Tax Complexities Related to the Use of a Student-Athlete’s Name, Image and Likeness

The days of pure amateur athletes performing for our nation's colleges are officially over. In the current environment, the National Collegiate Athletic Association (NCAA) allows student-athletes to be paid for "name, image and likeness" (NIL) aspects. This has created a pay-for-play attitude in college athletics with prospective students often opting to go to the school that's the highest bidder.

The tax ramifications of payments for NIL are still evolving. On the federal level, it's been well-established that student-athletes generally must report NIL compensation as taxable income on their personal tax returns. But state income taxation of NIL is proving to be a thornier issue.

What Are the Basic Ground Rules?

In 2021, the NCAA authorized payments to college athletes for NIL activities, reversing decades of bans against compensating these amateurs. In fact, previous NCAA investigations resulted in stiff sanctions for colleges that committed infractions in several high-profile cases. Now a student-athlete may be rewarded monetarily just for showing up the first day of school!

The lifting of NCAA restrictions has coincided with the use of the collegiate "portal" that allows student-athletes to move freely from one school to another without penalty or loss of eligibility.

The most common method of NIL payment is from brand endorsements and social media connections. Furthermore, there's no ceiling on the amount of money or benefits an athlete can earn from NIL. Some of the deals can ultimately reach into seven figures.

The NIL money often comes from schools, boosters and other organizations. Notably, so-called collectives have been formed by alumni fans and other supporters of collegiate athletic programs. These collectives aren't officially affiliated with the college or university, but their intentions are clear. To this point, the IRS has generally denied tax-exempt status for collectives under 501(c)(3) of the tax code, so boosters can't deduct their contributions. But that hasn't dampened the enthusiasm.

Nevertheless, there's some rain on the parade of free-flowing cash for those fortunate enough to have the requisite athletic prowess. The IRS generally treats NIL income received as taxable income, while state income tax may also be a concern. In addition, a student-athlete must report the taxable income on their Free Application for Federal Student Aid (FAFSA) form. This could jeopardize financial aid. Similarly, NIL could have an impact on Pell Grants awarded to qualified recipients.

What Are the Federal Tax Consequences?

Generally, a student-athlete is required to submit Form W-9, "Request for Taxpayer Identification Number and Certification," to receive NIL income from an entity. The IRS will use this completed form to match information from the entity. If things don't match up, the IRS computers could flag the returns for closer inspection.

If a student-athlete is employed by an entity, they'll have to complete Form W-4, "Employee's Withholding Certificate," like any other employee. The usual tax rules for employees will then apply. Most students will be independent contractors and, therefore, self-employed. Thus, they'll be required to file Schedule C. The distinctions often are based on the type of income received.

Cash awards. Cash awards are reported on the Form 1099-NECs that student-athletes will receive for each year. These awards are included in their taxable income as well as self-employment income reported on Schedule C. As opposed to wages, no tax is withheld. Normally, the student-athlete will make quarterly estimated tax payments instead.

Sponsorships and services income. This is a common arrangement for NIL deals. The student-athlete may be showcased at an event where they present a sponsor's services or logo. Again, the income is reported on Form 1099-NEC with the same tax repercussions as cash awards.

Royalty income. If the student-athlete is compensated for NIL on media sources (for example, video games), the compensation is treated as taxable royalty income. The key distinction between royalty income and sponsorship and services income is that the athlete isn't obligated to present the sponsor's logo or products.

Noncash awards. Generally, noncash NIL awards are considered to be taxable income. For example, a student-athlete may receive benefits for signing autographs, appearing in advertisements or participating on social media. They must notify the school program and include the consideration in taxable income.

What Are the State Tax Consequences?

It didn't take long for state tax revenue collectors to figure out that they could also get a piece of the pie from NIL income. But there are some special wrinkles in this area because student-athletes typically generate NIL income in multiple states.

For these purposes, a student-athlete must, at the very least, pay tax to the state where they reside. For example, if you are a student-athlete and live full-time in California outside of the school year, your state of residency is California. It doesn't change because you go to a university in another state, even though you play most of your games there.

It's important for student-athletes to understand the rules for establishing domicile in their home state, especially if they intend to change their official state of residency. For example, it might be beneficial to seek a change if the college is in a state without any state income tax.

But now states across the country are throwing a monkey wrench in the works. They're collecting their share of tax revenue from NIL when student-athletes visit their states for sporting events. This practice is an extension of the philosophy being applied by the states to professional athletes and other entertainers.

For example, if an athlete from the University of Southern California plays in a road game at Oregon, the state of Oregon could tax the player for a portion of their NIL attributable to the game in Oregon.  

Some states have agreed to reciprocity laws with each other that protect student-athletes from duplicate tax. For instance, the "DMV" area comprised of the District of Columbia, Maryland and Virginia has legislation protecting residents from additional taxation. Find out more details for specific areas from your professional tax advisors.

Following the Rules of the Game

This is an area that is fraught with tax perils for the uninformed. Although student-athletes can prosper from NIL, they must be careful to observe all the tax rules, including making estimated tax payments if they're not having tax withheld, and to stay updated on the latest developments. A team of professional advisors can help.

©  2024