Due to landmark changes to NCAA policy, student-athletes are now empowered to earn Name, Image, and Likeness (NIL) compensation through contracts, sponsorships, and endorsements.
Although this is a net positive for athletes at the collegiate level, NIL contracts and agreements significantly impact federal and state tax requirements for student-athletes, as well as those issuing contracts. From understanding state nexuses to fulfilling all reporting requirements, student athletes and their advisors should be fully informed of the tax liability that accompanies NIL contracts. Likewise, organizations offering NIL contracts or agreements should be aware of the payroll and tax implications of working with student-athletes through this relatively new form of business partnership.
In this article, we’ll explore the income tax implications of NIL contracts for organizations and student-athletes and offer guidance on how to ensure smooth payroll operations and legal compliance.
Although NIL policy is technically an interim NCAA policy that was adopted in 2021 in response to a number of court decisions, it has allowed student-athletes to enter into income-generating NIL contracts since July of 2021. State legislation has also been passed in close to 30 states to mirror or amend the terms and conditions outlined in the NCAA’s interim policy. It’s important to note that the NCAA continues to uphold its prohibition on “pay for play” deals and certain recruiting incentives, using NIL policy to exclusively apply to name, image, and likeness contracts that provide monetary or non-monetary compensation; in the latter case, this could include social media support, free merchandise, sports equipment, etc.
Colleges and universities can legally offer education and information to student-athletes about NIL contracts and agreements, but they are barred from providing any kind of legal or tax-related service, ranging from NIL contract review to tax preparation or other legal counsel. As a result, more colleges and universities are providing some form of baseline NIL education to keep student-athletes informed while simultaneously advising student-athletes to work with tax professionals to guarantee legal compliance.
How NIL Contracts or Agreements Impact Federal Taxes
Fundamentally, whether the compensation earned through an NIL agreement is monetary or non-monetary, it is taxable income. Since NCAA student-athletes are not technically employees of the school they attend, or employees of the business(es) that pay them, they generally file as independent contractors. For many student-athletes, it may be their first time filing an income tax return, but if the overall sum of NIL compensation is high, they should consider quarterly estimated tax payments over the course of the year to avoid uncalculated interest or penalties.
Before we outline the different types of compensation student-athletes need to report, it’s important to mention that any income or benefits a student-athlete receives must also be reported on the student-athlete’s submitted FAFSA (Free Application for Federal Student Aid). Taxable income earned through NIL could affect the amount of federal financial aid a student-athlete receives, as well as their Pell grant eligibility. Other forms of financial aid (housing stipends, as one example) are considered taxable income, and student-athletes must also report income earned from any offseason employment.
Since parents, advisors, student-athletes and sponsoring organizations have questions about which types of NIL compensation qualify as taxable income, we’ll provide a breakdown of the most common categories below:
- Cash Awards – In some cases, a student-athlete will simply receive cash payments from the organization they are partnering with, and must file a 1099-NEC to report taxable income. Since organizations are not responsible for managing withholdings for the student-athlete in this case, the student-athlete will need to account for income and self-employment taxes (15.3%) when filing a return. Especially for larger annual sums, quarterly estimated tax payments are recommended.
- Income Earned through Royalties – Periodically, a student-athlete receives compensation for the use of their name, image, or likeness in a commercial product or form of media (a song or video game, for example). In this case, any royalty income earned is considered taxable income.
- Income Earned through Sponsorship or Service – Since the official adoption of NCAA’s interim NIL policy in 2021, sponsorship and service income has been a very common form of NIL compensation. In this arrangement, a student-athlete agrees to showcase logos or products at an event in exchange for compensation.
- Non-monetary Compensation – Although non-monetary compensation is perhaps the easiest to overlook when accounting for taxable income, it all must be reported and included in a student-athlete’s gross income calculations. Non-monetary compensation can include food, clothing, compensation for autograph signing(s), compensation for an advertisement/appearance, product discounts, or sports equipment awarded as compensation.
Organizations providing NIL agreements or contracts to student-athletes must provide a Form W-9 to student-athletes. NIL activities may not be conducted until the completed W-9 is completed by the student-athlete and received by the partnering organization. In most cases, organizations must provide a Form 1099-NEC (Nonemployee Compensation) to student-athletes by January 31st of the year that follows any completed NIL work exceeding $600 within a one-year period. Organizations must also provide student-athletes with cash receipts of any NIL-related transactions that occurred in the previous year on platforms like PayPal or Venmo. Whether an organization has already created NIL agreements with one or multiple student-athletes, or is currently considering a contract, it’s important to work with a qualified payroll provider who can ensure timely, accurate payments, as well as full legal compliance.
How NIL Contracts or Agreements Impact State Taxes
State tax laws and state NIL regulations further complicate income tax requirements for student-athletes and organizations offering contracts. As just one example, a fair number of student-athletes attend institutions outside of their home state, sometimes affecting residency status. As a general guideline, if a student-athlete attends an institution outside of their home state, they are still considered a resident of their home state and pay state income taxes based on the requirements in that jurisdiction. In the event that a student-athlete wishes to change residency status to the state where the learning institution is located, they will require professional legal support to understand and navigate the residency rules that apply to the state where the school is located. Although some states do not impose state income taxes at all, others impose tax rates from 6.05% to as high as 15.05%, with a range of unique policies regarding tax deductions.
NIL-related regulations on personal income tax, state taxes, and payroll taxes remain in flux. This impacts both student-athletes and partnering organizations offering NIL agreements. For instance, it’s perfectly conceivable that nonresident states could begin imposing personal income tax to collect additional taxes on a student-athlete’s NIL earnings when they play games, make public appearances, or attend a university in a state where NIL income is earned. Organizations are likely to be affected by issues like this, including payroll nexus regulations, which vary dramatically state by state.
Like many tax and legal issues related to NIL, local, state, and federal policies are constantly evolving to adjust to the NCAA’s policy change. Student-athletes and their families must remain up to date on any regulatory changes and consult a qualified CPA or personal income tax advisor to ensure accurate filing of their personal income taxes. As for organizations issuing NIL contracts and agreements, working with a qualified payroll provider is essential: to stay up-to-date with changing regulations, ensure legal compliance, and issue payments in a timely and efficient way.
Navigate NIL Contracts and Agreements with Peace of Mind
Whether it’s the heart of March Madness or an off-season training period, sponsoring organizations and student-athletes need to make informed and responsible decisions regarding NIL contracts. Organizations must thoughtfully navigate payroll and tax responsibilities to remain compliant and maximize the benefits of NIL compensation. That’s why Workforce PayHub offers a comprehensive payroll solution to support organizations through expert support and an automated platform that streamlines payments and provides a convenient employee self-service portal. Contact us today to let us streamline your payroll process and support the growth of your business.
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