Do I Have to Pay Taxes On My NIL Deals?

You are a college athlete who just signed an NIL (Name, Image, Likeness) deal with a local auto dealership to post ten times on your social media accounts and do two autograph signing appearances. In exchange, the dealership is going to let you choose a brand-new SUV from their lot to drive for free for an entire year. This sounds like a sweet deal and a little too easy, so what is the catch? TAXES

With NIL live as of midnight on July 1st, there has been a lot of excitement and reporting about which athletes are receiving endorsement deals and what types of deals are allowed. Unfortunately, there has been limited guidance and education for the “student-athletes” on what these endorsements mean come tax time.

Every student-athlete is going to have a unique tax situation. This is not meant to be a guide to filing their taxes. This is meant to be a guide to understand what their endorsement deal may mean for them from a tax perspective. Ideally, this eliminates some big surprises for some athletes and helps them be more prepared when structuring a deal and when filing their taxes.

One of our own Private Wealth Advisors here at AWM, Zach Miller, is also an 8-year NFL vet and Super Bowl champ. On his time playing in college, he says:

“I know how much I could have used the extra money from endorsements when I was at Arizona State. Along with the opportunities to make money there is going to be complexity and universities should be giving the playbooks for finances and taxes to their players, too.”

As a young NFL star in their prime, money will come and go. But If you’re not wise about your taxes and investments, when it comes time for NFL retirement, you’ll be in a pinch to secure your financial independence.

What compensation is taxable?

• Cash payments (endorsements, posts, appearance fee, autograph signing)

• Merchandise deal: A deal that allows you to spend up to a certain amount on their goods

• Car lease or other use of a car

• Any goods received in exchange for promotion: clothing, merchandise, equipment, etc.

• Sale of products produced by or for you

What taxes will you have to pay?

NIL income is considered “Self-Employment” income. For any deals you sign where the compensation you receive is more than $600, you should receive a form 1099 from the company who “paid” you.[1]

• Federal Tax: Any amount over $12,550 will likely be subject to Federal tax. There is a standard deduction of $12,550 if you are single, meaning if your TOTAL income is below that amount you will not owe Federal taxes.

• State Tax: Whatever state you earn the income in, you will owe tax. The state you reside in, most likely the state that you are from and that your parents live in, could also be owed taxes, depending on your residency status.[2]

• Self-Employment Tax: Any “compensation” from NIL deals is self-employment income, which means you must pay self-employment tax. SE tax is in the 12-15% range for the first $142k of income.

When do you have to pay taxes?

Student athletes with reportable income will need to file a tax return or extension by April 15th, 2022. If an athlete had income in 2020, they may have to pay quarterly estimated taxes for any NIL money earned in 2021. This means an athlete could have a tax payment due as soon as September 15th.

Financial Aid:

If a student athlete is on any sort of “needs based” scholarship, financial aid, or grant, NIL income may affect their eligibility for financial aid. The university’s financial aid and scholarships department can assist them to find out how their aid would be affected by any NIL income. (There are too many nuances and unique circumstances to give general guidance here)

Conclusion:

The new NIL rules is great for student-athletes. There will be thousands of deals (with a handful of large deals) that help athletes capitalize on their brand. Unfortunately, there will be stories of athletes who jump into deals they do not fully understand and athletes who owe lots of money they don’t have to the IRS. We believe in taking ownership of your wealth through getting educated.

• Understand how deals are structured.

• Know what must be done to fulfill the contract.

• KNOW what will have to be paid in TAXES.

If you have more questions about Name, Image, & Likeness, don’t hesitate to contact Zach.

[1] Even if you do not receive a 1099 from the company, it is your responsibility to self-report the income to the IRS. Failure to do so can lead to penalties and interest due along with the original amount of tax owed.

[2]  The amount you pay to the state you earn in may reduce the amount you owe to the state you reside in. States have varying tax rates and standard deductions, and some have zero income tax. These state tax issues start to show the complexities of the tax laws and interpretations that student athletes will be faced with on their own.

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