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I attended my first ever Hackathon and won a cash prize.

I plan to donate the money.

I can receive the prize money in my own name, then donate it to a tax-exempt charity and get an income tax deduction.

My question: If I do that, will I end up out-of-pocket due to self-employment taxes?

Is the correct answer:

  1. Self-employment taxes do not apply to Hackathon prize money, even though personal income tax does. Therefore, the charitable tax deduction (balancing out the taxable income) should make this a net-zero transaction for me.

  2. Self-employment taxes do apply to Hackathon prize money, but only after deducting the charitable gift, making this a net-zero transaction for me.

  3. Self-employment taxes do apply to Hackathon prize money, and I'll still end up paying them despite giving all the money away and getting a full income tax deduction for the charitable gift.

I suspect #2, but haven't found a definite answer despite some searching.

Thanks!

  • What is your profession, if any? And are you itemizing your deductions? And, what form are they giving you to report the winnings on? – Joe Mar 20 '16 at 3:51
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    (I'm relatively new to the US tax context sorry.) I think the W-9 is so they can then give me a 1099-MISC. – Usas Mar 21 '16 at 11:38
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Generally, prize money is miscellaneous income, reported on line 21 of your 1040 and not subject to self employment tax. See IRS publication 525 for more details; under 'Prizes and Awards', they give an example of winning a photography contest.

Now, there are a couple of exceptions. If your main occupation is participating in contests such as this - or you do it sufficiently that it could be considered such - then it may be considered something you should pay self employment taxes on. If it's your first one - you're fine.

Also, it would have to be something that doesn't look like work for me to be confident it's self employment income. I'm not sure that winning the Netflix prize for improving on their algorithm by 10% wouldn't run the risk of being considered sort of employment. I'm not a tax advisor, but in that case I would hire one to be sure. I could imagine companies abusing 'prizes' otherwise to get out of paying employment taxes...

  • In addition, I'm sure the OP could ask the Hackathon to donate the price money directly to charity, avoiding the need to mess with taxes at all. – farnsy Mar 20 '16 at 19:41
  • @farnsy I'm not sure that is allowed actually. Only certain prizes allow that I believe (though I'm not an expert). The prizes that allow that usually are ones you don't enter for I believe. – Joe Mar 20 '16 at 19:59
  • @famsy Good idea, and the organizers have already said that's an option. There's an unusual complication with the charity I want to give to, where it would be vastly simpler to just give the money directly myself if possible. I know, strange, but the case. – Usas Mar 21 '16 at 11:32
  • Joe's answer is correct (thanks for pointing me in the right direction), the IRS publication he referenced confirms that line 21 of the 1040 is the correct place to declare it, and for anyone else new to self-employment taxes as I am, Joe's answer led me to the 1040 Self Employment attachment which defines what income is subject to self-employment tax. irs.gov/pub/irs-pdf/f1040sse.pdf – Usas Mar 21 '16 at 11:59
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Yes, #2: the Hackathon prize money counts as income, but a donation to charity is a deductible charitable gift.

For more background and a few scenarios:

http://people.opposingviews.com/deductible-donor-donates-prize-2517.html

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    To be clear, you are saying this prize requires paying SE (i.e. Social Security) tax? – JoeTaxpayer Mar 19 '16 at 23:35
  • Sorry if I'm missing something, but I don't see how this addresses the question of self employment tax in relation to the prize? Joe's answer above does. – Usas Mar 21 '16 at 11:51

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