Student-athletes rarely had to worry about tax issues until the recent past. If they received an athletic scholarship, they were often disallowed to work for compensation--or had limited rights when doing so--under the NCAA rules. Since the scholarships were tax-free and the student-athletes had little to no compensation, their parents could usually help them file any required federal or state income tax returns.
However, the NCAA Division 1 Board of Directors approved a new interim policy in 2021, allowing many student-athletes to be compensated for their name, image, and likeness (NIL). As a result, we now see student-athletes sign multimillion-dollar contracts for the use of their NIL rights in advertising. The contracts may arrange a partnership between a company and a student-athlete to represent and promote the company's brands. Sometimes, student-athletes work with investors to develop a personal brand.
While this can be very exciting for the student-athlete, they may not consider how NIL revenue can impact their tax liability. Several common tax challenges arise when college-age (or younger) students earn a significant income.
The first tax challenge is that a student-athlete is not considered an employee of the company signing the NIL contract. Thus, any payments made under NIL contracts are not wages.
A company will not withhold or remit any of the following taxes on behalf of the student-athlete:
Without having those taxes withheld, a student-athlete risks spending a significant portion of their compensation without retaining enough to pay their tax liabilities.
The second tax challenge is that a student-athlete is considered an independent contractor for tax purposes. They will be regarded as self-employed and receive a Form 1099 reporting their gross income. Being self-employed requires the following actions, among others:
These requirements are a lot to ask of a college student when experienced entrepreneurs have trouble navigating the rules. Fortunately, the student can take advantage of strategic tax planning opportunities to help manage and potentially lower their tax liability. This typically focuses on the following issues:
The answers to these questions and the overall tax strategy depend on the facts and circumstances of each situation. The student-athlete should talk with a tax professional to understand these opportunities.
The third tax challenge for the modern student-athlete is the mobility of university athletic departments. It is not uncommon for a college student-athlete to participate in sporting events in 10 or more states in a year. The student-athlete might also travel to film commercials, make appearances, or conduct promotions, which may qualify as business activities. Every city and state the student-athlete encounters may attempt to tax a portion of the income generated by the NIL rights.
Each city and state has different rules regarding how it would impose taxes on the student-athlete. The student-athlete should consider consulting with a tax professional to manage multistate taxation risks and opportunities.
The student-athlete also faces tax challenges due to the globalization of sports celebrities.
Globalization may require the student-athlete to participate in an international sporting event or to perform business activities in a foreign country. That foreign country may attempt to tax the student-athlete, and international tax implications can be even more complicated than multistate taxation.
In some cases, an international tax treaty with the foreign country clearly outlines when a student-athlete will owe taxes. In other cases, no international tax treaty exists. The student-athlete may need a U.S. tax professional to work with a tax professional in the foreign country, conducting any tax planning and helping the student-athlete comply with foreign tax rules.
However, tax planning does not stop once the student-athlete has paid their foreign taxes.
The student-athlete must review the international taxation rules in the U.S. For example, is the income exempt from U.S. taxation? If the income is taxable, can the student-athlete claim a foreign tax credit to offset any potential double taxation? Careful, strategic tax planning can help to minimize the risk of the foreign country and the U.S. government imposing income tax liability on the same income.
University athletic departments have a vested interest in keeping student-athletes on the field. No university wants a player suspended for failing to pay taxes! To help manage this risk, a university could require that any student-athlete receiving a scholarship must hire a tax professional in certain circumstances. This condition would help the student manage the tax obligations related to NIL income--and help the university keep its athletes in the game.
University leadership should keep the above information and reporting requirements in mind when crafting any terms and conditions based on the university's risk tolerance.
Contact your P&N tax advisor to learn more about strategies to address student-athletes' tax compliance, exposure, and obligations.