I'm a software developer. I just visited a large hackathon in Las Vegas. Its a contest where different folks bring ideas to make / design something unique. The event has sponsors, and give money as prizes for different challenges. We formed a five person pick up team, and our idea won us a $5000 prize! ($1000 each). Two of the folks on our team are international students, currently living in Los Angeles.
The prize committee asked us to fill out IRS W-9 forms The forms they gave us were one sided only. As I now check the IRS site, I see the actual form has very informative pages 2,3 and 4. According to page 2, the international students should have filled out a Form W-8 or Form 8233. The committee folks told us the best thing to do was have the team leader (me) take $3000 and then pay those folks (2 x $1000 each) from those winnings. So that's what we did.
As I now think about the tax implications, that makes me pretty nervous. Am I going to have to pay tax on $3000 of income, even though my actual winning is only $1000? As an independent freelance software developer, I report as a self employed business at tax time. That does give me some flexibility here.
Can I take in the $3000 as income with $2000 out as expenses to independent contractors somehow?
What should I do? I'd like to understand my options before giving the students their prize money.
Edit / Update:
I want back and reviewed my taxes for the past few years, to closely review my effective tax rate. So I told the students the details, and I'm going to accept the $3000 income responsibility, and allow them to piggy back on my current tax rate. I withheld X0% from them (i.e. paying them $X00 each) and I will reimburse any remainder after April 2017.
It's not a perfect solution, but the IRS will definitely get their cut.