If you’re a college athlete, you can now make a massive fortune of up to seven figures by using your name, image and likeness (NIL). It all amounts to you creating your own personal brand. This comes after a 2021 ruling by the US Supreme Court and the establishment of National Collegiate Athletic Association (NCAA) rules to govern how athletes can benefit from NIL activities.
However, NIL income comes with substantial tax obligations, at the local, state and federal levels. And if you fail to adhere, there are significant consequences, including fines and other penalties.
Understanding NIL Income
Using your name, image or likeness for profit is the key to NIL income. This could be through brand deals and endorsements, public appearances, social media campaigns, teaching camps, merchandise, autographs, photos, or even cameo appearances in video or at events.
Essentially, NIL deals are set up through collectives of third-party companies not affiliated to a college or school to support athletes. These collectives operate as for-profit businesses. Initially, some of them were allowed tax-deductible donations, but in June 2023, the IRS Office of Chief Counsel removed this eligibility.
Due to the increasing popularity and adoption of these deals, the process is becoming increasingly regulated. There are currently 32 states with NIL laws in place. Many of them stipulate four basic exclusion principles for NIL deals. Basically, as a student-athlete, you can’t:
- Perform an exchange in return for the payment.
- Use NIL income for your athletic performance or achievement.
- Be recruited to a college or school through the deal.
- Make a deal with your own school.
A primary point of contention being raised at the national level is whether athletes generating NIL income are considered employees of the schools for which they play. For example, at the start of 2024, the National Labor Relations Board ruled that college basketball players should be considered employees under US labor law. This has yet to be finalized, but could mean that athletes would be eligible for medical benefits, educational opportunities, and the right to collectively bargain.
In a nutshell, this all means that NIL income comes with quite a few tax and compliance issues.
Federal Tax Obligations
Since the Supreme Court ruled that student-athletes could benefit from their NIL, the IRS taxes such income at a rate of 15,3%. However, this only applies if it exceeds a minimum threshold of $400 for employees, or $600 for independent contractors.
This covers any free products you might receive in exchange for endorsements, as well as any fees or payments you receive. Importantly, that includes royalties, ad revenue, and licensing via non-fungible tokens (NFTs). It also means you’ll pay taxes on any payments received by collectives, regardless of their tax status.
All of this must be reported on your personal income tax return, in the same way you’d report any income, on Form 1040. It also means you may need to complete Form 1099 for any non-employment income, like interest or royalties.
Before you file your return, you’ll need to establish whether you’re considered an employee, or independent contractor, based on the contract you signed for your NIL use.
As an employee, you’ll complete Form W-4, and independent contractors will complete Form W-9. For either form, you’ll need to fill in Schedule C (for profit and loss generated) and Schedule E (for supplemental income and loss).
To file these forms, you must keep detailed records of all your income, along with any expenses you incurred while generating it.
Also, note that NIL income is treated like other types of student income for financial aid purposes. As such, if you complete the Free Application for Federal Student Aid (FAFSA), you’ll need to report NIL compensation as part of your adjusted gross income.
What happens if you don’t report NIL income?
If you fail to report NIL income or do it too late, you will be subjected to penalties with steep interest. Fortunately, there is a limit to how much you can be penalized – it’s currently capped at 25% of the total tax you owe. But this can still become very expensive, and it’s best to avoid late payments.
Also, depending on where your college or school is located, and where you live, you may be subject to state income taxes.
State and Local Tax Considerations
State and local tax laws apply both to where you earn your money, and where you live. Most states tax residents for all income, regardless of where it was earned. And some states also charge tax on revenue generated in that state, even if you don’t live there. These considerations are usually based on a tax nexus. Usually, states will help you avoid double taxation of the same income by providing a credit for taxes paid.
Also remember that if your NIL income comes from work or appearances you do across several states, you may have to pay multi-state taxes. However, not all states have NIL laws in place. In this case, you must comply with state laws about income taxation. Luckily, some states don’t impose income taxes. This includes Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
And if that wasn’t complicated enough, the tax rate varies between states. Generally, the highest tax rate is around 13.3%.
If you’re in doubt, it’s best to consult with a tax professional for guidance on specific state taxes.
Estimated Taxes and Withholding
As with filing federal tax returns, withholding requirements will vary depending on whether you’re classified as an employee or an independent contractor. As an employee, your employer is responsible for withholding taxes from your pay.
But if you’re considered an independent contractor paying $1,000 or more in taxes, you’ll pay estimated tax payments four times a year. This applies at both the state and federal levels.
If you make estimated tax payments, you’ll do so at the same rate as self-employment taxes, on Form 1040-ES. This covers your 12.4% Social Security tax and 2.9% Medicare taxes, as you won’t have an employee withholding these. Keep in mind that self-employment tax is paid in addition to income tax.
Deductions and Credits
As a student, you and your parents may be eligible for certain tax credits. However, this will depend on your filing status and income level. These credits include the Earned Income Tax Credit and the Child Tax Credit. The American Opportunity Tax Credit lets you claim qualified education expenses, with a potential refund of up to 40%!
And then there are tax deductions, which serve to lower your taxable income. Eligible deductions for NIL income include:
- Home office deductions
- Travel expenses and mileage
- Meals
- Marketing expenses
- Some equipment and supplies
How to keep records and document expenses properly
If you plan to apply for any deductions or credits, it’s important to accurately track all your expenses. This means keeping the relevant receipts, bank statements, and documentation clearly identifying the expense. You can use accounting software to accurately track your expenses, while ensuring compliance with tax regulations.
Tax Planning and Compliance for NIL Income
The first step in planning your taxes is knowing which taxes apply to you, depending on relevant tax laws.
Then, consider establishing a business structure. For example, entities like a single-member LLC (SMLLC) can offer protection against you being held personally liable for business debt. This helps if you suffer losses from NIL activity.
You must also carefully document your income and any expenses associated with NIL activity, and plan for quarterly estimated tax payments.
We recommend consulting with a CPA or tax professional. They can assist you with calculating estimated taxes, selecting a business entity, and creating an efficient tax shelter.
For help with your NIL income tax planning or accounting, schedule a Discovery Call with one of our CPAs.
The information presented in this blog article is provided for informational purposes only. The information does not constitute legal, accounting, tax advice, or other professional services. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Use the information at your own risk. We disclaim all liability for any actions taken or not taken based on the contents of this blog. The use or interpretation of this information is solely at your discretion. For full guidance, consult with qualified professionals in the relevant fields.