Changes in name, image and likeness rules have presented student athletes with wonderful opportunities as well as a host of complex financial planning and tax challenges. The following ten important facts can help these talented young people and their families navigate tricky financial considerations and avoid unexpected tax compliance problems.
- Your NIL compensation is not part of your athletic scholarship. Distinguishing between athletic scholarships and NIL income can be difficult and confusing, especially when you receive both. But it’s essential to carefully determine which is which. Scholarships are often untaxed but may be taxable in certain situations. NIL compensation is always taxable since, in the eyes of the IRS, it is earned income.
- NIL income often requires you to pay estimated taxes. NIL income you earn as a student athlete may be reported on a 1099 or another form instead of Form W-2. State or federal taxes probably aren’t being withheld when you get paid, so it’s on you to file and pay quarterly estimated taxes. The IRS doesn’t care if you didn’t know that; they’ll still hit you with penalties and interest if you don’t pay on time.
- Form 1099 income is business income. That whole 1099 thing goes back to an essential distinction: Money you earn as an employee is reported on Form W-2. Money that’s reported another way is usually considered self-employment income, a form of business income. Filing your annual tax return will involve more complexity and more forms, plus more recordkeeping to keep you from paying too much tax.
- Business income calls for a business entity. You need the right business entity to handle NIL income. Should you choose an LLC, S-corp or a different entity? It depends on your current NIL activities and future plans. Getting it right the first time around will save you headaches plus big money on your tax bill, but you still may want to change it later as your business income and NIL opportunities evolve.
- You need to keep detailed books and records. Many of the expenses associated with your athletic activities may be tax-deductible. To claim the deduction, you must be able to prove the expenses. Put NIL income in a separate account from other money and pay for sports-related costs out of dedicated NIL accounts (like a particular credit card). Keep track of mileage plus your costs for travel, training, equipment, marketing, agents, advisors and everything else, then work with a qualified CPA to determine which expenses are tax deductible.
- Nexus rules differ between states. When you establish nexus, you incur tax obligations in a specific jurisdiction. The number of events you have in the state, the total amount you earn in the state and other metrics can trigger all nexus. You need to understand the rules everywhere you live, play, work, travel or go to school.
- Multi-state income means multi-state tax obligations. You must report income and file taxes in each jurisdiction where you’ve established nexus, which means student athletes may owe money in multiple states. It’s important to keep in mind that while federal rules for NIL remain relatively consistent, state laws are constantly changing, with some states already introducing legislation to exempt NIL payments from state income tax entirely. These fluctuations mean that your take-home pay could differ significantly depending on the state where your school is located or where you establish nexus. It’s essential to work with a highly qualified tax advisor who can monitor nexus rules against your NIL activities so you can file and pay taxes appropriately. Otherwise, you could be on the hook for big tax bills, including penalties and interest, that you didn’t expect to owe.
- NIL income carries a higher risk of audit. More complexity creates a higher risk of noncompliance, and the IRS knows NIL income complicates the picture. They’re looking more intently at student athletes now, so winging it is not a smart strategy, no matter how appealing this pay may appear initially. Get good advice, keep clear records and use them both to help ensure your compliance with tax laws.
- Some taxable NIL income may not be in cash. You expect to owe taxes on NIL checks, but do you grasp the tax implications of non-cash compensation? Things like travel, cars, training, food, entertainment and other perks you receive as part of an NIL deal may seem like free gifts, but they’re counted as income. Be prepared to report their fair market value (FMV) and pay taxes on the income they represent.
- NIL can mask as gifts, grants or financial aid. Don’t be fooled if you receive NIL compensation from a collective that uses language describing it as financial aid. This money (and other forms of compensation) is business income; you have a legal responsibility to report and pay taxes on it, even if you don’t get a 1099 or another tax form that shows it. The IRS knows the difference, so you should too.
Turn Your NIL Into Sustainable Success
While most of their peers are receiving their first W-2, student athletes may be earning thousands or more in NIL income, which introduces complex tax implications. It’s reasonable to be confused, but don’t let your lack of experience create legal or financial problems for you down the line. Our experienced NIL advisors are here with answers and advice so you can stay on the right side of the IRS. Reach out today and find out how we can help you make the most of your NIL opportunities to build the life you want.
