It’s very exciting to win a prize or receive a free gift, especially from one of your favorite brands. DSW and Victoria’s Secret, for instance, give away freebies like cute tote bags, fuzzy blankets, or sweet-smelling perfume if you spend a certain amount of money.

But what if you received a bill in the mail later for these “gifts?” Would they still be as exciting? Probably not, right?  

You don’t have to be kept in the dark as a consumer. Here’s what you can expect when it comes to receiving freebies, prizes, or gifts from a company.

Do You Have to Pay for Something You Won?

person happy because they won something

According to the Federal Trade Commission (FTC), if a prize is real and credible, then it should be totally free. You should never be charged for entering the contest or winning.

Now here’s the tricky part. The Internal Revenue Service (IRS) may charge you taxes on certain gifts, especially cash or premium prizes that are worth at least $600. So let’s say you win an all-expenses paid vacation to Hawaii, or a brand new Ford Mustang. In those cases, you would be responsible for paying the taxes on those prizes.

How Are Prizes Taxed?

how are prizes taxed

You may receive tax forms for prizes under $600. In fact, the U.S. federal government considers prizes, awards, and raffle as income, regardless of the amount.

With that in mind, don’t be surprised if you end up having to pay taxes on a premium freebie or gift you received from a company. The brand’s not doing it to be mean or greedy. It’s the law!

How Much Can an Employer Give as a Gift to an Employee?

how much can an employer give as a gift to an employee

Around the holidays, many companies treat their team to employee gifts. But be warned – you may end up paying for these “free gifts” down the road.

Employee gifts are taxable, both in terms of income tax and employment taxes. Each company can deduct business gifts of up to $25 per person per year. This is why you may see gifts coming out of your paycheck or showing up on your W2 form at the end of the year.

What Should I Do If I’m Charged for a Free Item?

The last thing you want is to end up unknowingly paying for freebies. You should never see a charge on your credit card statement that you didn’t authorize. Be sure to read the fine print before you accept a prize or gift.

If you believe you’ve wrongfully paid for an item that was advertised as free, you should:

  1. Ask for a refund from the store or company that charged you.
  2. Dispute the charge with your bank within 60 days.
  3. Report it to the Federal Trade Commission (FTC) at reportfraud.ftc.gov.
  4. Contact an attorney for significant charges.
  5. Tell your friends and family so they can avoid any prizes or gifts from the wrongful company.

Final Thoughts

The easy answer is companies can’t charge you for a “free” item upfront, but they can charge you for the taxes later. It ultimately depends on the prize or gift you’re receiving.

If you win a graphic shirt in a social media contest, for instance, you probably won’t be getting a tax form. However, if you win a new car on a game show or get a diamond watch from your job, you’re definitely going to be charged taxes by the IRS.

It’s your job to always know your rights as a consumer. Take a look at the Federal Trade Commission’s website for more information, and don’t be shy about asking plenty of questions about the free items you’re receiving from companies.

References

Federal Trade Commission Consumer Advice. (2021 May). Fake Prize, Sweepstakes, and Lottery Scams. Retrieved from, https://consumer.ftc.gov/articles/fake-prize-sweepstakes-lottery-scams

Howard, E. Rathburn, P. (2022, March 8). Winning the Lottery: Dream or Nightmare? Retrieved from, https://www.investopedia.com/managing-wealth/winning-jackpot-dream-nightmare/

Nerd Wallet. (2020, June 18). Do I Have to Pay Taxes on Game Show Winnings? Retrieved from, https://www.nerdwallet.com/article/taxes/pay-taxes-game-show-winnings

Federal Trade Commission Consumer Advice. What to Do If You’re Billed for Things You Never Got, or You Get Unordered Products. Retrieved from, https://consumer.ftc.gov/articles/what-do-if-youre-billed-things-you-never-got-or-you-get-unordered-products

Marks Paneth. Getting Around the $25 Deduction Limit for Business Gifts. Retrieved from, https://www.markspaneth.com/blog/2017/getting-around-the-25-deduction-limit-for-business-gifts

Grauschopf, S. (2022, March 31). What to expect After You Win Sweepstakes. Retrieved from, https://www.liveabout.com/what-to-expect-after-you-win-sweepstakes-904537

H&R Block. Taxes on Prize Winnings and More! Retrieved from, https://www.hrblock.com/tax-center/income/other-income/taxes-on-prize-winnings/ Wright Ford Young & Co. Giving Gifts to Employees? IRS Wants Its Share. Retrieved from, https://www.cpa-wfy.com/giving-gifts-to-employees-irs-wants-its-share/

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