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June 20, 2013

Taxation of Major League Baseball Signing Bonuses

With the Major League Baseball draft done and teams working on signing their respective draftees for hundreds of thousands of dollars, even millions for some, there are some unique tax planning opportunities that can be taken advantage of.

The first thing that needs to be understood is what constitutes a “signing” bonus in the eyes of the taxing authorities.

  • The bonus is not conditional on playing any games for the team
  • It’s payable separately from any other compensation
  • And it’s not refundable

For many of the draftees it will be their first exposure to a significant amount of money and paying a significant amount of tax.  Signing bonuses are subject to federal tax irregardless of whether they meet the above criteria.   Where tax planning opportunities may arise is related to state tax. If all three of the above criteria are met “signing” bonuses are not subject to state tax apportionment.

Typically a team will withhold state tax of the team state where the player is assigned.  If their bonus is deemed a “signing” bonus it will not be apportioned as wages and will be taxed in their resident state.  Where a player resides can have dramatic effect on their overall tax situation.

Below is an illustration; player A bonus treated as a “signing” bonus – Player B bonus not treated as a “signing” bonus

Player A Player B
Signing Bonus $1,000,000 $1,000,000
Team St. Louis Cardinals St. Louis Cardinals
Residential State Florida Florida
Minor League Team Assignment Springfield, MO Springfield, MO
Team State Tax Rate (Estimate) 0% 6.00%
State Tax Estimate $0 $60,000

Another scenario to be aware of would be if a player is a resident of a state that has income tax i.e. Missouri and they would be assigned to a minor league team in Florida, the team would not withhold any state tax since Florida does not have a state tax; the player would be liable for state income tax in their resident state of Missouri.

Tax planning is often missed in the first year of a player’s career so it’s important to work with the Sports Advisor, Certified Public Accountant and Financial advisor to determine the most beneficial factors to be addressed in a player’s contract.

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