Your annual gala raffle just cleared $20,000, every dollar earmarked for programs. Here is the uncomfortable question nobody at the planning meeting asked: does the IRS get a cut? For many nonprofits, the answer is yes — and "but we spent it all on our mission" is not a defense. Gaming is one of the most common fundraising tools tax-exempt organizations use, and it is also one of the fastest routes to an unexpected tax bill, a pile of winner paperwork, or a shutdown letter from your state attorney general. The good news: two statutory exceptions rescue most well-run games, but only if you set them up correctly before the first ticket is sold.
Why the IRS Treats Your Fundraiser as a Business
Tax-exempt status does not mean tax-free on everything. Income from an activity that is a trade or business, regularly carried on, and not substantially related to your exempt purpose is unrelated business income (UBI) — taxable at the 21% corporate rate on Form 990-T.
Gaming checks two of those three boxes almost automatically:
- Trade or business. Selling raffle tickets, running bingo cards, or dealing pull-tabs for money is a commercial activity. The IRS said so explicitly in its gaming guidance to exempt organizations: gaming is generally a business activity, not a charitable one.
- Not substantially related. The purpose that matters is the activity itself, not what you do with the money. Funding scholarships with bingo proceeds does not make calling numbers an educational activity.
That leaves the third prong — regularly carried on — as the main escape hatch for occasional fundraisers. Whether your gaming is "regularly carried on" is a facts-and-circumstances test weighing how often you run games, how long each run lasts, how you promote them, and how for-profit businesses conduct similar activities. A once-a-year gala raffle looks very different from weekly bingo nights advertised to the general public year-round. But frequency alone is a fragile defense, which is why Congress created two much stronger exceptions.
The Two Exceptions That Can Save Your Games
1. Traditional Bingo Is Excluded by Law
Section 513(f) of the Internal Revenue Code provides that certain bingo games are simply not an unrelated trade or business — no matter how often you run them. To qualify, your game must meet all of these conditions:
- Played in the presence of everyone wagering. Wagers are placed, winners are determined, and prizes are distributed with all players present. The regulations describe the classic game: cards printed with five rows of five squares, markers placed over randomly called numbers.
- Not commercial in your area. Bingo must not be regularly carried on by for-profit organizations where you play.
- Legal where played. The game must not violate any state or local law.
Miss any condition and the exclusion collapses. And the exclusion covers traditional bingo only. So-called "instant bingo," "mini bingo," pull-tabs, and scratch-off cards do not qualify — their winners are effectively determined when the deck is manufactured, not in the presence of the players — so their proceeds are UBI unless another exception applies.
2. Substantially All Volunteer Labor Excludes Any Game
Section 513(a)(1) provides the broader shield: if substantially all the work of carrying on the activity is performed without compensation, the income is not from a trade or business at all. This exception cares nothing about game type — it covers raffles, casino nights, pull-tabs, poker tournaments, and everything else.
The unofficial rule of thumb practitioners use is 85% or more of total work hours performed by true volunteers. That standard is stricter than it sounds:
- Paid staff hours count against you fast. One paid coordinator working full-time on a gaming operation staffed by a handful of weekend volunteers can sink the ratio.
- Tips and perks can be compensation. Volunteers who pocket tips or receive anything of value for their shifts start looking like paid workers.
- Document the hours. If the IRS asks, "everyone was a volunteer" is a claim, but a sign-in log with names, dates, and hours is evidence. Keep one.
Run your raffle or casino night with a genuinely all-volunteer crew and careful hour logs, and UBIT usually drops out of the picture entirely — regardless of frequency.
A Note on the Third Path: Occasional Gaming
Even without an exception, a genuinely one-off game may fail the "regularly carried on" test. A single annual raffle, unadvertised beyond your donor list, is the classic example. But do not stretch this: monthly drawings, seasonal bingo series, and year-round pull-tab dispensers at your social hall all look "regular" to an examiner. Treat infrequency as a backstop, not a plan.
When You Do Owe Tax: Form 990-T
If your gaming is UBI and no exception applies, gross gaming income of $1,000 or more triggers a Form 990-T filing obligation, with tax at the 21% corporate rate. Directly connected expenses — prizes, printing, rent for the hall, permit fees — are deductible against that income, so meticulous expense tracking directly lowers the bill. Failing to file draws the same failure-to-file and failure-to-pay penalties as any other return, plus interest. Note that too much UBI relative to your overall activity can also raise questions about whether operating the business has become a substantial nonexempt purpose — a threat to exemption itself, not just a tax bill.
Winners Mean Paperwork: W-2G Reporting and Withholding
Separate from UBIT, anyone who pays gambling winnings — nonprofits included — owes the winners (and the IRS) information returns. The rules turn on game type and prize size:
Raffles, Lotteries, and Similar Drawings
- Report on Form W-2G when the winnings minus the wager are $600 or more AND at least 300 times the wager. A $2 ticket winning a $2,000 television clears both tests; report it.
- Withhold 24% (regular gambling withholding) when the winnings minus the wager exceed $5,000. You remit the withholding and show it in Box 4 of the winner's W-2G.
- For multi-ticket wagers like "five tickets for $1," the wager is the full amount paid for all tickets on that draw.
Bingo, Keno, and Slot Machines
- Report on Form W-2G when winnings reach $1,200 or more (not reduced by the wager).
- No regular withholding is required on bingo prizes — but you still file the W-2G.
Noncash Prizes and Missing TINs
- Prize value is fair market value, not what you paid. A donated television worth $2,000 is a $2,000 prize even though it cost you nothing.
- If a winner of reportable winnings does not provide a taxpayer identification number, you must backup-withhold at the same rate.
- Collect each big winner's name, address, and TIN before handing over the prize. Chasing a stranger for a Social Security number after they have driven home with the jet ski is a losing errand — and the withholding liability is yours whether or not you collected it from the winner.
IRS Publication 3079, the Gaming Publication for Tax-Exempt Organizations, walks through these thresholds with worked examples and is worth bookmarking before event night.
The Form 990 Piece: Schedule G
Gaming does not hide inside your fundraising totals. Report all gaming income on Form 990, Part VIII, line 9a — kept separate from fundraising-event income — and if gaming gross income exceeds $15,000, you must complete Schedule G, Part III. That schedule breaks your gaming into three columns that mirror exactly what this article has covered:
- (a) Bingo — your traditional bingo nights.
- (b) Pull-tabs / instant bingo / progressive bingo — the games the bingo exception does not cover.
- (c) Other gaming — raffles, casino nights, poker tournaments, and the rest.
The form also asks for the states where you conduct gaming, whether you use outside managers, and what share of the labor is volunteer — the IRS is checking your exceptions right on the return. Organizations filing Form 990-EZ face the same $15,000 trigger measured on line 6a. And where gaming happens inside a larger fundraising event, you must allocate income and expenses between the gaming and the event rather than lumping everything together.
State Law Can Shut You Down Faster Than the IRS
Federal tax treatment is only half the compliance picture. Charitable gaming is regulated state by state — sometimes county by county — and the state rules bite first: no license, no game. Common requirements include registering with the attorney general or a gaming commission before advertising, using only approved game types, capping prizes or payouts, restricting who may operate games, and filing post-event accounting.
California shows how strict this gets. Under Penal Code section 320.5, eligible nonprofits may conduct raffles only if they register with the Attorney General first, sell tickets with detachable stubs, determine winners by draw held in California under adult supervision, use at least 90% of gross receipts for charitable purposes in California, and never sell tickets online or at gambling venues. The famous 50/50 raffle is illegal for ordinary California charities — only nonprofits affiliated with major league sports teams may run them at home games, under a narrow 2015 carve-out. Other states are more permissive but nearly all require some license or registration, and a few effectively prohibit raffles or online ticket sales altogether.
The practical rule: check your state's charitable gaming statute before you print the first ticket, and re-check every year. A game that is perfectly exempt from UBIT under the volunteer-labor exception still needs a state license to exist.
Bookkeeping That Keeps Your Gaming Clean
Every exception and filing in this article runs on records. Build a gaming ledger that survives an audit:
- Separate gaming from everything else. Track each game type — bingo, raffles, pull-tabs — in its own revenue and expense lines so Schedule G practically fills itself out.
- Run a per-event profit and loss. Gross receipts, prize costs at fair market value, printing, hall rental, permit fees, and net proceeds, closed out after every event.
- Log volunteer hours. Names, dates, shifts, and duties for every worker, paid or unpaid. This log is your Section 513(a)(1) evidence.
- Keep a winner register. Prize descriptions, fair market values, wagers paid, W-2Gs issued, and withholding remitted — reconciled to your bank deposits.
- Reconcile to the returns. Gaming revenue in your books should tie to Form 990, Part VIII, line 9a, and your volunteer percentages should tie to what you attest on Schedule G.
If your general ledger already separates programs, grants, and fundraising, add gaming as its own dimension rather than burying it in "special events." Examiners — and your own treasurer — should be able to trace any Schedule G number back to event-level detail in minutes.
Common Mistakes That Cost Nonprofits Real Money
- Paying the bingo caller. One compensated worker can look harmless until their hours breach the volunteer-labor ratio for the whole operation.
- Assuming mission spending exempts the income. It never does. The activity is tested, not the use of proceeds.
- Skipping W-2Gs on "small" raffles. A donated $2,000 prize on a $2 ticket is reportable. Prize value, not ticket price, drives the threshold.
- Forgetting state registration. The most common enforcement action in charitable gaming is not an IRS audit — it is a state regulator shutting down an unlicensed game.
- Commingling gaming with gala revenue. When bingo money and ticket sales share one line, you cannot prove expenses against UBI or complete Schedule G accurately.
Keep Your Gaming Books Audit-Ready From the First Ticket
Bingo nights, raffles, and pull-tabs can be terrific fundraisers — the tax code even gives traditional bingo and all-volunteer games explicit safe harbors. The nonprofits that get hurt are the ones that treat gaming as casual fun instead of the regulated business activity the IRS and the states see. Separate books, volunteer logs, winner paperwork, and a state license filed before opening night turn a compliance minefield into a routine fundraiser.
As your fundraising calendar grows, keeping gaming revenue, prizes, and volunteer records organized is essential. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in. Get started for free and see why developers and finance professionals are switching to plain-text accounting.
