A prize is income, and the IRS treats it as ordinary taxable income to the winner — not a gift. The federal overview on the federal baseline states this plainly: winners are responsible for any tax on what they receive, and the sponsor generally must report prizes of $600 or more to the IRS on Form 1099-MISC.
The $600 threshold is a reporting line, not a tax-free line. A winner who receives a $50 prize still owes tax on it; the sponsor just isn't required to file a 1099 for amounts under $600. Build the tax disclosure into your official rules so winners aren't surprised, and collect the winner information you'll need to issue forms.
Sponsors should also decide whether to gross up — pay the tax on the winner's behalf — for high-value prizes, because a winner who owes tax on a non-cash prize may have to come up with cash. The prize calculator helps you total award values and counts so the 1099 math is clear before you launch.
State income tax can apply on top of federal, and the rules differ by state. While this guide focuses on the federal baseline, your official rules should point winners to confirm state obligations. The compliance checklist includes the tax disclosure as a required rule item.
Net effect: treat tax as a planned line item, not a surprise. Disclose it, capture winner details, file the 1099s you're required to, and the prize award closes cleanly for both sides.