Now that college athletes can earn money off their name, image and likeness (NIL) after the NCAA adopted new rules in June 2021, they may find a costly surprise from Uncle Sam.
Money made off of social media accounts and perks like free shoes, a clothing allowance, or use of a car all can be taxable, and ignorance of tax laws won’t save athletes from the IRS.
“NIL representation in college isn’t the same as agent representation for the NFL or NBA where there is an attorney or accountant in house, [NIL] is just representation, no one to tell you to set aside for taxes," former NFL and Hofstra University football player Devale Ellis told Yahoo Money. "A lot of these kids are signing these deals and aren't aware of the tax implications.”
Here's how it breaks down.
What’s taxable income?
For many student athletes, the easiest way to earn money is as a social media influencer, monetizing their social media channels.
“Some of these kids are coming out of high school with 200,000 followers on social media, so the brand is instantly monetizable,” said Mekka Don, former football player at Ohio State University, entertainer, and lawyer who has negotiated media opportunities, licensing, and endorsement deals for artists and athletes.
Most content creators start earning income from partnerships, merchandise, donations or tips, and subscriptions — known as subs —according to Juan Rodriguez, a certified public accountant and founder of Lodgz Financial PLLC.
“This isn’t tax free and they need to track and report this income,” Rodriguez told Yahoo Money, recommending an accounting software such as QuickBooks or Xero "to ensure they’re reporting all income that hit their account during the calendar year.”
Other perks athletes might get — from shoes to clothes to cars — can also be taxable, even though it's not direct income.
“These kids are getting deals to drive a car around for a year in exchange for a number of social media posts or an unlimited allowance to spend on Nike’s website,” Don said. “Just because there is no actual monetary exchange doesn't mean that there isn't value that's taxable.”
It may be difficult to determine a dollar amount, but the value of those items are taxable. This is where having an accountant is helpful.
“An athlete given use of a car for one year from a local dealership for appearing in their commercials must report the value of that usage as income,” according to a post written by Katie Davis, CPA, a partner with James Moore & Company and leader of the firm’s Collegiate Athletics Services division.
What taxes do athletes need to pay?
When most people work, they receive a paycheck with taxes taken out by their employer. At the end of the year, they receive a W-2 form. By contrast, athletes, entertainers, and social media influencers are typically considered as contractors who are self-employed and receive a 1099 tax form documenting their income.
“When you get paid with a W-2, you have FICA taxes taken out," said Stacie Jacobsen, director of the wealth strategies group and co-lead of the sports, media, and entertainment group for Bernstein Private Wealth Management. "But most of these athletes receive a 1099 as independent contractors, so they are responsible for Social Security, Medicare, and state taxes."
Those taxes must be paid even if the athlete doesn’t owe federal income tax, according to Davis.
“As with any other taxpayer, a return must be filed if the athlete makes at least $400 of self-employment earnings in the tax year,” Davis wrote.
Then there's state tax, where filing can get "wildly confusing," according to David, if an athlete from one state attends college in another because varying state tax laws and residency requirements. The athlete could end up owing states taxes in two states.
Making it even more complicated is if the athlete has endorsements or other income-generating activities in yet another state, which could mean owing taxes in that state as well.
“What [college athletes] don't realize is that you don't only have to pay federal taxes, but I learned this being in the NFL, I had to pay state taxes in every state that I made money in,” Ellis said.
When taxes get even more complicated
We live in a crypto world. Some professional athletes, like Super Bowl champion Odell Beckham Jr., are taking their salary in crypto currency. In December, Postgame offered NIL Coin (NIL), a cryptocurrency built on the Ethereum blockchain, to reward college athletes for the use of their NIL.
Recently, crypto’s value took a nosedive. For tax purposes, do you report the value at the time of the deal or the decreased value?
“Bitcoin was $66,000 a coin a month and a half ago, and now it's $30,000, but you pay taxes on the value of the deal when it was received,” Don said. “The flip side is, let's say the value at the time of the deal was $30,000 and then it went to $60,000. You pay taxes on the initial deal at $30,000 and would probably have to pay capital gains tax on the difference that increased since the original deal.”
The tax implications can also affect the parents of student athletes.
“Many athletes are still dependents on their parents' tax returns and NIL deals might reduce financial aid awards and impact their parents' taxes,” Jacobsen said.
For instance, the University of Georgia informed student athletes that Pell Grant or need-based financial aid could be affected by compensation received from NIL activities. If athletes aren’t on a scholarship, their financial aid package might be reduced based on taxable income received from NIL deals.
Finally, the few college athletes earning millions from NIL may benefit from setting up an LLC to report income on Schedule C of their tax returns, which allows them to deduct other expenses, like fees to hire a CPA, according to Mitchell Butvilas, a tax associate at Grossman Yanak & Ford LLP.
Protect yourself from the tax man
Each state and college is trying to come up with its own rules and advisory board to help athletes navigate NIL deals. But ultimately, it’s the athlete’s responsibility to pay all applicable taxes. College athletes negotiating NIL deals likely should speak to a tax professional to make sure they don’t get caught in the IRS’ crosshairs.
“We were kind of just thrown into it and I haven't had to really deal with any taxes and don't have too much experience with that,” said Penn State swimmer and college senior, Olivia Jack, who recently opted out of capitalizing on her NIL in part because of the complicated finances behind it. “It's very rare for someone to have taken a personal financial literacy class in high school or college, so for us to be expected to know how to handle our finances with no prior education has been absolutely wild to me.”
Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda