We've got some good news and some bad news. We'll start with the good news - entering sweepstakes can be lucrative. Like most things, it all depends on how much time and practice you put into it. Now on to the bad news - Uncle Sam hasn't gone anywhere.
US law requires you to declare sweepstakes earnings on your annual 1040 form. The infamous 1040, it hasn't gone anywhere, and the government even has their hands in sweepstake prizes of all things. But don't fret, there is a multitude of ways to maximize your winnings and hang on to as much (as legally possible).
"You gotta spend money to make money." This rings true in sweepstakes as well. If you're spending money on postage, postcards or anything to mail in your entry for a sweepstake, those expenses can potentially be deducted from your winnings. The same holds true of the items in your home (Internet, electricity, the square footage of the room where you sit and enter contests, etc.). If you're doing this regularly, keep a log of the hours (per day). These are expenses (check with a tax consultant) could be applied to offset the taxes on your earnings.
In conjunction with expenses, if you don't know the market value of your winnings, then deducting the relative expenses is useless. Put together a simple spreadsheet with the name and sponsor of the contest, the date the prize (cash or product) arrived, and the estimated value. For prizes with a value of $600 and over, the sponsor should send you a 1099-MISC form. Some will even send these for prizes under $600. Keep an eye out for these forms as, by law, sponsors must mail them before January 31st of the following year.
Now comes an interesting decision. Are sweepstakes (for you), a hobby or a small business? If you're turning a decent profit year in and year out, the IRS will likely mandate you consider this activity a small business. As a small business, you can deduct more expenses, but additional responsibilities also come into play.
The IRS publishes guidelines on how to distinguish between a hobby and a small business. A tax advisor can also assist in this regard. Death and taxes are the two constants in life. Postponing the former and being smart about the latter is a wise route to take.