In the first tax year with name, image, and likeness compensation implications, NCAA athletes must comply with both federal and state tax laws.
Death, taxes, and name, image, and likeness (“NIL”) compensation. NCAA athletes are permitted to profit off their NIL. With this newly granted right, athletes must comply with the applicable United States tax laws (“U.S. Tax Law”). International NCAA athletes must confirm their eligibility for NIL compensation with their respective F-1 visa status.[1]
This will serve as a brief overview of what NCAA athletes should consider when filing their 2021 taxes.
For the most part, NCAA athletes have not had to deal with the responsibilities of filing taxes under these specific conditions because they were forbidden from monetizing their status. Now though, individual athletes will need to analyze their specific circumstances and seek the assistance of a professional. Here are some of the common considerations NCAA athletes may now encounter:
(i) Professional Assistance. Identifying a competent professional is extremely important. At the very least, the athlete should do some basic research to ensure that the professional has not been subject to any discipline or otherwise been the subject of complaints from prior clients. If an athlete chooses to obtain help from a business manager, accountant, assistant, etc., it is important to understand the appropriate fees and responsibilities arising from the relationship. A few considerations an athlete must determine is if: (a) the professional in a fiduciary relationship with the athlete; (b) are the fees calculated on an hourly basis; and (c) is the relationship a continuing one, or is it a single transaction?
(ii) Legal Entity. Athletes may choose to create a separate legal entity, such as a corporation or limited liability company (“LLC”), to receive the compensation earned from sponsors in conjunction with their NIL. Athletes must understand the proper U.S. Tax Laws associated with each possible entity they choose to form, and decide which entity structure is right for them.
(iii) State Tax. Every state has different tax requirements. For any income an athlete receives in association with their NIL compensation, they must properly file state income tax when applicable.
Nine states do not have a state income tax — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming[2] (New Hampshire and Washington tax applicable capital gains).[3] For any state with an income tax, athletes must consult the applicable state income tax requirements to ensure compliance.[4] It is important to note that athletes may owe income tax in states where they do not have residency. For example, if an athlete is a resident of one state, but is at school in a second state, it is entirely possible that any NIL income may be taxed by both states.
(iv) Federal Tax. In almost every circumstance, athletes must comply with the applicable federal self-employment tax requirements because most athletes will likely be compensated as an individual contractor (“IC”).
As an IC, income tax is not withheld from compensation and thus, athletes will need to pay the applicable tax as an IC for any compensation they receive. This is only a federal tax.[5] Any athlete falling under this category must be concerned with two things:
(1) the Social Security tax; and
(2) the Medicare tax.
In the 2021 tax year, the Social Security tax rate is 12.4 percent, and the Medicare tax rate is 2.9 percent.
To note, the Social Security tax has a cap, and it fluctuates each tax year — in 2021 it is capped at $142,800.00 — meaning any compensation exceeding $142,800.00 is not subject to the Social Security tax. On the flipside, the Medicare tax applies to all self-employment income and does not consider how much an athlete (or anyone) earns. However, there is a Medicare surcharge tax for any income exceeding $200,00.00.[6]
In all circumstances, athletes must use either a 1099 or 1040 tax form.[7] Note that some athletes may be subject to estimated tax payment, requiring them to file and pay on a quarterly basis throughout the year.
(v) Free is Not Always Free. An athlete should think twice before accepting any free products or services in conjunction with their NIL rights. Prior to accepting a new car from a local dealer or merchandise from any company, an athlete must prepare themselves to pay the applicable tax on the product or service because it may be considered a taxable income.
(vi) Deductibles. Athletes must keep track of all money spent associated with/related to their NIL compensation because some of the money they spend may be deductible from otherwise taxable income. It is important to keep track of this information because an athlete must show that the money they spent was associated with/related to a NIL business expense, rather than a personal expense. This is merely a brief overview of tax considerations that NCAA athletes should consider when filing their taxes. As always, seeking the assistance of a trusted professional will best serve an athlete and ensure compliance with the applicable state and fede
[1]https://www.jdsupra.com/legalnews/international-student-athletes-and-ncaa-1729551/
[2]https://www.aarp.org/money/taxes/info-2020/states-without-an-income tax.html#:~:text=Nine%20states%20%E2%80%94%20Alaska%2C%20Florida%2C,2024%20and%20ending%20in%202027.
[3]https://taxfoundation.org/publications/state-individual-income-tax-rates-and-brackets/
[4]https://www.nerdwallet.com/article/taxes/state-income-tax-rates
[5]https://www.gobankingrates.com/taxes/filing/how-much-is-self-employment-tax-state/#:~:text=Self%2DEmployment%20Tax%20Rates,no%20matter%20where%20you%20live.
[6]https://www.jdsupra.com/legalnews/name-image-and-likeness-five-months-1219411/#:~:text=NIL%20athletes%20are%20classified%20as,Security%20tax%2C%20and%20Medicare%20tax.
[7]https://www.indeed.com/career-advice/career-development/1099-vs-1040?aceid=&gclid=EAIaIQobChMI9qKlisqh9gIVzOvjBx0r7gxHEAAYASAAEgINxfD_BwE
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