Gambling winnings are considered unearned income rather than earned income in California. This means that gambling winnings are not subject to payroll taxes like earned income from wages and salaries. However, gambling winnings may still be taxable at the state and federal level.
What is considered earned income?
Earned income refers to income received from working, such as:
- Wages
- Salaries
- Tips
- Commissions
- Bonuses
- Net earnings from self-employment
Earned income is money you receive for providing services. In contrast, unearned income is money you receive from investments, winnings, inheritances, or other sources unrelated to employment.
Why are gambling winnings considered unearned income in California?
Gambling winnings are considered unearned because they do not come from actively working or providing services. You receive gambling income passively from games of chance rather than in direct exchange for labor. Some key reasons gambling winnings are deemed unearned income in California include:
- Gambling winnings come from games of chance and luck rather than work.
- You do not pay payroll taxes or make FICA contributions on gambling winnings.
- Gambling income is not reported on IRS Form W-2 like earned income.
- You do not “earn” or merit gambling winnings through skill and effort.
What are some examples of unearned income in California?
In addition to gambling winnings, other common types of unearned income in California include:
- Investment income (dividends, interest, capital gains)
- Lottery or prize winnings
- Inheritances
- Lawsuit settlements or awards
- Royalties
- Rental income
- Alimony payments
- Child support
- Unemployment benefits
- Veterans benefits
- Pension payments
- Social Security benefits
These types of passive income are not directly tied to employment or self-employment. You receive them without having to clock in and out of a job every day. They do not qualify as taxable earned income in the same way as wages and net self-employment income.
What are the tax implications for gambling winnings in California?
Although gambling winnings are not considered earned income, they are still taxable in most cases. Here are some key tax rules for reporting gambling winnings in California:
- You must report all gambling winnings as “other income” on both your federal and California state income tax returns.
- The casino or payer is not required to withhold taxes on gambling winnings as they do with earned income.
- You must pay federal income taxes on all gambling winnings above $5,000. You cannot reduce this amount by your losses.
- You can deduct gambling losses on Schedule A, but only up to the amount of your winnings.
- California taxes gambling winnings as ordinary income, with rates up to 13.3% depending on your total taxable income.
In summary, make sure to report gambling winnings on your tax return. You must pay applicable federal and California state income taxes. Keep detailed records of losses to offset some of the tax burden.
How are gambling winnings reported to the IRS and California?
If you have significant gambling winnings, the casino or entity paying you may report them to tax authorities using these forms:
- IRS Form W-2G – For wins of $600 or more in gambling winnings (except winnings from bingo, keno, and slot machines)
- IRS Form 1099-MISC – For wins from slot machines, keno, and bingo
- California Form W-2G – For wins of $1,200 or more from California sources
You will receive copies of these forms to help you report the income. However, even if no forms are issued, you are still responsible for reporting all gambling income above certain thresholds on your tax returns.
Do I need to pay FICA taxes on gambling winnings in California?
No, you do not need to pay Federal Insurance Contributions Act (FICA) taxes on gambling winnings in California. FICA taxes consist of:
- Social Security tax: 12.4% (split evenly between employee and employer for wages)
- Medicare tax: 2.9% (also split between employee and employer)
These payroll taxes fund Social Security and Medicare benefits. But since gambling income is unearned, it is not subject to FICA taxes. You do not make FICA contributions on gambling winnings like you would with earned income from wages or net self-employment earnings.
When are gambling winnings considered earned income federally?
Gambling winnings are generally unearned income for federal tax purposes as well. However, in very limited circumstances, professional gamblers who gamble as a trade or business may treat gambling winnings as earned income. This occurs if you meet the IRS definition of a professional gambler, including:
- You gamble regularly with the intent to profit.
- Gambling is your primary source of income.
- You have few other sources of income.
- You treat gambling as a job by putting in substantial time, effort, and expenses.
- You can show losses as business expenses rather than itemized deductions.
Meeting this narrow criteria allows you to report professional gambling income and losses on Schedule C and deduct related business expenses. Very few gamblers meet these standards, but it is possible in theory.
What types of gambling winnings are taxable?
Almost every form of gambling winning is taxable income, including winnings from:
- Lotteries
- Raffles
- Horse tracks
- Casinos (table games and slots)
- Poker tournaments
- Sports betting
- Bingo
- Keno
- Game shows
- Contests
- Sweepstakes
Certain small gambling winnings may not need to be reported. But as a general rule, if you gamble and win money, be prepared to pay taxes.
Can I deduct my gambling losses?
California lets you deduct gambling losses to the extent of your winnings for the tax year. For example, if you have $10,000 in winnings and $8,000 in losses, you can deduct $8,000 to lower your taxable gambling income to $2,000. Any excess losses beyond your winnings cannot be claimed as a deduction.
You must claim gambling losses as an itemized deduction on Schedule A of your federal return. Make sure you keep detailed records such as receipts, statements, tickets, and logs to prove your losses if audited.
Can I spread out reporting my gambling winnings over multiple years?
Unfortunately, no. You cannot prorate your gambling winnings over several tax years or defer reporting winnings to a later year. The IRS considers gambling winnings taxable in full in the year you actually receive the payout, no matter how large the amount.
There is no provision in the tax code allowing you to smooth out recognition of gambling income. You must report the full amount in the given tax year and cannot spread it over future years.
Should I make quarterly estimated tax payments on gambling winnings?
Possibly yes. Since taxes are not withheld from gambling winnings, you may need to make quarterly estimated tax payments to avoid penalties. This is recommend if you expect to owe at least $1,000 in state and federal taxes on your winnings beyond any other withholding from wages or other income sources.
IRS Form 1040-ES and California Form 540-ES allow you to pay quarterly installments on income not subject to withholding. Estimated payments for gambling winnings are generally due by April 15, June 15, September 15, and January 15 of the following year. This allows you to pay as you earn rather than face a huge tax bill the next April.
Should I withhold taxes from my gambling winnings voluntarily?
To avoid needing estimated tax payments, consider asking the payer to voluntarily withhold state and federal taxes from your gambling payout. Withholding helps cover your tax liability immediately and avoid interest or penalties.
While not required, many casinos and other payers will withhold taxes if you fill out a W-2G or W-4 form and request it. Withhold too much and you get a refund; too little and you will owe more next April. But it can simplify the tax payment process.
Are there any special rules for jackpot prizes?
Larger jackpot wins from lotteries and casinos may be subject to special withholding rules:
- Federal: Lottery winnings over $5,000 have a flat 24% tax withholding. Gambling winnings over $5,000 have a default rate of 27% federal withholding if requested on Form W-2G.
- California: For lottery prizes over $1,500, the Lottery will withhold federal taxes at 24% and California taxes at 7%. For other California gambling income over $1,500, the payer must withhold 7% state taxes if requested on Form W-2G.
While not required, having taxes withheld can make paying your tax bill easier. Otherwise, make sure to set aside money to pay state and federal taxes later.
Are gambling winnings considered income for Medicaid and SSI in California?
Yes, gambling winnings could affect eligibility for programs like Medicaid (Medi-Cal in California) and Supplemental Security Income (SSI) benefits. These programs have income limits to qualify.
Large gambling winnings could push your countable income over the eligibility thresholds for Medi-Cal and SSI in a given month. This could cause you to lose benefits, at least temporarily. Make sure to report any significant gambling income if you receive needs-based public assistance.
Can I offset gambling losses against other types of income?
Unfortunately, you cannot directly deduct gambling losses beyond the amount of your gambling winnings in a tax year. Gambling losses can only offset gambling income.
You cannot use gambling losses to offset or reduce taxes on wages, investment income, self-employment income, or other types of taxable income. The deduction only applies to the activity of gambling itself.
Are there any differences for professional or business gamblers?
If you meet the strict IRS criteria as a professional gambler, there are some different rules that apply:
- Your gambling income and losses are reported on Schedule C as self-employment business income.
- You can deduct gambling-related business expenses.
- You have to pay 15.3% self-employment tax on net gambling earnings.
- You can qualify for the 20% qualified business income deduction.
However, as noted above, very few gamblers actually qualify as professionals engaged in the trade or business of gambling. For most taxpayers, gambling remains unearned hobby income reported as “other income.”
What if I have gambling winnings from other states or countries?
If you are a California resident and have gambling winnings from outside the state or country, you must still report them on your California tax return. California taxes residents on all income, regardless of source.
You can take a credit for taxes paid to other jurisdictions. But the full winnings are still considered taxable income in California. Make sure to report out-of-state or foreign gambling income.
Are there any local gambling taxes in California?
Some cities in California impose additional local taxes on gambling winnings:
| City | Local Gambling Tax Rate |
|---|---|
| Los Angeles | 5% |
| San Francisco | 8.5% |
| Palm Springs | 6% |
Make sure to check if any local taxes apply in the jurisdiction where you won gambling income. You may owe city or county taxes in addition to California state taxes.
Are gambling winnings considered income for student financial aid?
Yes, gambling winnings must be reported as untaxed income on the FAFSA when applying for federal student aid. All gambling winnings are included, regardless of amount.
Reporting gambling income can reduce your eligibility for need-based financial aid. Aid formulas expect students to contribute a portion of untaxed income to college costs.
However, gambling losses cannot be deducted when reporting income on the FAFSA. Be prepared for winnings to affect your financial aid package.
Conclusion
In summary, gambling winnings are considered unearned income rather than earned income for both federal and California state tax purposes. While not subject to payroll taxes, gambling winnings must be reported as ordinary income on your tax return. Make sure to pay applicable federal and California taxes owed on gambling income above certain thresholds.
Keep detailed records of any losses to deduct against winnings on your tax return. Withhold taxes upfront or make estimated payments to avoid penalties. If you receive significant gambling income while on public assistance, report it promptly to avoid issues with benefits eligibility.
While gambling winnings are taxable at ordinary income rates, they are not considered “earned income” in the traditional sense. You do not pay FICA taxes or receive W-2s on gambling winnings. But you are still responsible for reporting gambling income and paying any resulting federal and California income taxes.
