Nothing is certain in life but death and taxes. And student-athletes are discovering leading up to Tax Day that paying Uncle Sam cannot be avoided after generating NIL income.
Yet, many impacted by the NCAA’s decision to adopt Name, Image, and Likeness are ill-prepared for the tax consequences they could be facing.
“I had a player come to me in tears,” an SEC recruiting coordinator told On3. “He had no clue that he had to pay taxes for his NIL income. He wasn’t a guy that made tens of thousands of dollars. But he made enough that he should file a return and will probably owe some money.
“I asked him where his 1099s were. He stared at me with a blank face and said, ‘I don’t know what you’re talking about, coach.’ We later came to find out that he had gotten some 1099s. But he threw them all away.”
A compliance director at a Big 12 program told On3 a similar story.
“I’m really worried that they’re going to be in for a big surprise,” the compliance director said. “If they even file their taxes.”
Filing taxes for NIL is ‘shock to system’ for student-athletes
It’s a common theme echoed across the country.
Despite all the good that’s come from student-athletes making money off their NIL, experts agree few college players are prepared to pay the taxman or even know they have to file taxes.
“I think a lot of athletes are surprised they have to file taxes. They weren’t prepared for it,” said Ryan Whelpley, an associate in the Corporate Practice Group at Morse in Waltham, Mass., who has written extensively about the tax consequences for student-athletes surrounding NIL. “There’s a lot of reports out there that athletes are unaware that they need to file taxes. I think a lot of them now, especially toward the end of the tax season, are starting to figure that out. So, I think we’ll see a good amount of the athletes filing for an extension for their taxes if they were too late to get their taxes filed.
“I think this year is a shock to the system.”
Katie Davis, a practice lead for higher education & collegiate athletics at CPA firm James Moore & Co., recently told DreamField that taxes should be the first thing student-athletes pay attention to when working on NIL deals.
“Be aware that taxes exist, and it could be more than you think,” Davis said. “In a way, college athletes have it harder than the pros because no one is withholding taxes on your behalf like they would if you were an employee of a company.”
What forms of NIL income can be taxed?
College athletes are making money through NIL activities in a number of different ways, including guest appearances at clubs, schools, autograph signings, exhibitions, sponsorships, endorsements, content creation/influencer, non-fungible tokens, gifts and giveaways (gift cards).
Tax experts say any net income from NIL activities – including non-cash compensation – is considered taxable income.
For example, if a business pays a college athlete in the form of products endorsed for the business, such as clothes and shoes, the athlete should include the fair market value of those products in their taxable income.
“A lot of people think traditionally just cash received is taxable income,” Whelpley said. “But it also comes in other forms of non-cash considerations. It’s merchandise that they might be receiving from a NIL deal – if they’re sponsored by a particular product, if they get clothing and shoes, if they have a car lease or use of car, or maybe get gift cards.
“Those are all different forms of consideration that are applicable. You have to take into account the fair market value of those different products when filing taxes.”
Most making NIL money are independent contractors
Most student-athletes are paid for NIL activities as independent contractors, meaning they are considered self-employed.
A company hiring an athlete as an independent contractor for NIL does not withhold income, Social Security and Medicare taxes. As independent contractors, college athletes are responsible for making their own estimated federal and state tax payments. This includes both the employer and employee portion of Social Security and Medicare taxes.
“It’s definitely something that they should be conscious about when they’re entering into deals,” Whelpley said.
“Most of these athletes are independent contractors. They’re responsible for filing and paying taxes, unlike an employee where, traditionally, taxes are withheld from your paycheck. That doesn’t happen with an independent contractor. And it’s usually in those agreements that it expressively identifies they’re responsible for paying taxes. So, understanding the allocation from the start when entering these deals is important.”
What taxes are required for NIL income?
It’s important to understand the types of taxes student-athletes making money off NIL are responsible for.
- Self-employment tax: Whelpley said the income generated from NIL activities is considered self-employed income. This means the college athlete must pay self-employment tax. Self-employment tax is a tax consisting of Social Security and Medicare taxes. The self-employment tax rate is 15.3%.
- State tax: Whelpley said in any state a college athlete earns income from NIL activities, the athlete owes state income taxes unless that state does not have individual income taxes. The student-athlete could also owe income taxes on NIL earnings in their state of residency. Whelpley said the income tax rates and deductions vary substantially from state to state.
- Federal tax: Whelpley said the standard deduction for 2021 is $12,550 for single filers. If the college athlete’s income is below that amount, they generally will not owe federal income taxes or be required to file a federal income tax return. The standard deduction for 2022 increases to $12,950 for single filers.
- Quarterly taxes: Whelpley said if the college athlete expects to owe more than $1,000 in federal taxes for any NIL income for that tax year, they may need to make estimated quarterly tax payments using Form 1040-ES, or face a penalty for underpayment. This pay-as-you-go approach can help athletes who earn big paydays avoid a large tax bill.
How is NIL income reported?
Experts also say it’s important to note the different types of tax forms that could be required as an independent contractor.
If a student-athlete earned $600 or more, income will be reported on Form 1099-NEC. If they’re paid through a third-party platform, like Paypal, student-athletes would receive a Form 1099-K if they had 200 or more transactions and made $20,000 in 2021. Beginning in 2022, the payment threshold for Form 1099-K will be reduced from $20,000 to $600. The transaction requirement will be eliminated entirely.
If a college athlete’s net earnings from NIL activities are $400 or more, they need to file a Form 1040 Schedule C and pay self-employment taxes. Even if the college athlete’s net earnings from NIL activities are less than $400, they still have to file an income tax return if they meet any of the other requirements listed in Form 1040.
What about deductions?
Tax professionals say any expense directly related to NIL activities can lead to deductions. Those are important because they subtract from the taxable income to lower the amount owed. Experts say to make sure to have receipts for deductible items like:
- Travel expenses (airfare, hotel, baggage fees)
- Meal expenses
- Internet and phone expenses
- Advertising expenses
In addition, Whelpley said college athletes should track all tax deductions for record-keeping purposes. That can be done through a monthly spreadsheet, or an expense tracker app. Davis has created an Excel template she recommends to help student-athletes track expenses and potential deductions.
Will government go after players that don’t pay taxes?
Most NIL insiders agree we won’t know for a while what percentage of student-athletes will their taxes in 2021. And it’s also too early to tell if Uncle Sam will make an example out of college athletes who fail to pay.
“It’s definitely a concern that some college athletes that were compensated through NIL deals either won’t properly account for that compensation in their tax returns or won’t file tax returns at all,” said Mit Winter, a sports attorney at Kansas City-based Kennyhertz Perry LLC. “But I don’t think we’ll see the IRS coming after lots of college athletes for not properly filing their taxes. The athletes that signed financially significant deals have agents or other advisors that helped them with their taxes. And the IRS likely isn’t going to waste its limited resources on going after athletes that received small amounts of money or that were compensated via something else besides money, like free food or gift cards.
“That said, if the IRS is presented with clear evidence that an athlete didn’t file taxes when he or she should have or didn’t report all of his or her income, it may decide to make a point of an athlete.”
Whelpley agrees about the IRS targeting an individual player. But he also wouldn’t be surprised if the government looks at the entire issue.
“They may go after an issue like this,” Whelpley said. “Their attention may not be on a sole athlete that only makes a few hundred dollars but as a system as a whole, if there are many athletes that are not filing their returns or missing tax payments. They might take another look at this to better understand the issue.”
Education key to eliminating tax issues with NIL
That’s why everybody involved – tax experts, NIL insiders, college coaches and compliance directors – agree that more education is needed. It’s needed to help student-athletes better understand that paying taxes from money generated off NIL can’t be avoided.
“The education piece is important,” Winter said. “Universities should either be educating their athletes on the basics of paying taxes or partnering with organizations that can provide that education.”
Whelpley stressed the importance of student-athletes also working with a tax professional and not just leading up to Tax Day. But he also said education about tax consequences with NIL must be a priority for everyone involved moving forward.
“I think it has to be all parties,” he said. “Whether it’s the school, the platform, the representation for the student-athlete, an attorney, an athlete, an agent, even the brand, everybody has to do a better job of educating. That’s how NIL can be more effective and tax compliant. The more education you can give them, the better they’ll all do.”