College athletes confront tax consequences from NIL revenue

Student athletes who are now allowed to score lucrative endorsement deals for their name, image and likeness may well encounter surprise tax bills.

Last July, the National Collegiate Athletic Association began permitting college athletes to profit from their so-called “NIL rights,” enabling them to sign sponsorship deals, charge for autographs and market their own brands. However, they are still bound by the laws of the states where their school is located. Professional service providers have emerged to offer tax and accounting advice and software for some athletes and schools.

However, the NCAA wants to prevent schools from paying to attract players, and last week issued new guidance to remove so-called “boosters” and “collectives” from the recruiting process. The guidance defines a “booster” as any third-party entity that promotes an athletics program, assists with recruiting, or assists with providing benefits to recruits, enrolled student-athletes or their family members, according to the NCAA. The definition can include “collectives” set up to funnel the NIL deals to prospective student-athletes or enrolled student-athletes who might be considering transferring. The NCAA’s recruiting rules forbid boosters from recruiting or providing benefits to prospective student-athletes.

Tim Nwachukwu/Photographer: Tim Nwachukwu/Gett

Another concern for students could be the taxes they end up owing for endorsement deals.

“I think there are going to be large tax implications as it pertains to name, image and likeness,” said Peter Schoenthal, CEO of Athliance, a company that provides software and educational resources to universities to help them comply with the NIL rules. “For the first time, you have student athletes who have the ability to capitalize off of who they are. We have already started to see athletes do very well. We’re talking tens and hundreds of thousands of dollars. Many of those athletes aren’t properly represented and many of those athletes have never come into money before in their lives.”

Most athletes being paid are receiving a Form 1099 from the companies they have deals with, but they may not understand their tax obligations. 

“The problem is going to be, and we’re already starting to see it, is student athletes are starting to make decent sums of money, but they’re unaware of the tax consequences or even the fact that they have to pay taxes,” said Schoenthal. “You have a lot of athletes that weren’t prepared and started receiving 1099’s after the new year. They aren’t sure what to do with it. They don’t have their resources. You’re going to see student athletes with liens with the federal government because they weren’t actually able to pay their taxes because they didn’t save their money. That’s why we’re calling it the 'new student athlete student loan' because you’re going to owe money to the government that you’re going to have to pay back.”

The NCAA change came on the heels of a unanimous Supreme Court decision last June that ruled in favor of college athletes who had sued the NCAA over rules that limited the education-related payments that schools could pay them, arguing that it violated antitrust laws. But it could have implications for students and their tax obligations.

“The Supreme Court issued their ruling indicating that the athletes, even though they're amateurs, could still collect money, benefits and so forth as it relates to using their likeness or their names and promoting products,” Dennis LaPorte, a partner at UHY LLP and managing director of UHY Advisors, in Sterling Heights, Michigan, told Accounting Today last year (see story). “A lot of these individuals are on scholarships, and between schoolwork, practicing, the games and everything else, they don't really have a whole lot of time for other work. Many of them may not have even had to file income tax returns in the past. So now all of a sudden, they're going to start receiving 1099s for these different fees that they get for making appearances or using their likeness on promotional items or commercials. They’re going to have not only regular income taxes that they’ll have to file, but they'll also have to turn around and pay self-employment tax as well. Unless they actually get on someone’s payroll, they won’t have the Social Security and Medicare tax taken out of their income taxes. If they get paid more than $600, they should be receiving a 1099 from whoever it is that’s paying them.”

Schoenthal would like to see better education of student athletes about the tax situations they might encounter before they end up owing more than they can pay in taxes. One suggestion he has is for student athletes to set up limited liability companies to accept the funds they receive, as well as understand more write-offs and deductions. So far, he hasn’t heard about the IRS cracking down on student athletes, as most are still not earning anywhere near the amounts of money that professional athletes can make. 

“I don’t think we’re talking about the type of money where the IRS is going to come down with big investigations,” said Schoenthal. “But I do believe what’s going to happen is you’re either going to have athletes that don’t file their taxes, but they have received 1099’s so that will lead to an investigation or athletes filing their taxes and realizing they owe a couple of thousand dollars and they haven’t saved the money to do so, which is going to lead them to being on a payment plan with the IRS.”