having 501(c)(3) status and being in existence for at least 2 years. Make sure you give enough time to get approved – at least 2 months.
The first thing to figure out is what gets printed on the ticket. The requirements, like most things, vary by locale and may include the following: Name of NPO, ticket cost, raffle license number, prizes awarded, date & location of the drawing, and the buyer’s name & contact info. You may also need to included certain legal statements like “You need not be present to win.” There are numerous ticket printing services with templates (e.g., Canva.com or TicketPrinting.com) which can serve as a good starting point.
When it comes to selling the tickets, think twice about selling tickets online. The reason is that it is difficult to prevent someone from out-of-state or a minor from purchasing a ticket, and your ticket-selling website must have certain safeguards in place (certain technology companies, like RallyUp, seek to lower your burden setting up a site). As of this writing, Alabama, California, Hawaii, Kansas, Utah, and Washington prohibit online raffles.
One more note about online raffles. The federal Wire Wager Act prohibits regular online gambling and for online gambling to provide regular and essential income to an organization. Thus, avoid running an online raffle with regularity.
Note: Taxes can be complicated. We summarized the key points below, but the IRS publishes a great document with examples in Publication 3079: Tax Exempt Organizations and Gaming. We highly encourage you to check it out.
Reporting on the Winner
If the fair market value of the prize is at least 300 times the wager (i.e., ticket price) AND the fair market value, minus the wager, is over $600, then you must file Form W-2G with the IRS and give a copy to the winner.
When the person receiving the prize is not the actual winner or is a member of a group of two or more people sharing the winning, have them fill out IRS Form 5754 and submit it to you. This form contains helpful information for you to fill out Form W-2G.
In addition to the above requirements, if the fair market value of the prize, minus the wager, exceeds $5,000, then you must withhold income tax at a 24% rate (as of this writing) and report it on Form W-2G with the winner’s signature. This is straightforward for cash prizes, but must also be done for non-cash prizes, like a car.
If it is a non-cash prize, the winner pays the organization the necessary tax. For this reason, it is very common for winners of non-cash prizes to reject the prize due to the tax burden. Some non-profits offer to pay the tax burden or provide a “cash-only option” so the winner is rewarded.
At year end, report the total amount of federal income tax withheld during the year on Form 945: Annual Return of Withheld Federal Income Tax. This will include all the taxes reported across all the Forms W-2G filed for the year.
Unrelated Business Taxable Income (UBTI)
Unrelated Business Taxable Income, or UBTI, is income earned by 501(c)(3) organizations that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption. Hence, UBTI is taxable. Unfortunately, income from raffles qualifies as UBTI and must be reported on IRS Form 990-T.
An exception to this rule is made for organizations where substantially all the work is performed by a volunteer workforce – just make sure to record hours worked by compensated and volunteer workers! For complete IRS rules, see IRS Publication 598.
For each federal IRS form you submit, there is likely a corresponding state form to submit as well. Consult your local tax laws to determine your requirements.
Keep Your Records
Always keep your records for your raffle for at least three years. This is a best practice if not a legal requirement. At a minimum, records should contain:
- An itemized list of all gross receipts
- An itemized list of all expenses (other than raffle prizes)
- A list of the prizes awarded and the names of any persons who wins prizes
- The number of participants in the raffles
- Hours worked by compensated and volunteer workers
- Copies of any license applications and IRS forms
Whew! We know that’s a lot to take in. If you can get your process down (and take careful notes), you can make raffles a major part of your fundraising efforts year after year.