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Our consulting business has received various questions over the years regarding how to deal with business setup, tax preparation and filing. We’ve learned through our own experiences and wanted to pass along information that we think will be helpful to you.

Before we begin, it’s important to understand that the Internal Revenue Service (I.R.S.) requires an individual who accumulates over $600 in a calendar year from tournament winnings to be reported by the person who paid them. This is done via a “1099-Misc” form. The same provision applies to independent contractors who are hired for services.

Note: This blog post is a work in progress and will feature updated tax information for both the State and Federal level, as it relates to esports LAN gaming center owners and tournament event organizers.

Your Tournament Winners Must Pay Taxes

If you learn nothing else from this post, this essential tax tip should be taken to heart: if you run tournaments and your customers win over $600 in a year, their accumulated earnings are subject to tax. Here in California, if you get audited by the State, they will not allow a deduction for it. So if the State sees the payouts and there are no 1099s to go with it, they disallow it.

The IRS is worse, they will hit you up for the 30% backup withholding that you should have taken out for any $600+ winner that didn’t get a 1099.

Solution: keep track of winners and once they’re about to hit $600, hand them form W-9 (request for taxpayer ID number). To make things easy, pre-fill out forms with your info (on the space next to line 5 and 6, you put requester’s name and address). Keep the forms ready to go in a drawer and train your employees to track winners and distribute forms as needed.

Gamers may not be into this. If winners refuse, you are then required to withhold 30% of their prize money. If they ask why, the answer is simple: it’s the law. There is an education process involved here, but once they understand this (and especially when they see a big withholding staring them in the face), they should be more than happy to comply. And as more and more esports players are taxed nationwide due to the spotlight that’s being put on the sector due to it’s explosive growth, it’s really the best practice way to go for everyone.

Your Tournament Organizers Should Be 1099’ed, Preferably As Business Entities

The State of California now has very strict rules about who can and cannot be an independent contractor. But even if you’re not in California, the basic premise remains the same: your non-employee tournament organizer (TO), who comes in once a week or once a month to execute on the event side and run a tournament at your center, needs to be given a 1099 for over $600 earned over the course of a calendar year. It’s due by January 31 – we advise clients to ensure their TO’s are legitimate business owners with a company name and Employment Identification Number (EIN). Get that information to your CPA, or if you do your own tax prep, ensure you file a 1099 for them by the deadline.


Throughout the year, any time your provider runs an event at your venue and bills you for their time, make sure you receive invoices, even if you pay them cash. (Note: the best practice method in this case is to have them sign a cash receipt at the time they get paid). There are free invoicing tools and websites available for them to send you invoices (have them mark it paid once they’ve been paid).

If the TO is confused as to why he should set up a small business, in addition to the aforementioned legal reasons, you can explain to the TO that he will also be able to take on other customers who would likely demand the same information, plus there are numerous tax benefits to owning a small business, including the ability to deduct for legitimate expenses. If the TO needs help with the process, you may want to consider offering them some assistance if they’re inexperienced in these areas. This may cost you some time and money up front, but the peace of mind knowing that things are set up right going forward will be well worth it.

You Can Become a Corporation and Hire TO’s as Employees

Another option to explore is moving your business into a corporation (if it’s not already) and hiring your tournament organizers, effectively making them employees of your company. They would then track their hours and be paid a salary accordingly. This is the best way to avoid independent contractor issues or disputes, but it may not make sense if the person is rarely on-site or is paid based on attendance and for small events.

Want to learn more about starting a gaming center? Get a free consultation.


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