Since July 1, 2021, college athletes have been legally allowed to earn NIL (name, image, and likeness) money. This significant change in NCAA policies has had a profound impact on college athletes. Prior to this, athletes were prohibited from profiting off their own NIL, limiting their earning potential. However, with the new regulations in place, athletes are now able to enter into endorsement deals, collaborate with brands, and monetize their social media presence.
As college athletes start to monetize their name, image, and likeness (NIL) through various endorsements and sponsorship deals, it is important for them to understand the tax implications of these payments. We will provide college athletes with an overview of what they should know about taxes related to these payments.
Understanding NIL Payments
NIL payments refer to the income that college athletes earn by endorsing products, appearing in commercials, or participating in other promotional activities. College athletes need to know that these payments come with tax implications, and they may need to categorize the different types of income for tax purposes.
Categorization of NIL Payments
NIL payments can be categorized into two main types for tax purposes:
- Personal Service Income: When athletes are paid directly for their skills, such as making appearances, participating in camps, or attending events, this income is considered personal service income. These payments are typically subject to income tax and self-employment tax.
- Endorsement Income: Endorsement income refers to payments received by athletes for promoting products or services. This income is treated as advertising or promotional income and is subject to income tax.
Reporting NIL Payments
To stay in compliance with the tax regulations, college athletes must report their NIL payments accurately. Here are a few important points to keep in mind when reporting NIL income:
- Maintain Good Recordkeeping: It is crucial for athletes to keep track of all their NIL payments and related expenses. This includes maintaining records of contracts, invoices, and receipts. Having a well-organized recordkeeping system will help when it comes time to file tax returns.
- File as Self-Employed: Since NIL payments are often considered self-employment income, athletes should consider filing as self-employed individuals. This means they will need to file Schedule C along with their regular tax return to report their income and deduct any qualifying expenses.
- Self-Employment Taxes: College athletes who earn NIL income as self-employed individuals are also responsible for paying self-employment taxes. These include both the employer and employee portions of Social Security and Medicare taxes. It is important to set aside a portion of the NIL income to cover these tax obligations.
- Deductible Expenses: Athletes may be able to deduct certain expenses related to earning NIL income. These expenses can include travel expenses, marketing and advertising costs, and fees paid to agents or representatives. It is advisable to consult with a tax professional to determine which expenses are deductible.
Tax Forms for College Athletes and NIL Payments
As college athletes earn NIL (name, image, and likeness) income, they may receive various tax forms related to their earnings. It is important for athletes to understand the different tax forms they might receive and their significance in the tax reporting process. Here are the key tax forms that a college athlete may receive for NIL payments:
1. Form W-9: College athletes may be required to complete and submit Form W-9 to the entities that are paying them for NIL services. Form W-9 is used to provide the payer with the athlete's taxpayer identification number (TIN) and certify that the athlete is not subject to backup withholding.
2. Form W-8: International student athletes may be required to fill out a W-8 form such as a W-8BEN. This form is used by nonresident individuals that are receiving income from US sources. If a payor is not equipped to onboard or pay out W-8 contractors, it could potentially exclude certain individuals from NIL opportunities. Using MALLO to streamline onboarding and payment of W-8 athletes removes the complexities and guesswork in navigating international tax forms, laws, and banking.
3. Form 1099-MISC: College athletes may receive Form 1099-MISC from the companies or organizations that paid them for their services. This form is used to report miscellaneous income, including endorsement earnings, appearance fees, or any other types of income earned as an independent contractor. It is important to note that starting from the tax year 2020, the IRS has introduced a redesigned Form 1099-MISC, and depending on the nature of the income, athletes may receive either the traditional Form 1099-MISC or the new Form 1099-NEC (Nonemployee Compensation).
4. State-Specific Forms: Depending on the state in which the athlete resides or earns NIL income, there may be additional state-specific tax forms that need to be filed. These forms may vary and may include state income tax withholding forms or state-specific versions of the federal tax forms mentioned above.
It is important for college athletes to carefully review each tax form they receive and ensure that the information provided is accurate. These tax forms play a vital role in the tax reporting process and must be properly reported on the athlete's tax return.
To ensure accurate tax reporting and to navigate the complexities of tax forms, it is highly recommended that college athletes consult with a tax professional, such as a certified public accountant (CPA), who is knowledgeable about sports-related tax matters. A tax professional can guide athletes in understanding which tax forms to expect, how to correctly report their NIL income, and help maximize potential deductions while remaining compliant with tax regulations.
Benefits of a Compliant Payment Solution
It is essential for both payors and athletes to implement a compliant payment solution. A payment solution provider ensures that payments are processed compliantly, and both parties avoid being burdened with decoding tax regulations. Additionally, it ensures that college athletes are paid on time, which affords them a greater amount of financial stability and it protects the reputation of institutions paying these athletes.
College athletes need to be aware of the tax implications of NIL payments and anyone paying these athletes should have a compliant payment solution in place to ensure that they execute timely payments and maintain tax and privacy compliance. Having a streamlined solution in place removes many of the complexities for both parties and creates a healthier ecosystem for everyone involved.
It is important to note that tax laws may vary from state to state. Some states may have additional tax obligations or different rules related to NIL income. College athletes should consult with a tax professional who is knowledgeable about the specific tax regulations in their state to ensure compliance.
As college athletes embrace the opportunity to monetize their NIL, it is crucial for them to stay informed about the tax implications of these payments. By understanding the different categorizations of NIL income, reporting accurately, and consulting with tax professionals, athletes can ensure they are meeting their tax obligations while maximizing their earning potential. Remember, it is always better to seek professional advice to navigate the complexities of tax laws and regulations.
For more information about taxes related to NIL payments, please contact us.
Disclaimer: The contents of the blog post are for informational purposes only and should not be taken as tax advice. Tax laws and regulations are complex and may vary from state to state. The information provided in this post is a general overview and may not apply to all situations. It is advisable to consult with a local tax professional such as a certified public accountant (CPA) to determine how the tax regulations may apply to your specific situation.