Q: I need legal guidance on prize distribution and tax compliance for U.S. players in an skill based esport tournament
I'm developing a battle royale game similar to PUBG or Fortnite with Free-to-Play and Pay-to-Play tournament modes. In the Pay-to-Play mode, players pay a $50 registration fee, creating a $5,000 prize pool. Prizes include $1,000 for the winner, and $25 per kill and $30 per headshot, awarded during the game.
1. Am I required to withhold taxes for U.S. players on prize money, or can I have a disclaimer making players responsible for their own tax obligations?
2. What are my responsibilities for reporting U.S. players' earnings (e.g., issuing a 1099-MISC)?
3. Do I need to comply with tax withholding or reporting for players from countries other than the U.S.?
4. Are there specific requirements for disclaimers or prize distribution policies in the tournament rules?
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A:
In the U.S., you are generally required to issue a 1099-MISC form to players who earn $600 or more in a calendar year from your tournament. While you can include a disclaimer in your terms making players responsible for reporting and paying their taxes, the burden of reporting still falls on you for larger payouts. You are not required to withhold taxes for U.S. players, but you must report their winnings to the IRS if they meet the threshold.
For non-U.S. players, you may also have tax obligations, such as withholding under U.S. tax treaties, depending on the country they are from. You should ensure you understand the specific tax requirements for each country where you have players participating. You will need to collect tax-related documentation from foreign players, such as a W-8BEN form.
In your tournament rules, you should include clear policies on prize distribution and tax responsibilities, informing players about their reporting obligations. Including a disclaimer about tax liabilities can help clarify this, but it won’t absolve your duty to report winnings to the IRS where applicable. Consulting with a tax professional is a good step to ensure compliance with these requirements.
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