Student-athletes need help clearing tax hurdles related to NIL

On her way to breaking Pete Maravich's all-time NCAA scoring record, and in her thrilling NCAA tournament run, Iowa Hawkeyes guard Caitlin Clark has established herself as a marketing powerhouse. Clark has inked deals with several megabrands including Nike, Gatorade, State Farm, Buick and even Goldman Sachs, as reported in The Sporting News.

The era of name, image and likeness agreements has catapulted collegiate sports into a new dimension, offering student-athletes opportunities to profit from their personal brands. Yet, this financial windfall comes with a hidden peril: an array of tax obligations threatening to entangle unprepared student-athletes in potentially daunting tax situations that many are ill-equipped to handle.

The stakes have never been higher. While the NCAA's adherence to the U.S. Supreme Court's 2021 decision opens the door to lucrative deals that were once prohibited, the scope of NIL income extends beyond straightforward cash payments to include endorsements, sponsorships and social media partnerships — with even non-monetary compensation like free merchandise falling under the taxable income category. This broad spectrum of income sources recognized and taxed by the IRS is fraught with potential pitfalls.

Consider this: Bronny James, guard for the USC Trojans men's basketball team (and son of NBA great LeBron James), has a $4.9 million NIL valuation, according to On3's NIL Valuation index. Assuming his taxable earnings reach that amount in 2024, he could owe the IRS a staggering $1.8 million of those earnings. And that number doesn't even include state income taxes in California, with a top rate of approximately 13.3%.

Given James' pedigree, he likely has an elite team to manage his NIL earnings and keep him on Uncle Sam's good side. But few athletes have that level of business and advisory infrastructure in place when they tap into NIL income opportunities. Without immediate and informed action, many will find themselves overwhelmed by increased liabilities and complex compliance requirements. 

1099 status

NIL deals introduce 1099 income, and with it tax obligations that differ from the W-2 earnings that most employed Americans are accustomed to. According to the IRS, student-athletes earning NIL income "will be regarded as self-employed and receive a Form 1099 if their income is more than $600."

This shift requires a proactive stance: Athletes must now track their earnings and make their tax payments directly — a significant departure from the automatic deductions familiar to those with W-2 income. 

The IRS offers no leniency for the unaware. Failure to accurately report income and pay taxes on time can trigger a cascade of consequences, including overwhelming tax debt, audits and penalties. Those consequences could potentially mark an ominous start to athletes' professional and financial futures.

Estimated tax payments

As NIL income typically classifies student-athletes as independent contractors, they enter the realm of estimated quarterly payments. 

This lack of employer withholding mandates a disciplined approach to financial planning, requiring athletes to set aside a portion of their earnings to satisfy their obligations. Missteps in managing these payments can lead to a downward spiral financially, with the specter of accruing tax debt and hefty penalties looming large for those who falter, potentially placing their financial stability on shaky ground before their careers fully take flight.

State tax obligations

The complexity of NIL income doesn't end with Uncle Sam; it extends into a web of state nexus and reporting obligations. 

Athletes must now grapple with the possibility of filing taxes in multiple states, each with unique laws and rates, depending on their residence and where their NIL activities transpire. This multistate maze introduces significant risks of errors, omissions and ensuing financial penalties. Keeping meticulous records becomes not just beneficial but essential, as the stakes of missteps are fraught with potential audits and liabilities.

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Non-monetary compensation

The implications of NIL deals extend into non-monetary compensation, too, where many "free" products or services received in exchange for endorsements are deemed taxable income by the IRS. 

This adds yet another layer of complexity, requiring athletes to accurately assess and report the fair market value of these benefits — a process ripe with ambiguity and potential for misjudgment. 

"Arguably, an athlete should have a 1099 from every partner and declaring income would be easy, but NIL athletes should remember that not all NIL partners are going to understand those rules, reads a blog post from the Athlete Licensing Co. "Even if an athlete doesn't receive a 1099-MISC for a deal, they still have an obligation to report the compensation on their tax return."

Championship seasons

The NIL era offers unprecedented financial opportunities to student-athletes. It is a landscape filled with potential rewards paired with navigable challenges and should be marked by stories of triumph, both on and off the field. 

There is a vital need for collaborative efforts among families, financial advisors and tax professionals to guide and empower these young athletes. With the proper preparation and support, student-athletes can approach their NIL opportunities with confidence and clarity, turning potential challenges into stepping stones for lasting success and financial well-being.