Online fundraising is the most effective way to reach the masses, and online raffles sure seem like they require little effort. But nonprofits beware: raffle events are regulated by gambling statutes and unfortunately, these vary not only state by state, but also county by county.
Raffles require some sort of consideration in exchange for a chance to win a prize. In some cases it is financial, and in some cases it is informational. If your organization requires participants to give information that will not just be used for registration you’re throwing up a potential red flag. Because online gambling is illegal in many states you will want to make sure you are cautiously observing federal and state regulations for your fundraising event, especially if you are opening it up to residents all over the U.S. Using phrases like “void where prohibited” will offer you some coverage, but only some.
It’s not just the state regulations that you have to contend with either. Federally, nonprofit organizations are required to report raffle prizes if the payout is at least 3 times the amount of the wager, and the amount of the prize minus the wager is over $600. The nonprofit must file a Form W-2G with the IRS and give a copy to the prize winner. The winner is required to report the prize income as well.
For winnings over $5,000 the nonprofit must withhold 25% of the income and report the amount to the IRS. If the prize is a non-cash prize and the fair market value exceeds $5,000 the winner must pay 25% of the value to the nonprofit (minus the cost of the wager). The winner must also submit their social security number or other tax ID number to the nonprofit, if they do not then the nonprofit must withhold 28% of the prize income. This is referred to as “backup withholding”.
The IRS considers the income from raffles to be unrelated business income. Even though the money may ultimately go toward funding the nonprofit’s exempt programs, running a raffle is not substantially related to its exempt activities. The nonprofit is required to pay tax on that portion of income.
So though it may seem like low effort in the forefront, it may not be worth it in the end. There are federal restrictions on a business that regularly engages in online gambling or raffles so if you do decide to engage in one now and then it is recommended that you run them sparingly.
(Compiled from Online Raffles Are Chancy, At Best, Richard H. Levey, Legal Issues of Online Raffles for Nonprofit Fundraising, Elizabeth Rayne, and irs.gov)