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December 28, 2021

College Athletes Could Be in for a Big Tax Surprise on NIL Deals

A bright light is finally being shined on the financial inequities seen in collegiate athletics. In some cases, universities are seen making millions of dollars on the backs of its athletes while some of them struggle to pay for food or rent. Finally, on June 30, 2021, the NCAA adopted new rules in which its student athletes could now profit off their name, image and likeness (NIL) without losing their “amateur status.” This has benefited college athletes immensely by allowing them to make money while still enrolled in school and offers support for those who won’t make it to the professional level. Although with money now being received by student athletes, that income will be subject to taxation. Depending on the amount of their income, they could be in for a big surprise if not properly prepared. Now is the time for these athletes to plan for tax compliance if they have not already done so.

How Deal Structure Impacts Taxation

In most endorsement deals, including appearances, autograph signings and media posts, student athletes likely will not be hired as employees. In this case, taxes will not be taken out on their behalf the way they would if they were receiving a regular paycheck. This is both good and bad. It’s good because they’re receiving a larger check up front but can be bad if they think the check is 100% for them. In certain instances, depending on the state and income figure, 50% of that income could be subject to taxation.

Tax on Income and Gear

After each calendar year, these student athletes can expect to receive some tax forms from the companies in which they are doing business with. The IRS requires businesses to issue 1099s to its payees who received at least $600 or more during the tax year. Income can even include “free stuff,” such as the value of gear received from a vendor. The income will likely be treated as ordinary income, which currently has a top federal tax rate of 37%. They will also likely be subject to self-employment tax because these student athletes are not employees of the companies paying them.

Self-Employment Tax

Self-employment tax is comprised of three different taxes on self-employment income:

  • 12.4% Social Security tax;
  • 2.9% Medicare tax; and
  • 0.9% Medicare surcharge tax, depending on income levels described below 

For 2021, the Social Security tax applies to self-employment income up to $142,800. It’s projected to be $147,000 in 2022. The Medicare tax is imposed on an individual’s self-employment income and there is no ceiling as with the Social Security tax. The Medicare surcharge tax is imposed on self-employment income exceeding $200,000 – $250,000, depending on the filing status. Collectively, these three taxes make up self-employment tax.

Don’t Forget Quarterly Estimated Tax Payments

Aside from the taxes mentioned above, college athletes will have a compliance burden that includes more than just filing annual tax returns. Since athletes will be making money throughout the year without any tax withholding on their income, they will likely be required to make quarterly estimated tax payments to the IRS and states to avoid underpayment penalties.  Fourth quarter estimates for 2021 are due 1/15/22 and returns are due shortly afterwards on 4/15/22, so they need to start gathering all their required expense documentation and information now. Proper, ongoing tax planning is essential so that they’re able to pay their taxes and remain compliant with the law.

Anders Sports, Arts and Entertainment advisors are well versed in the tax compliance requirements for collegiate athletes and can assist in year-end tax planning and overall guidance. Contact Anders advisor below to learn more.

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