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I won a hackathon, the prize was $2000 in the form of a check made out to me. I was part of a 6-person team and we split the prize money as follows:

  • $300 to each team member (including me)
  • additional $200 to one member (not me) whose hardware broke in service of the project

I cashed the check myself and paid each person out-of-pocket with personal check. I got a 1099-MISC for this with the amount listed as "Other Income". How can I avoid owing taxes for the full $2000?

On Turbo Tax, if I report this income as a prize money it does not offer any options for related deductions so I'm thinking maybe I should list it as a job try to deduct the $1800 I paid out to other people? Any advise is welcome here, as my tax debt is currently more than my share of the winnings.

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    You should send your teammates a link to this question, and ask them which of these options they like the best. :) – Ben Miller Apr 21 '16 at 12:06
  • On the numbers you gave, you paid $1500 to the others not $1800. – dave_thompson_085 Apr 22 '16 at 2:50
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I would deduct all the other payments out as subcontractors, but I typically have all the paperwork and entities set up to make that applicable. In Turbotax I do this with as subcontracting expense under my business entity, but for the IRS the categories of the deductions do not matter

This isn't tax advice, it is what I would do, and how I would defend it under an audit. Everyone else that was paid also needs to report it. The lack of reciprocal filing (you deducted income paid to someone else, the person did not report that income, or reported it in a different way) is a number one thing to trigger IRS scrutiny. Although accurate, you need to be aware that you are shifting the tax burden away from yourself, by deducting it.

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    +1 perfectly reasonable answer for a change. How did you hack CQM's account? I'd add that the OP can send 1099-MISC downstream to the recipients even though the amount is below the $600 threshold. – littleadv Apr 21 '16 at 5:28
  • @littleadv Since he is below the $600 threshold, he should only file 1099-MISC for 2015 if he enjoys extra paperwork, hates his friends, and wants extra attention from the IRS. – Ben Miller Apr 21 '16 at 10:34
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    @BenMiller or wants a paper trail... – littleadv Apr 21 '16 at 16:10
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A simple option is to ask your teammates to send you their portion of the tax bill. This option makes everyone's taxes easier, especially since it is very likely that they have already sent in their tax returns.

  • wouldn't that count as 'income' for 2016? although since everyone will be sending him tax on $200, there won't be any 1099 thresholds met, so it could be under the table and OP could use their own discretion here. – CQM Apr 21 '16 at 3:08
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    @CQM Your answer is more correct, but I think you would have a hard time convincing 5 people that they need to amend their returns to include an extra $300 of undocumented income. Asking them to send you some money to help pay the tax bill would probably be easier for them to agree to. I would not call it income for 2016. If asked, I would call it a gift, which was a partial return of the gift given to them in 2015. The IRS likely won't care, as long as the entire amount gets taxed by somebody. In my unprofessional opinion. – Ben Miller Apr 21 '16 at 3:20
  • Yes, this is the simplest answer, if not the most technically correct, IMHO! The problem should be prevented in the future by the OP deducting taxes before distributing winnings, or all parties agreeing on how to file the income. – jkuz Apr 21 '16 at 16:17
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I would just take $2000 and multiply by your marginal tax rate, weight that between the 5 other people according to their share of the prize money and ask them to give you that.

From your question it seems like you all have a good working relationship, I'm sure the other partners would agree to that. I think it's the simplest solution that is also fair and equitable. Basically, you pay the tax on 2000 and they pay you back for their share of the tax. Much easier than trying to pass it through your tax return for 5 separate people for a minimal amount of $'s.

In hindsight, the best way to do it would have been to 1099 the person with the lowest marginal tax rate for the year to minimize the total tax paid on the 2000. Probably only would've been a few dollars difference but still the most efficient way to do it.

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