Earnings from name, image, or likeness can help offset tuition costs but also come with tax obligations

What: Last year, the Supreme Court of the United States (SCOTUS) ruled that the National Collegiate Athletic Association (NCAA) was illegally using its monopoly power to suppress compensation colleges could pay their student athletes. The NCAA quickly dropped its prohibition on college athletes being compensated for the use of their name, image, and likeness (NIL) but cautioned athletes that there still could be state statutes affecting amateur status. A number of states have quickly adopted NIL statutes permitting college athletes to take advantage of the SCOTUS ruling and NCAA guidance. Approximately 24 states have enacted NIL legislation, with 17 of those states having an effective date in 2021. Hundreds of college athletes have already entered into some form of endorsement deals or are self-promoting using techniques such as non-fungible tokens. 

Why: For many college athletes who don’t move on to play professional sports, the time they’re in school may be the only opportunity to take advantage of the ability to make earnings from their NIL. And for many of these athletes, the earnings from NIL may be the most significant income that they’ve had in their lifetime. So far, most have only had to file very simple tax returns or none at all, but now they might face many complicated tax issues for the first time that include the following: 

• Professional team. When putting together a team of professionals to help obtain sponsorship deals, to get insurance, and to comply with associated legal requirements that include taxes, college athletes should understand the fees due to these professionals for their services
• Legal entity. College athletes may explore whether it is best to operate under a separate legal entity such as a corporation or as a limited liability company
• State law. It’s important to determine if their state has adopted a NIL statute and its requirements; differences in state tax law could also impact college athlete recruiting
• Self-employment taxes. Most college athletes will not earn NIL as an employee but as an independent contractor, making them responsible for paying self-employment taxes
• Estimated taxes. When an independent contractor, income tax is not withheld from compensation so college athletes will likely need to pay quarterly estimated taxes
• Compensation. Taxable compensation can include free products and services received from companies
• Business expenses. College athletes will need to keep track of expenses that are related to earning NIL since these could be deductible from otherwise taxable income. They will need to distinguish business expenses from personal ones and maintain documentation
• State taxes. Those college athletes who go to more than one state to earn NIL will also have to deal with multiple state income tax laws and tax filings
• Employee status. There are additional proposals to eliminate all restrictions on the ability of college athletes to earn income, including sharing in broadcast revenue, as well as proposals to tax the scholarships that college athletes receive. The result of these proposals could be to convert college athletes into paid employees of the college or university

Who: Tax expert Mark Luscombe, JD, LL.M, CPA, Principal Federal Tax Analyst at Wolters Kluwer Tax & Accounting, can help discuss these and other possible tax issues facing college athletes. 

PLEASE NOTE: These materials are designed to provide accurate and authoritative information in regard to the subject matter covered. The information is provided with the understanding that Wolters Kluwer Tax & Accounting is not engaged in rendering tax advice or accounting, legal, tax or other professional service.

Contact: To arrange an interview with Mark Luscombe or other federal and state tax experts from Wolters Kluwer Tax & Accounting on this or any other tax-related topics, please contact Bart Lipinski.

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