Following a lengthy legal battle, the AP reports U.S. District Court Judge Claudia Wilken approved a deal between the NCAA and lawyers representing college athletes. While the deal is nuanced, the key takeaway is schools can now begin paying athletes directly. This change represents a significant departure from the NCAA’s longstanding tradition of its players being student-athletes, hence remaining amateur (and unpaid) during their time in college. Although this coming year will be the first time that college athletes will begin to get paid directly by their schools, athletes receiving millions of dollars through NIL and endorsements has become a mainstay in recent years. This ruling will allow each school to pay a total of $20.5 million to their student-athletes in the initial year.
While these significant cash flows for the college athletes can be financially beneficial, they also carry tremendous tax burdens that the players may not be prepared to accept. Here are three important tax considerations that NCAA athletes should consider as they head into a new era of compensation.
1. All Compensation Is Subject To Taxation
Section 61(a) of the Internal Revenue Code states, “Gross income means all income from whatever source derived.” This line item means that as athletes receive money — from schools; name, image, and likeness collectives; or sponsorships – they will be required to remit taxes on those funds received. As many deals are worth millions of dollars, it is important to highlight the ramifications of receiving these funds.
For instance, consider Duke standout basketball forward Cooper Flagg, whose Fox Sports reports he received $28 million in compensation during his one year as a college star. This amount of income firmly puts him into the top tax bracket at the federal level, meaning that all income over $626,350 will be taxed at a 37% tax rate. This means that without any other deductions, Flagg would owe over $10 million in federal income taxes. Furthermore, Flagg will have considerable state income tax liabilities due to the 4.25% tax rate levied in his home state of North Carolina. He also will have to pay the 15.3% self-employment tax.
What can also be problematic is that all compensation — including in-kind benefits — is subject to taxation. According to Opendorse, athletes need to be aware of compensation beyond just the cash payments they receive. For instance, if a player has a partnership with a local car dealership and, as part of that partnership, the athlete gets a free car lease, the fair market value of that lease is a form of compensation to the athlete. Similar rules apply to other forms of in-kind compensation such as athletic gear, meals and entertainment, and travel expenses.
A potential factor lost in the equation is NCAA athletes do not have an employer who takes taxes out of their paycheck, as most taxpayers do. Instead, they must make quarterly payments to the taxing authority for their portion of the taxes owed. Thus, if an athlete receives a $1 million check, the individual must put aside a significant portion (potentially more than half of it) of those funds to pay taxes. This withholding will become even more important as athletes begin derive even more compensation directly from their schools.
2. College Athletes Also Need To Pay The Jock Tax
A critical wrinkle in the taxation of sports-related income is the jock tax. According to H&R Block, the jock tax is an extra layer of taxation levied on athletes when they play in a different taxing jurisdiction. This tax is levied on the athlete’s salary. However, some jurisdictions will include bonuses that were achieved if the conditions of receiving those bonuses were met while performing in that other jurisdiction.
The jock tax has led to numerous news headlines. According to Kiplinger, the jock tax led to a back-and-forth tax battle between California and Illinois over NBA legend Michael Jordan’s income during the 1991 NBA Finals. The article also highlights how other NBA players like Stephen Curry and Nikola Jokic routinely pay over $1 million in jock tax on an annual basis.
The precise formula for calculating the jock tax is messy and varies substantially based on where the athlete plays. College athletes now being compensated by their school will need to determine the portion of their income earned while playing at universities and tournaments in different states and ensure that they comply with the tax laws in those states.
3. State Income Taxes Come Into Play
Even after college athletes pay federal income taxes and jock taxes, they will then need to pay their state income taxes. Those rates can fluctuate drastically, from as high as 13.3% in California and as low as 0% in several states, including Texas, Florida, and Washington. Thus, athletes may want to consider their state tax liability when selecting their school. As I covered in a Forbes post, an athlete like Arch Manning decided between playing at Alabama, LSU, and Texas. While there were clearly many factors in play, Manning chose to play at Texas (0% state income tax rate) over the other schools in states that impose an income tax, saving him hundreds of thousands of dollars per year.
This nuance has led to states like Alabama and North Carolina to consider exempting NIL from state income taxes. As I noted in another Forbes post, Arkansas has gone the entire way and passed a law exempting this income from state taxation. Interestingly, many of these proposed and passed laws were directed at NIL income without considering the possibility that these athletes might eventually get paid directly by their schools. Thus, the House v. NCAA ruling has tremendous impacts on state income taxation considerations for these athletes. The players will need to carefully consider and monitor their income to ensure that they comply with state tax laws.
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