The Tax Man Cometh
Athletes are about to really find out about taxes
I spoke to a D1 coach this week, and he mentioned hearing that athletes are going to be paying up to 47% in taxes on the revenue-sharing distributions they receive from institutions. While I didn’t fully understand the desperation of states exempting NIL earnings from state income tax, I fully understand it now.
Professional athletes don’t have their income exempted from state income tax, partially because they pay taxes on games in the state(s) where they compete, rather than solely in the state where they reside. They call it a jock tax, but the assessment of it generally doesn’t affect where a player goes in free agency or which teams an athlete looks to play for. I’m sure that’s partially because of the volume of money professional athletes are taking home, but for a college athlete, taking home just 53% of their earnings is a rude introduction to the new reality of the NIL business in college athletics: revenue sharing with the schools.
Before this second chapter of NIL began, athletes could get deals for whatever amount of money a business was willing to pay, and they were often able to receive the money without regard for taxation because the full sum of the payment was delivered without any taxes taken out. However, now athletes expecting to receive tens of thousands of dollars or more will likely sign deals with the school’s collective and the school itself, because money received from the school will be paid out in accordance with guidance the school has received regarding the distribution of those funds.
Many administrators have expressed concerns about whether athletes will handle the necessary tax obligations. One Power 4 athletic director I spoke with was almost looking forward to the wave of tax evasion incidents that were surely going to arise from athletes ignoring the grown-up responsibilities that come with being involved in NIL. Rapper Tee Grizzley would say that the aforementioned AD might have been “praying on [the athletes’] downfall.”
Some schools and collectives have provided their athletes with some version of tax support or financial literacy, but overwhelmingly, for athletic departments, the NIL era was viewed as a reality that brought athletes more money, but brought the school very little in return. Therefore, they couldn’t rightly justify dedicating more money to supporting athlete earnings. That, of course, is the wrong way to look at it. Better (and more responsible) athlete earnings create better athletic outcomes, which keeps or attracts better coaches, generates more ticket sales, secures more media rights, and could even justify changing conferences. Losing games does none of that and sends the athletic department in reverse.
Going forward, and depending on how much money athletes are receiving, they may want to set up their own entity to lower their tax liability by writing off expenses related to furthering their business purpose. Necessary travel, gear, training, etc., can be exempted from taxation by the athlete’s newly formed entity.
As many of you surely know, there are workarounds or loopholes in the tax code that allow individuals to permissibly avoid their tax burden. Scholarships, for example, have always been a bit of a uniquely taxed instrument because higher education has been a target for federal support for decades. For instance, technically, room and board is not a qualified tax-exempt expense, meaning that athletes are supposed to pay taxes on their room and board, but I’ve never known any college athlete to pay taxes on that portion of their scholarship—even though they should pay tax on it by law. Scholarships are flexible in the way they are awarded and distributed, and recipients can sometimes receive over $100,000 in scholarships (combined from the university and outside organizations) a year, depending on their academic strengths and the exceptional profile they present to a university.
And perhaps scholarships are treated so favorably in terms of taxation because the federal government has been loaning large sums of money to young adults and profiting off the business opportunities such transactions create. But now, the federal government will also be getting its hands more fully into the business of student taxation through these revenue-sharing distribution payments.
The same financial immaturity that prompts 18-year-olds, like the 2004 version of me, to borrow money for school without much understanding of, or respect for, interest rates, will now be on full display as many athletes will undoubtedly not file tax returns for funds they are rightly owed.
The NIL era is less than four years old, and as it enters its second chapter, there hasn’t been much stability to draw from, even though it would undoubtedly benefit those living with NIL-related business exposure on a daily basis. Now, taxation and athlete finances are more fully entering the picture, as schools continue to do whatever they can to drive as much money as possible into the pockets of their athletes—so that schools can drive as much money as possible back into their athletic departments.