More and more college athletes are earning money from what is known as NIL deals. Ever since the NCAA officially started allowing athletes to take advantage of NIL opportunities, many college athletes are finding themselves fielding multiple offers to make money in exchange for using their name, image, and likeness.
This is all well and good. We cannot applaud this enough. However, we cringe when we think of what these college athletes do not know about the tax burden this also puts at their feet. These funds aren’t simply handed to the athlete, and they pocket it. Most NIL finds are considered earned income and must be reported on a tax return.
Therefore, it is crucial that all college athletes receiving NIL funds be working closely with a CPA that knows the sports industry and complex tax matters. They can help them navigate the tax landscape properly, so they aren’t faced with unpaid tax issues and costly penalties.
In this blog we will touch on some of the do’s and don’ts a college athlete needs to know when managing NIL dollars. We say touch on, because this is a very complex matter that is always changing, especially given the fact that the very existence of these deals is still so new to the landscape.
Many college athletes believe that they can still be claimed as a dependent on their parents’ tax return. Depending on how much NIL money they earn, this may not be the case. Once the athlete crosses over a certain income threshold, they can no longer be claimed as dependent and must file their own return. Not filing a tax return of their own to show their earnings is a big don’t.
As we mentioned above, most if not all the money earned through NIL deals is viewed as earned income. These funds should go on a Schedule C of a 1040 tax return. Doing so allows the athlete the option to report expenses to offset this income. Therefore, the athlete needs to track any expenses related to this income. The do here is, work with a CPA to learn more about this type of filing option.
If the athlete sets things up as a business and all things are outlines on a Schedule C, the net income will be subject to what is known as the Qualified Business Income Deduction (QBID). Knowing about the QBID is a large do for the athlete as it presents them with an additional 20% tax deduction.
It is becoming common practice for athletes to donate some of their NIL earnings to charity. This is always heartwarming to see, as often the athlete shares why they have a connection to the cause. However, it is a big don’t for the athlete to think their generosity does not come with tax implications. They will have to recognize their total income and other deductions will come along with that; however, they won’t get to deduct the entire amount. Only a portion is viewed as deductible.
We cannot stress enough that so much more needs to be considered when it comes to how college athletes report their NIL income. Total compliance should be their goal so they can continue to gain the most financially from their many opportunities. If you are a college athlete in this position, DO reach out to us today to start a relationship with.