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College Athletes: Know Your Tax Obligations in NIL Agreements

an athlete signing autographs

Collegiate athletics is a competitive and popular multibillion dollar business industry. With television rights deals, conference realignment, recruitment, and much more, collegiate athletics garner significant media coverage. One topic receiving significant recent attention is the area of Name, Image, and Likeness (NIL) agreements, which allow student-athletes to financially benefit from their NIL. Due to the potential tax consequences, student-athletes should know their tax obligations in NIL agreements before signing.

Because of the growing influence of student-athletes as celebrities in social media and their communities, the attention surrounding NIL is not surprising. NIL opportunities have provided new revenue sources for student-athletes that, in some instances, may reach significant sums according to some media outlet rankings of the highest estimated financial value of student-athlete NIL agreements.  So it is crucial to follow relevant IRS and state guidance on how to report and pay taxes on NIL income.

TAS has developed and published educational tax resources for student-athletes on our NIL Get Help page to highlight general information, including federal tax reporting, federal tax withholding, estimated tax payment, and return filing requirements associated with NIL income. I want to bring additional attention to this issue to help educate prospective and current student-athletes and their families regarding important federal tax considerations.

National Collegiate Athletic Association Case Law and NIL Interim Policy Create New Challenges

NIL contracts are a relatively new phenomenon, which may have legal implications on all parties involved. The landscape of collegiate athletics changed on June 21, 2021, when the U.S. Supreme Court ruled in National Collegiate Athletic Association v. Alston that student-athletes could benefit from their NIL. After Alston, the National Collegiate Athletic Association (NCAA) enacted an Interim NIL Policy, many states enacted NIL legislation, and for the first time, student-athletes were able to benefit from their NIL. On October 26, 2022, the NCAA issued new guidance clarifying institutional involvement in enrolled student-athletes’ NIL activities.

With so much activity during its infancy, it did not take long for NIL agreements to present complicated issues, including governing legal authority. In some instances, respective state NIL laws may conflict with the NCAA’s universally applied NIL legislation and policies. On June 27, 2023, the NCAA published an NIL Update Memo providing answers to frequently asked questions and maintaining that NCAA legislation and policy is the governing authority when applicable state NIL laws conflict.

Generally, most student-athletes will likely engage with entities known as NIL collectives, which are independent of a university and usually pool funds from boosters and businesses to provide financial opportunities for student-athletes to leverage their NIL. In the past, many NIL collectives have applied for and received tax-exempt status from the IRS. However, in a June 2023 memorandum, the IRS Office of Chief Counsel explained that many organizations that develop paid NIL opportunities for student-athletes are not eligible for tax-exempt status under IRC § 501(c)(3) “because the private benefits they provide to student-athletes are not incidental both qualitatively and quantitatively to any exempt purpose furthered by that activity.” This will likely change how NIL agreements are structured and the status or type of institutions they contract with going forward. These changes may have tax implications for the various parties to the NIL agreement. Please visit our NIL Collectives TAS Get Help page that provides some general information about NIL collectives.

Tax Considerations For Student-Athletes

Due to quickly evolving NIL rules, student-athletes will need access to current and relevant information to enable them to meet their tax filing obligations, especially since many will be filing taxes for the first time. Below, I have provided some basics on federal income tax implications of NILs, but student-athletes may also need to familiarize themselves with potential state tax consequences.

What Is Name, Image, and Likeness Income?

Generally, any money, goods, property, or services received from NIL activities are all considered forms of taxable income. Student-athletes should be mindful that NIL agreement income (including non-cash benefits or compensation) is reportable and is considered taxable income.

For example, if a student-athlete receives free products or services in exchange for an endorsement, it is still taxable income. The student-athlete is required to include the fair market value of those products or services in their taxable income. Some NIL agreements may allow student-athletes to profit from their personal fame and celebrity through activities such as signing autographs, doing endorsements, selling apparel, developing their own merchandise, securing sponsorship deals, partnering with corporations, making promotional appearances, doing brand marketing on social media, and even licensing via non-fungible tokens (NFTs).

Generally, NFTs are unique, non-replicable digital entries that represent objects such as videos, sounds, images, or works of art and where ownership rights are recorded on a blockchain. Licensing involving NFTs provides compensation for publicity rights in a manner resembling copyright or trademark rights. Taxpayers may refer to the IRS Digital Assets page for more updated information on NFTs and digital assets. In summary, student-athletes should be aware that all forms of compensation are considered taxable.

What Steps Should Student-Athletes Take to Ensure Tax Compliance?

For tax purposes, student-athletes should determine if they will be treated as an employee or an independent contractor prior to receiving NIL income. If they are considered an employee, student-athletes should complete Form W-4, Employee Withholding Certificate, although the most likely scenario is they will be considered independent contractors and should complete Form W-9, Request for Taxpayer Identification Number and Certification. Depending on their income and whether their parents can claim them as a dependent, some student-athletes must file a federal tax return to report their self-employment income and pay federal taxes if they have net earnings of at least $400 in self-employment income from NIL activities or if their income is more than the standard deduction. Similarly, some student-athletes will be regarded as self-employed and should receive a Form 1099 if the income they received is at least $600. In addition, they will likely need to take some of the following steps, among others:

  • Document and track all expenses incurred in generating NIL income;
  • Calculate and remit estimated quarterly payments for all tax liabilities;
  • File a Schedule C, Profit or Loss from Business, with Form 1040 to determine taxable income; and
  • File a Schedule E, Supplemental Income and Loss (from rental real estate, royalties, partnerships, S corporations), with Form 1040 to determine taxable income.

Student-athletes and their families can visit IRS.gov to see if they need to file a tax return, if they can be claimed as a dependent, and whether an unmarried dependent student must file a tax return when their earned or unearned income exceeds certain limits. In addition, depending upon the laws of the respective states where the student-athlete earns NIL income, multiple state income tax filings may be necessary. Navigating through it all can be an arduous process, especially for a first-time tax filer.

Conclusion

The landscape of college sports has changed drastically since the Alston decision. Taxpayers such as student-athletes can now harness their fame for financial gain, but it is essential for them to be vigilant and aware of the related federal tax obligations that come with NIL income. NIL agreements are an evolving area that will continue to pose questions in need of answers, and while TAS may not be able to help student-athletes with their coursework or athletic endeavors, we are here to support them in understanding their federal tax obligations and help ensure they understand their taxpayer rights and responsibilities. Taxpayers experiencing hardship can seek TAS assistance in resolving their tax problems with the IRS, and some student-athletes may be eligible for Low Income Taxpayer Clinic assistance as well.

Published: February 20, 2024
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Source: Tax Connections

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