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The Tax Implications for High School and College Athletes

David Wagner

The Tax Implications for High School and College Athletes

David Wagner, Advanced Staff Accountant

By now, many of you have heard the news about Name, Image, and Likeness (NIL) interim policy has been adopted by the National Collegiate Athletic Association (NCAA).  According to the NCAA President, Mark Emmert, “this is an important day for college athletes since they all are now able to take advantage of name, image and likeness opportunities.”  The intentions of this law are to allow high school and college athletes the ability to promote themselves, without removing eligibility from the student athletes.  Included in the law are strict rules preventing athletes from being compensated for their performance of their sport and using “improper inducements” tied to the choice of a particular school, hence “pay for play”.  Prior to this law, NCAA athletes, with a considerable following on social media, were forced to forgo payment from Youtube, Twitch, Tik Tok, etc. to continue to play the sport which has become so much of their life. 

While this ruling only became effective at the beginning of July, many high school and college athletes are eagerly looking to sign life-changing deals for their NIL. Bo Nix, Auburn quarterback and one of the first to sign a NIL deal, posted a sponsored post for Milo’s Tea Company on his Instagram.  Hercy Miller, an incoming freshman basketball player at Tennessee State, has signed a four-year ambassador deal, worth around $2 million, with Web Apps America, a technology company. Some companies are even taking gambles on players before they’ve even started a game at the collegiate level.  Bryce Young, quarterback for University of Alabama, has already signed deals amounting to over $800,000, with a few million dollar deals pending, without ever starting a game at the collegiate level.

For a bit of local flair, University of Kentucky basketball player, Dontaie Allen, is launching his own custom merchandise deal with The Players Trunk, for an unspecified amount. While these deals are great income for student athletes, the last thing on their minds are the taxes resulting from these deals. 

At this time there is no specific guidance from the Internal Revenue Service, but there are two key ways this income could be treated based on professional athlete guidance provided by the IRS: service-based income or royalty income. 

Service-based income, such as commercials and social media revenue, will be treated as nonpassive income, self-employment income. Royalty income can be treated as either nonpassive or passive income depending on the level of participation.  Just as all things in tax, that still leaves one question, what qualifies as participation? 

The participation tests are compiled of seven different tests in which a person must only satisfy one of these test to be considered a participant in the business. These can be found on the following website under Material Participation Tests. (For greater explanation on the tests, please seek help from a Strothman tax professional.)

Self-employment Income

If you qualify for any of the participation test, this would require the athlete to be considered self-employed. The income resulting from the deal will require the athlete to pay self-employment tax of 15.3% on their first $142,000, on top of the federal income taxes for any profit made off of the deals. 

While taxes do take away from the income that the athlete brings home, the great benefit to self-employment income is the ability to claim expenses for the year in relation to the income from your personal business.  There are different tax strategies to help lower the taxes you pay as an individual, such as creating an S-Corp and paying a salary to yourself.  But, there are many other tax strategies available to help relieve some tax burdens of these deals.  

Passive Income

If the athlete does not qualify for any of the test indicators, the deal will fall under passive income.  If the income falls under passive income, two questions need to be answered:

  • Is this student athlete claimed as a qualifying dependent (see qualifying dependent rules) on another person’s tax return?
  • Is the amount of passive income from the contract and personally in excess of $2,200?

If the answer is yes to both questions, the Internal Revenue Code (IRC) currently states that passive income will be subject to “kiddie tax.”  The kiddie tax is calculated on passive income over $2,200 attributed to the children, at the parent’s or guardian’s tax rate.  For example, if a dependent student-athlete makes $10,000 of passive income during the year, $7,800 of their passive income would be taxed as if the income was the parent or guardian claiming the qualifying child.  ($10,000 – $2,200 = $7,800).

The original intent of the kiddie tax rule was to prevent an athlete’s parents from eliminating passive income from their personal return and placing it on their children’s return to pay a lower income tax rate overall by spreading out the earnings to their children.  However, with the ability for dependent children to be making substantial amounts of money as passive income off of the NIL interim policy, there might be a refreshing of the IRC or a ruling by the IRS to show guidance for these new, unprecedented circumstances. 

The ideas discussed in this article will lead to many more questions, not just on a federal level, but also at the state and local tax level.  If you or anyone you know would like to know more information on this topic discussed, please feel free to reach out to me, dwagner@strothman.com.