In June of 2021, the world of college athletics saw a drastic shift when the NCAA decided that college athletes could begin using their name, image, and likeness (NIL) as a source of revenue. Since this ruling, we have seen many athletes, like Shedeur Sanders and Caitlin Clark, reach net worth figures exceeding $3M! However, with new income comes new responsibility. The NIL policy that allows college athletes to make money through their own personal brands also results in complex tax reporting requirements. It is important for these student athletes to ensure that all the necessary steps are being taken to maintain compliance with federal and state tax reporting laws.
What Is NIL Income?
NIL income can be sourced from various kinds of promotional endeavors such as personal appearances, tangible merchandise, camps, and clinics. All NIL income (including non-cash benefits and compensation) is considered taxable and reportable income, which can come with some unknown territories.
College athletes who are receiving NIL income will be considered “self-employed” and will be issued a 1099-NEC reporting their taxable earnings for the tax year (if they received income of at least $600). As self-employed taxpayers, these student athletes will be responsible for paying self-employment tax in addition to regular income tax. Self-employed individuals are also generally responsible for making quarterly tax payments because tax is not withheld from their pay throughout the year.
What Should I Consider When Receiving NIL Deals?
When determining whether to take advantage of NIL income opportunities, student athletes should consider what state legislation has decided regarding the NCAA’s ruling. Currently, no federal law prohibits or allows NIL; the decision is left at the state level. Pennsylvania was the 25th state to pass an NIL law allowing student athletes to collect NIL income.
Once it has been determined whether a student athlete can participate in NIL deals based on state regulations, it is important to look at the significance of the income that could be earned. Forbes estimates that the average NIL deal will net a student athlete around five figures, with more prominent athletes reaching six-figure and seven-figure endorsements. However, tax complications can arise for all student athletes receiving NIL income – not just the famous athletes we see on television.
Complex issues can also arise with respect to a student’s residency status. A student athlete’s “home state” is typically the state of residence, regardless of where the student attends school. For example, a student athlete who is a resident of Pennsylvania but attends school in Ohio will generally remain a Pennsylvania resident for state income tax purposes. Adding further complication is the fact that athletes traveling to compete in other states will likely owe taxes on income earned in those states, as well as being subject to taxation in their home state.
Other Important Tax Matters
Additional considerations for student athletes receiving NIL include:
- File Schedule C with Federal Form 1040 to report taxable NIL earnings
- Document and track all expenses – expenses related to NIL income can be deducted against the NIL income, serving to reduce the overall tax liability (common expenses include mileage, airfare, lodging, meals, agency fees, etc.)
- Submit quarterly estimated payments on time to avoid paying penalties and interest
- Track income and expense like a business owner – maintain separate bank accounts and credit cards to separately account for all NIL-related income and expenses
- Consider forming a legal entity, such as a Limited Liability Company, to limit personal liability
While getting paid to play the sport they love may sound like a dream to a lot of college athletes, most probably don’t anticipate the potential nightmare of dealing with the administrative tax burden that comes along with NIL income. An understanding of the associated tax responsibilities, along with careful record-keeping, can make the compliance process easier.
If you are a student athlete that needs tax advice related to your NIL income, please reach out to your GYF Executive or contact our office at 412-338-9300.
