NIL tax tips for college athletes

February 28th, 2024 Off

By Chris Clark

If you are a college athlete making money – or thinking about making money – from you name, image, and likeness, you need to make sure that you are educated on your tax responsibilities. Dollars earned from NIL activities will be subject to both self-employment and income taxes and must be reported when filing your yearly tax returns.

AthletesForProfit.com spoke with Dr. John Karaffa, a sports tax law expert, college professor, founder of ProSport CPA, and author of Touchdown Finance, to gain some insight into precisely what athletes need to know from a tax standpoint.

“The biggest/first thing I tell them is ‘Welcome to Taxes!'” said Karaffa. “It’s a great opportunity, but now we will be serving (our future pro athlete clientele) sooner than we would have in the past. Athletes need to remember that some tax will be owed on the money being paid to them. And as time goes on, they will learn firsthand that taxes are their largest expenses, by far, and they should take time to learn about how to mitigate them.”

Karaffa pointed out that many college-aged students – including athletes – are already working in the “gig economy” by taking on jobs working for companies like Uber, Lyft, and Doordash, meaning that they may already be familiar with Schedule C (also known as self-employment, or 1099) income and the corresponding tax obligations.

Said Karaffa: “I wrote my book, Touchdown Finance, as a guide for young athletes to help them build healthy habits and to share nuggets of wisdom from former professional athletes on how to make good financial decisions. The earlier they can get engaged on personal finance and tax, it will pay off.”

One common question among student-athletes seeking to participate in the NIL economy is this: should an LLC (limited liability corporation) be created?

“It really doesn’t save someone tax-wise to set up a LLC/loan-out company unless the income may approach 6-digits annually. An LLC otherwise can be useful to add some anonymity, to protect a player’s Social Security Number, to provide some liability protection, and for posterity reasons,” Karaffa explained. “Many student-athletes are spending money on LLCs, under the pretense that it will save them in taxes. That is incorrect. The LLC on its own does not magically make expenses deductible that weren’t already deductible.”

Here are some other helpful NIL tax tips for college athletes, based on Karaffa’s recommendations:

Keep track of and document your earnings.

Ensure you maintain copies of any contracts you sign for NIL services. Keep records of your bank statements as well as 1099 tax forms that are issued to you by the companies paying you for services. Also, you may be able to deduct certain expenses, so keep receipts of any funds you spend that could be related to your NIL business.

Understand how NIL earnings are taxed. 

NIL endorsement dollars and NIL royalties must be reported on your income tax returns and could be taxed differently. Be sure to set aside some of your earnings to pay for taxes (some of the more prominent athletes could owe 30-40% in tax on what was earned).

Your state of residence matters for NIL tax purposes. 

The state you maintain a residence in could make a significant difference in how you are taxed on your name, image, and likeness activities.

Seek out good teammates. 

This is a great opportunity for you to start building a relationship with a tax professional who understands athlete tax. As a pro, you will want the best on your team, so start now with someone reputable and knowledgeable in this area.

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