After the NCAA adopted rules in July of 2021 allowing college athletes to make money off their name, image, and likeness (NIL), many individuals around the country have entered deals with major companies and brands. The NIL market is estimated to exceed $500MM this year, which is a huge win for student-athletes. However, this new source of income also comes with a hefty bill from Uncle Sam—something that most of these athletes have not experienced before.
What is taxable income?
Taxable income could be any of the following:
- Monetary compensation, e.g., endorsements, social media partnerships, posts, making appearances, and autograph signing.
- Goods received in exchange for promotion over $600, e.g., free cars, trips, athletic wear, merchandise, and even cryptocurrency.
- Merchandise deal, i.e., a deal that allows a student-athlete to spend a certain amount on a company’s goods.
- Money from the sale of products produced by or for a student-
What taxes will student-athletes have to pay?
For tax purposes, student-athletes will likely be considered self-employed, and independent contractors and will receive a 1099 form documenting their income. There are three main tax categories that athletes should be aware:
- Self-Employment Tax: As with any other taxpayer, if an athlete makes more than $400 a year, then a tax return must be filed for self-employment taxes, i.e., Medicare and Social Security. This tax is usually in the 10-15% range for income up to $142K.
- State Tax: An athlete owes state taxes in the state they earn income. However, state taxes can be complicated based on the structure of the NIL agreement. For example, if an athlete from one state attends college in another state, then the athlete could potentially owe taxes in both states due to residency and varying state tax laws. Additionally, if a NIL sponsorship deal involves working in multiple states, then that may mean multiple state filings.
- Federal Tax: Any amount earned over $12,550 will be subject to Federal income tax for single filers.
Deductions
Athletes should also be aware and keep track of any deductions they can make on their taxes. Deductions are important because they take away from the taxable income to lower the amount that is owed. Some common deductions that athletes should be aware of are the following:
- Travel expenses, e.g., airfare, train tickets, hotel, baggage fees, cabs
- Meal expenses
- Mileage, i.e., if they need to drive somewhere
- Internet and phone expenses
- Office Supplies
- Advertising expenses
Implications and Considerations of Taxation
There are various implications and considerations an athlete must understand when he or she makes NIL income and is issued 1099.
- Financial Aid & Grants: Since NIL compensation is taxable, it must be reported on FAFSA, a need and financial-based application that provides students with assistance for college fees and expenses. For instance, the University of Georgia informed athletes that the Pell Grant or need-based financial aid could be reduced or cut off based on earnings from NIL deals.
- Parents Dependents: Another complication arises from whether the parents of athletes can claim them as their dependents. The major factor here is financial support—if parents provide more than half their child’s financial support, then they can claim them as their dependent. However, if the money an athlete is receiving from NIL deals outweighs what they are being provided by their parents, then they may no longer qualify as a dependent.
Athletes should consider creating a sole proprietorship, an LLC, or another entity for their NIL income. Different entities provide different benefits. For instance, an LLC may provide the opportunity for an athlete to write off certain expenses, such as mileage if they drive to an appearance while attributing potential liabilities to the LLC, instead of the individual. Alternatively, while a sole proprietorship also permits pass-through taxes and a deduction of business expenses, the liability is attributed to the athlete. It is important to understand these differences when considering the formation of an entity.
Protection
As students navigate the complexities of taxes on their NIL income, it is likely that the next few tax seasons will be the messiest. Educating students on what is taxable, the different types of taxes, and the various implications of paying taxes is extremely important. While schools are trying to help their students navigate this new space, it is ultimately up to the athletes to get informed and ensure they are well-positioned within the requirements of the IRS.