In response to the US Supreme Court’s ruling in NCAA v. Alston et al., the NCAA has an interim policy allowing student athletes to receive payment for the use of their name, image and likeness. Various states have approved legislation concerning the NIL activities that have or will go into effect over the next four years.

There are all types of considerations from a tax perspective. Most likely, the athlete will be treated as an independent contractor and receive a 1099. This creates additional tax obligations for the athlete.

1. Should the athlete consider creating a tax entity versus being a sole proprietor?
2. How does an athlete report the income and expenses?
3. In which state(s) is the athlete taxed?

If an athlete is paid as an independent contractor, generally, there is no withholding on the payments from the business. The athlete is then responsible for the federal, state, Social Security and Medicare taxes. The Social Security and Medicare taxes may be mitigated by creating an S Corporation or C Corporation. Each entity type has pros and cons, which should be discussed with a tax advisor.

The income reported by the athlete may include more than just monetary payments. Some athletes receive “free” items as well, including clothing, merchandise, a car, trips, etc. These are taxable to the athlete as compensation as well and should be included on the tax return. Any expenses incurred by the athlete to perform the services should be documented in order to properly deducted expenses from the income received.

The federal government will get a portion of all the NIL proceeds received by the athlete, but which state or states will benefit? This is a complicated question.

Resident State

An athlete must file a tax return in the state in which he/she is a resident. A person can be a resident of more than one state. The state the athlete originally lived in before they moved to college may still consider the athlete a resident – based on domicile. There are technical definitions of domicile, but most simply, it is a place you intend to return to and consider your home. Also, a person can be a resident based on the number of days spent in a state – generally more than 183 days. This could apply to all college students.

Performance State

This is the state in which the services are taking place. This can be difficult to define depending on the specific type of compensation received. Per the NCAA, the student athlete cannot be “paid to play.” Therefore, the traditional rules that have governed professional athletes revolving around game days, etc., do not seem to apply to the college athlete. The athlete will need to review the contract, the type of payment being received, and the type of services performed in conjunction with the state laws the athlete performs the service in to determine the state’s ability to tax the remuneration. The athlete may need to review the best way to structure a contract to avoid additional taxes.

Due to the complexity of the rules, it is best for college athletes to reach out to professional providers before a contract is signed. The contract may create significant tax consequences that could be mitigated or avoided with proper tax advice. If you have any questions, please contact us.