College Athletes and Their Sponsors Face Tax Reality of NIL

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All of the athletes now earning compensation—whether through promotional deals or personal business endeavors, whether endorsing products or selling non-fungible tokens—will have to remember one thing: They’ll need to file income taxes and, in some cases, turn over portions of their earnings to Uncle Sam and state treasuries.

Before the NCAA reversed course in late June and issued an interim NIL policy that allows college athletes to profit from NIL without jeopardizing NCAA eligibility, college administrators sometimes expressed worry about the tax impact such a change would have. College athletes, unfamiliar with paying taxes, will be obligated to participate in a tax process that can frustrate old and young alike. Now that NIL is here, some schools plan to educate their athletes on basic tax, finance and budgeting issues. Others will be obligated by state NIL statutes to do so.

To be clear, college athletes are better off financially by earning NIL compensation than being denied it altogether; any amount of money greater than $0 is still better than $0. Yet, like all taxpayers, college athletes should be mindful of accompanying complexities. Sportico’s Emily Caron wrote earlier this week on how NIL compensation could affect financial aid and Pell Grant eligibility. It’s only one of the many other potential tax implications that could arise out of this new landscape.

As a starting point, companies that sign college athletes to NIL deals will likely classify those athletes as independent contractors—an arrangement commonly seen in athlete endorsement deals. This is partly because the endorser is often an employee of a pro team, which has primary control over the athlete’s work and time. An endorsement deal also doesn’t constitute full-time work but rather specific and, customarily, episodic obligations. Participation in autograph shows and promotional events, just like the use of the athlete’s NIL for products or services, would all be in line with independent contractor work. That said, in recent years, some states have made it more difficult for employers to classify their workers as independent contractors.

Tax consequences vary widely for independent contractors and employees. A company does not withhold income taxes, Social Security and Medicare for independent contractors the way it does for employees. An independent contractor normally is sent a pretax payment or pretax fee, so the amount appears larger than it will be after paying taxes. Meanwhile, an employee ordinarily has taxes taken out by their employer. An independent contractor would also receive a Form 1099-misc instead of a W-2.

To illustrate NIL tax consequences for college athletes, let’s consider the following six hypothetical situations. In generating these calculations, we assume the athletes: are residents of the states where they attend college; have not earned other income; and are independent contractors or self-employed, and thus aren’t employees of companies with which they do NIL business. In addition, we assume that as independent contractors they may also be able to deduct agent fees and other business expenses, but those would vary and aren’t calculable at this time.

To illustrate the differences from state to state, we’re using three hypothetical examples, comparing the situations in Florida and in California:

Remember, these are basic estimates. Dollar amounts would change based on independent contractor/employee status and potential deductions. If classified as employees, for example, the athletes wouldn’t enjoy the same deduction opportunities because they can’t deduct employee business expenses. However, they would gain advantages of employee status, which in some instances can mean health care, retirement and stronger claims for unemployment benefits.

We see three big takeaways.

First, if the athlete is paid a modest amount for his or her NIL, the athlete won’t pay state income taxes—even if they live in California, the highest taxed state in the land. But note: They still must pay the federal government and still must file tax returns.

Second, if the athlete is paid a sizable amount for his or her NIL, the athlete will pay significant taxes. Whether they are in a state with, or without, an income tax will impact how much they take home after taxes. All things being equal, schools in one of the nine U.S. states without a tax on wages (Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming) could enjoy a potential recruiting advantage on account of their tax laws.

Third, taxes are a complicated topic. Athletes would be well-advised to seek legal and tax counsel, not only before signing a contract but after their payments start to come in.

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