A common question people have about taxes is whether prize money is considered taxable income. And further, whether athletes pay tax on prize money. Here’s a look at how the IRS and the state of California classify prize money when it comes to taxes.

Prize money is considered any money received from awards, raffles, lottery winnings, and any other type of contest. Generally, the IRS taxes prize money as ordinary income. This means that whatever percentage you are taxed for your regular income, that same rate will apply to the prize money you received.

Additionally, if you live in a state that imposes state income tax (such as California), you will be taxed on your winnings from the state as well.

Keep in mind that receiving a large amount in prize money may potentially put your earnings at a higher tax bracket. It’s also important to note that just like income tax, prize money must be claimed on your tax return, and winnings must be noted on IRS Form 1099-MISC the year it was received.

Do athletes pay tax on prize money?

Another common question with respect to prize winnings is whether athletes, such as pro golfers, pay taxes on their prize earnings. If an athlete is a resident living in the United States, they must pay federal income tax on prize money they earn in the country and outside the United States. Like other prize winnings, athletes must also pay state income tax on that money if they live in a taxable state. Many pro athletes choose to live in states that do not have state income tax (e.g. Texas, Florida, Nevada) in order to save hundreds of thousands of dollars each year.

Professional athletes are likely to incur many expenses in their career, and those expenses may be tax-deductible. Athletes should work with a tax professional or an experienced tax attorney to help them make the most of their financial winnings by potentially lowering their liability through deductions.

Do foreign athletes pay United States taxes on winnings?

Generally, non-resident athletes only pay U.S. income tax on prize money earned in the United States. Tax issues are can be complicated. If you are faced with accounting for prize money, or are an athlete that needs to pay income tax on prize winnings, it’s best to work with a tax professional or experienced tax attorney to assure you are paying the appropriate taxes and avoid a costly audit in the future. Don’t try to navigate the IRS and the state alone.

Allison Soares is a partner and tax attorney at Vanst Law. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving audits.