Navigating the Complex Tax Landscape of NIL
Understanding Tax Implications for Student-Athletes
Student-athletes can now benefit from their name, image and likeness (NIL) contracts. The NCAA board of governors has implemented an interim policy, which suspends the previous policy, allowing student-athletes to enter into NIL deals and be compensated for using their NIL. This compensation can be monetary and/or non-monetary and has significant federal and state tax implications.
Federal Tax Considerations
The NCAA notes that monetary and non-monetary compensation are taxable income, and student-athletes who benefit from their NIL must file a tax return. Common forms of NIL income include:
- Sponsorship/service income is one of the most common incomes student-athletes derive from NIL deals. Under these types of arrangements, the athlete must present logos or products at an event for which they receive compensation.
- Cash awards from NIL income will likely need to be reported on Form 1099-NEC, which the student-athlete will receive every year from the organization the athlete represents. Such payment must be included in the student’s taxable income. Notably, these earnings differ from W-2 wages, and no income taxes will be withheld. The athlete will be subject to both income tax and self-employment tax and will be required to file returns. The student-athlete will likely need to make quarterly estimated tax payments for such income.
- Royalty income is compensation for using NIL on media, such as video games. Royalty income is included in the athlete’s taxable income. The critical difference between royalty income and sponsorship/service income is that the athlete is not obligated to present the sponsor’s logo or products in the case of royalties.
- Non-cash NIL benefits can be considered taxable income and should be taken into account. For example, suppose the student-athlete is compensated for autographs, appearing in an advertisement or on social media. In that case, they must notify the school program and include such consideration in gross income.
The NCAA has released general guidance for college financial aid offices. Still, it only states that NIL income should be considered in determining the amount of financial aid and does not consider the impact of NIL on student income.
State Tax Implications
College athletes potentially generating income from NILs will need to navigate several state income tax issues, as complex issues could arise concerning the student-athlete’s residency status. It is commonly known that an athlete’s “home state” usually will remain their state of residence even if the athlete leaves that state to play for a university in another state. For example, an athlete who is a Kansas resident, but attends the University of Texas, will generally remain a Kansas resident for state income tax purposes.
Student-athletes will need to be aware of the domicile and statutory residency rules and the factors for establishing residency for the state in which they attend school and their home state if they intend to change their residency to the state where the university is located.
Regarding income tax, not all states impose income taxes, but some can impose tax at rates up to 13.3% and the rules on tax deductions can vary. If a state imposes a personal income tax, the student-athlete’s residence state will tax the athlete’s income from all sources, while nonresident states could seek to tax a portion of the athlete’s NIL earnings. Furthermore, it is a question if states will seek to source or apportion athletes’ NIL income using game days or duty days formulas, and if so, what reporting obligations could apply from state to state?
Allowing student-athletes to profit from using their NIL is a game changer; however, NIL legislation varies from state to state, creating uncertainty and confusion. It remains to be seen whether and how NIL will be legislated at the federal level. Licensing agreements can differ regarding compensation and rights granted to the student-athlete.
Further, it is critical that student-athletes fully understand the potential tax and reporting requirements and stay on top of developments as the playing field continues to evolve at both the state and federal levels. Finally, we recommend student-athletes generating income from their NIL assets obtain professional advice to help navigate these complex issues. Contact an Adams Brown advisor to discuss further.