Have you heard of NIL? If you’re a sport fan, or student-athlete, then this has been a great topic of conversation in the last few years. Since 2021, student-athletes have had the opportunity to profit from endorsement agreements and business ventures using their own personal brand via their Name, Image and Likeness (NIL). This shift has rocked the sport world, changing the landscape of what it means to play professional sports and the rewards (and responsibilities) that come with it at such a young age.
And since it’s April, you know what we are going to talk about: taxes and NIL income!
How NIL income is paid to student-athletes, thus taxed, is worthy of a conversation. Unlike their fellow players in the world of professional sports who receive W2 income, the student-athlete is traditionally paid via 1099 income as an independent contractor and can receive in-kind compensation in the form of gear or larger tangibles that go vroom. The “why” of this income is not what I’m going to focus on here, but the “how” is what I’m most concerned with. You see, many athletic programs have very restrictive rules on providing tax and financial advice and the standard “consult with your tax or financial advisor” is the hallmark of restrictive advice. And when a young adult is told that their income is considered self-employment income and that it is taxable, the gap in knowledge of “how” to pay their taxes can sometimes get lost in the shuffle.
But don’t worry, I’ve found it.
If you are a student-athlete and receive cash compensation via a NIL contract, you are obligated to calculate and set aside enough money to pay your tax bill on your own. Traditionally, taxes are not withheld from self-employment income and are the responsibility of the player to pay out of your bank account. You can visit the IRS website at www.irs.gov and do a quick calculation on how much to set aside if you have an estimate of how much you will earn in the year. Now, this fun isn’t just for your federal tax, you may also owe a state income tax depending on if you are deemed a taxpayer in the state of your permanent address, state of the school of which you play for or the state in which you earned your NIL income. And not all states have the same income tax rates. And not all states even have income tax! And yes, you will owe that tax out of your bank account, too. State tax on NIL money is the tricky one, so you’ll have to develop a system to track each NIL contract so it can be matched with the right state thus taxed at the right rate.
What about if you are a student-athlete and receive non-cash compensation via a NIL contract? In English: you receive “stuff” instead of a direct deposit into your bank account. Well, the IRS has rules around this and will have the last say on if that set of new cleats was considered income or not. Or that new car. If your “thing” is deemed to be taxable income, you will still owe taxes on the value of the object. And unlike an income paid in cash, you can’t just take off a wheel to pay your taxes with. Be mindful when receiving non-cash compensation that you have enough cash on hand to cover both the Federal and State taxes, so you don’t find yourself between a rock and a hard place come April next year.
In summary, my tax educational advice to you is this: work with a tax professional that works with professional and student-athletes. The multi-state rules are complicated, and the NIL world is changing fast, so you need someone that is keeping up with it all. You can then get a good estimate of what percentage of tax you should set aside with every NIL payment, so the money is there to pay your quarterly taxes. Let that tax money just sit there in a separate bank account, and behave, so you have the cash you need to pay your taxes. That, my friend, is winning with money.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice. Cetera Advisor Networks LLC, exclusively provides investment products and services through its representatives. Although Cetera does not provide tax or legal advice, or supervise tax, accounting or legal services, Cetera representatives may offer these services through their independent outside business. This information is not intended as tax or legal advice.