Win a prize above $5,000 and the payer must send 24% of it straight to the IRS under IRC Section 3402(q). That number — 24% — gets quoted everywhere, and it fools people every single jackpot. Here’s what it actually means.
Withholding is an advance payment, not the tax
Think of the 24% as a down payment on your eventual tax bill, similar to what your employer withholds from each paycheck. Your real liability is determined by your total taxable income for the year and the bracket structure. In 2026 the top bracket is 37% — 13 points above the withholding rate. On a $1 million prize, 24% withholding sends $240,000 to the IRS, but the true federal tax is roughly $320,000. That $80,000 difference is due in April, not at the claim window.
Why 24% specifically?
The rate was set by the Tax Cuts and Jobs Act of 2017, replacing the old 25% backup withholding on gambling. Congress pegged it to the former 24% bracket, but jackpot income almost entirely lands in the 35% and 37% brackets, so for big prizes the withholding systematically undershoots. For prizes $5,000 or less, no withholding is required at all — though the income is still fully taxable and must be reported on your return.
Annuity winners: it happens every year
Take the annuity and each of your 30 annual payments gets 24% withheld as it arrives. That’s actually a more accurate setup — many individual payments fall below the top-bracket cliff, so the 24% advance tracks closer to the real blended rate. The first payment on a $160 million jackpot is about $1.85 million, taxed at roughly a 30% blended federal rate — the withholding is close to right for early years, and the last payment, over $7 million, still tips into the top bracket.
What to do about the gap
Three moves protect you. First, file Form W-4R with the payer requesting additional withholding if you want more taken up front. Second, make quarterly estimated tax payments (the IRS safe harbor: pay 100–110% of last year’s tax or 90% of the current year’s). Third, resist spending the “extra” money that appears in your account after withholding — it belongs to the IRS in April. Our calculator shows both the withholding figure and the true tax so you can see the gap in dollars before it’s due.