On June 30, 2021, the NCAA Board of Directors announced a temporary rule change that allows college athletes to profit from the use of their name, image, and likeness (NIL). The new policy went into effect on July 1, 2021, and college athletes immediately started signing endorsement deals. Reported endorsement deals range from a few hundred dollars to nearly 7 figures in the case of the University of Alabama Quarterback Bryce Young. While this is an exciting opportunity for college athletes in terms of income, these athletes must recognize that they will likely have to file income tax returns to report their earnings. In some cases, they will have to pay a substantial amount in federal and state taxes.
Most, if not all, of the NIL endorsement contacts will treat the college athletes as independent contractors instead of employees. A company that uses an independent contractor does not withhold federal, state, social security, or Medicare taxes. An independent contractor is responsible for making their own estimated federal and state tax payments, which include both the employer and employee portion of social security and Medicare taxes. College Athletes will likely receive either Form 1099-MISC or Form 1099-NEC instead of Form W-2 to reflect their earnings. Taxable earnings include but are not limited to: cash payments for endorsements, appearance fees, autographs, social media posts, and non-cash items received in exchange for services.
Let’s consider four hypothetical examples to illustrate the potential tax consequences for college athletes. In these calculations, let’s assume the college athletes are residents of Georgia, attend college in Georgia, have not earned any other income, are treated as independent contractors and they don’t have any deductible expenses that can be used to offset their income. The state and local taxes associated with endorsement income will vary depending on the athlete’s residency and where he or she earns the money.
|Total Gross Income (1099-NEC/1099-MISC)||Estimated Federal Tax
*includes self-employment tax
|Estimated State of Georgia Tax||Total Federal and State of Georgia Tax|
College athletes may be required to file tax returns and may have federal tax liabilities even if they are only paid $1,000 in NIL endorsements. As the dollar amount of NIL endorsements increase, so will the percentage of associated federal and state taxes. Given the athlete is considered a contractor, the onus is on the student to understand which tax jurisdictions are involved and filing the proper forms in a timely manner.
College Athletes should strongly consider seeking legal and tax professionals to help them avoid potential pitfalls that they may encounter as a result of receiving NIL endorsements. Understanding tax implications from the early stages of entering endorsement contracts can help ensure you avoid tax penalties down the road.
About the Author
Eddie Bradford is a Principal in Frazier & Deeter’s Tax practice and one of the leaders of the firm’s Entertainment practice. He serves clients in a variety of industries including sports, entertainment, law, healthcare, real estate, engineering, architecture, manufacturing & distribution and technology.