Until recently, student athletes at colleges didn't have to worry about deducting expenses, tax credits, or reporting bonus payments — because they did not get paid at all.
Now, however, things have changed, and amateur athletes are routinely paid for the use of their "NIL," or "name, image and likeness."
"That's what changed the landscape for college athletes," said Craig Brown, managing principal at Galway Family Office, which focuses on providing full-service business management, financial planning, estate planning services, bookkeeping and tax services to its specialty client base of athletes, entertainers, high-net-worth and ultra-high-net-worth individuals and families.
"In the past, it was only the top of the top that were considered marketable brands, but now amateur athletes, although they may not make it into the pros, can realistically be well compensated," he explained. "It's interesting that the majority of professional athletes are W-2 employees, whereas most amateurs are single member LLCs. Their money comes to them pre-tax, and many of them have no idea they will owe a big chunk of their payment in tax. So April 15 comes around and they have no way of getting the funds to pay the $60,000 they owe in tax."
"All student athletes across all sports will now be compensated," said Brown. "It's growing exponentially. Most of these athletes come from humble beginnings and have never had that much to spend. So they buy new cars, give gifts to their family, and before they know it's all gone. In essence, all of these student athletes are free agents, meaning if you play for a smaller school and play very well, you might consider entering into a transfer portal, which is essentially a mechanism that allows a player to announce to the world that they are transferring from one university to another. "
A football player at, say, Stanford has to weigh different factors in deciding on a transfer, according to Brown. "He may be very talented but knows that he's not headed for the NFL. Some state school with a decent football program may give him the opportunity to make more money now through his NIL, and he would have to weigh that against the Stanford degree and the potential for future earnings."
The legal history
The genesis of the change was a lawsuit brought by former UCLA basketball player Ed O'Bannon against the National Collegiate Athletic Association. The suit, filed on behalf of the NCAA Division I football and men's basketball players, challenged the NCAA and Electronic Arts Inc. in their use of the image and likeness of former student athletes.
The district court held in 2014 that the NCAA's amateurism rules were an unlawful restraint of trade in violation of Section 1 of the Sherman Antitrust Act. The court permanently enjoined the NCAA from prohibiting its member schools from giving student athletes scholarships up to the full cost of attendance at their respective schools and up to $5,000 per year in deferred compensation, to be held in trust for students athletes after they leave college.
The court held that even though many of the NCAA's rules were likely to be procompetitive, "They were not exempt from antitrust scrutiny because and must be analyzed under the Rule of Reason." Applying the Rule of Reason, the court held that the NCAA's rules had significant anticompetitive effects within the college education market, in that they fixed an aspect of the 'price' that recruits pay to attend college.
The record supported the district court's finding that the rules served the procompetitive purposes of integrating academics with athletics and preserving the popularity of the NCAA'S product by promoting its current understanding of amateurism. A panel of the Ninth Circuit Court of Appeals concluded in 2015 that, "The district court identified one proper, less restrictive alternative to the current NCAA rules — allowing NCAA members to give scholarships up to the full cost of attendance — but the district court's other remedy, allowing students to be paid cash compensation of up to $5,000 per year, was erroneous."
The court vacated the district court's judgment and permanent injunction insofar as they required the NCAA to allow its member schools to pay student athletes up to $5,000 per year in deferred compensation.
In the meantime, Electronic Arts and the Collegiate Licensing Company, who were original codefendants along with the NCAA, left the case, settling with O'Bannon and the class he represented for $4 million. And state legislators in a number of states, influenced by the O'Bannon case, advocated NIL legislation that allowed college athletes to be paid for endorsements.
