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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.

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    Consider going back to committee that paid the prize and telling them this is a screw up. Maybe you can get them to distribute the prize properly before all of the reporting gets done. Work fast though, because Forms 1099 can go out any day now.
    – user32479
    Jan 4, 2016 at 21:19
  • If they already gave out the money, there's no chance they'll take it back and redistribute now. I don't think it would even be legal. From the committee point of view, zipzit signed a statement that entitles him to the money, they passed the hot potato and will not take it back unless someone forces them to admit wrongdoing.
    – littleadv
    Jan 5, 2016 at 6:24

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The committee folks told us

Did they also give you advice on your medication? Maybe if they told you to take this medicine or that you'd do that? What is it with people taking tax advice from random people?

The committee told you that one person should take income belonging to others because they don't know how to explain to you which form to fill. Essentially, they told you to commit a fraud because forms are hard.

I now think about the tax implications, that makes me pretty nervous.

Rightly so.

Am I going to have to pay tax on $3000 of income, even though my actual winning is only $1000?

From the IRS standpoint - yes.

Can I take in the $3000 as income with $2000 out as expenses to independent contractors somehow?

That's the only solution. You'll have to get their W8's, and issue 1099 to each of them for the amounts you're going to pay them. Essentially you volunteered to do what the award committee was supposed to be doing, on your own dime. Note that if you already got the $3K but haven't paid them yet - you'll pay taxes on $3K for the year 2015, but the expense will be for the year 2016.

Except guess what: it may land your international students friends in trouble. They're allowed to win prizes. But they're not allowed to work. Being independent contractor is considered work.

While I'm sure if USCIS comes knocking, you'll be kind enough to testify on their behalf, the problem might be that the USCIS won't come knocking. They'll just look at their tax returns and deny their visas/extensions.

Bottom line, next time ask a professional (EA/CPA licensed in your State) before taking advice from random people who just want the headache of figuring out new forms to go away.

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  • I'd appreciate the downvoters to explain what they are disagreeing with.
    – littleadv
    Jan 5, 2016 at 6:24
  • I understand. Unfortunately it was clear the prize committee wanted to reduce their overhead and hassle... I'm not going to do 1099 thing (that has other implications, including no SSAN). The students do have a work permit card, but this is clearly prize money. We think having me report the full $3000 income and pay taxes on it works best. The students get cash at the same after tax rate as I. The IRS gets their cut. I will go back to the prize folks and file a formal recommendation for the future.
    – zipzit
    Jan 5, 2016 at 8:29
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    @zipzit you got it. From tax standpoint, what you're doing is claiming the prize money for yourself, paying the full tax on it, and giving gifts to your friends at your discretion. Since it is below the gift tax exemption threshold, no tax forms are necessary, and they don't need to report it on their tax returns. Plain and simple, as long as you're willing to bear the tax on the full $3K (the amount of gifts you give to them is up to you, of course, from 0 to whatever you feel right).
    – littleadv
    Jan 5, 2016 at 8:34
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    @zipzit no difference. Never take tax advice from random people, be it your gardener, your employer or some random little advisor on the net that can't even spell his own nickname properly. When in need for authoritative opinion - only a licensed professional (attorney/CPA/EA licensed in your State) will do. While random people on the Internet can suggest you various directions to research on your own, the committee people suggested you doing something your own research was showing to be wrong, and you did it anyway... So...
    – littleadv
    Jan 5, 2016 at 8:36
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    @zipzit you did, but the better solution would be for your friends to give the committee their W8's, get their own chunk themselves, and pay no taxes on it because they're most likely exempt as foreign students. While your solution is reasonable within the limitations of the current situation, they end up paying your tax rate, which is likely higher than theirs. What's done is done, just keep in mind next time that if something tells you to do something that doesn't feel right - check with someone professional, get a second opinion.
    – littleadv
    Jan 5, 2016 at 8:47

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