A new California law will allow college athletes to get paid for use of their name, image and likeness through endorsement deals, autograph signings and other opportunities. And after decades of denying athletes compensation, the NCAA Board of Governors has unanimously voted to allow student-athletes to benefit financially from these activities in the future.
It’s a movement that has people talking (and several other states considering similar legislation). But one aspect is virtually absent from the conversation—the financial and tax impacts on student-athletes.
“We have discussed the impact of name, image and likeness in our director’s meeting, but we didn’t even think about the tax implications,” said Jeff Pritsker, Assistant Athletic Director for Business and Administration at San Jose State University.
Those tax implications could be significant, wide ranging… and further complicated by the nature of college sports and its participants.
The public has long debated whether to pay college athletes. Athletics programs and merchandisers generate hundreds of millions of dollars in revenue from products, sponsorships and more. And student-athletes have become their inadvertent moneymakers.
Yet some insist that paying athletes blurs the line between collegiate and professional athletics and gives richer schools an unfair advantage in recruiting. It’s also noted that these athletes are already awarded scholarships that cover tuition, books, room and board and other necessary living expenses.
California believes it has a compromise in the Fair Pay to Play Act. This new law allows student-athletes to make money off of their name, image and likeness. It does not, however, require schools to give athletes a cut of the revenues generated by sports programs. The arrangement is similar to the rights enjoyed by Olympic athletes, as they too must balance their endorsement deals with maintaining their amateur status.
While this law is meant to help these students, it could be a trick play gone wrong if the student-athletes aren’t adequately prepared to handle the resulting tax consequences.
Federal Tax Returns: A New Rule in the Game
Under current tax law, individuals receiving income from any arrangement involving use of their name, image or likeness must report that compensation as income on their personal federal tax returns. This includes not only cash but also the fair market value of items or services received. For example, an athlete given use of a car for one year from a local dealership for appearing in their commercials must report the value of that usage as income.
As with any other taxpayer, a return must be filed if the athlete makes at least $400 of self-employment earnings in the tax year. The standard deduction ($12,200 in 2019) also applies, so athletes earning less than that amount will not owe federal income tax. However, self-employment tax is still on the table— an additional 15.3% tax on top of the income tax. This applies even if the athlete doesn’t owe federal income tax.
Because the IRS looks at net income from these activities, athletes could take some deductions. This is limited to costs directly related to the income-generating work, such as travel expenses, supplies purchased, vehicle mileage, etc. (Expenditures covered by the student-athlete’s school would not qualify for deduction.)
“It’s important that young student-athletes understand their tax responsibilities. If an athlete receives a car or other non-cash benefit, I worry that he or she will be shocked when a 1099 arrives months later and there is no cash to cover the taxes,” said Katie Davis, CPA, a partner with James Moore & Company and the leader of the firm’s Collegiate Athletics Services division. “Not to mention that taxpayers can’t come up with receipts to support deductions after the fact. So athletes need to be proactively educated on appropriate financial practices such as recordkeeping.”
State Income Tax: A Wrinkle in the Playbook
Many collegiate athletes would also be subject to state income tax. This becomes wildly confusing when an athlete from one state attends school in another, thanks to differing state tax laws and residency qualifications.
For example, a student-athlete from a high school in Georgia (which has a state income tax) enrolls at a university in Florida (which does not) and plays for the football team. He receives free meals from a restaurant in Florida in exchange for endorsing the business. If the athlete is still considered a Georgia resident by that state’s laws, the benefit is considered income subject to Georgia’s state income tax even though the activity took place in Florida.
The scenarios become even more complicated when endorsements or other income-generating activities take place in yet another state. Let’s say that same student travels to California with his team to play in the Rose Bowl. While he is there, he receives money for signed photos of himself that are sold to fans attending the game.
Now not only could the income be subject to Georgia state income tax, the student might also have to file a nonresident California income tax return to report this revenue. It’s potential double taxation.
And still, few people are talking.
These students are as young as 17 or 18 years old. The overwhelming majority of them have little (if any) experience in tax matters and likely no access to accounting professionals who can help them.
The potential for financial missteps is very real—and frightening—for these athletes.
“The point is valid that it could create tax burdens for student-athletes that they currently do not experience or have representation to help them through that,” said a Power 5 conference CFO who chose to remain anonymous for this article. “It is hard to believe that institutions can wash their hands from any tax responsibility.”
The state of Florida is considering these ramifications as its legislators work on similar laws, especially in the wake of the NCAA’s Oct. 29 vote. Four bills covering collegiate athlete compensation have been filed for the state’s 2020 legislative session, with Florida Governor Ron DeSantis emphatically endorsing the idea.
The accompanying financial concerns, thankfully, seem to be on the radar for at least some lawmakers.
“The NCAA took a tremendous first step. (But) something that is also very important nationwide is financial literacy and preparing young student-athletes for financial opportunities, including saving for their futures and understanding tax responsibilities,” said Chip LaMarca, State Representative for Florida House District 93. “We look forward to addressing this need here in Florida.”
The concern is reaching national levels as well, with U.S. Senator Mitt Romney commending the NCAA Board of Governors for their recent vote. However, he also cautions against creating a landscape in which a select few schools with huge fan bases attract all of the best athletes due to the financial boon they can provide. “There needs to be some adjustment to the whole name, image, likeness approach to make sure that we don’t create those problems,” he said in a recent roundtable discussion.
Davis notes that there are areas to be addressed by every participant in is decision—the NCAA, federal and state governments, and the universities.
“Many unanswered questions need to be considered by all of these parties as regulations are finalized and policies and procedures are established,” she said. “Will the burden of helping student-athletes with financial management fall on the university’s athletic department? What is the university’s risk when an athlete doesn’t handle his or her tax responsibilities properly? While there may not be financial penalties for universities, the reputational risks should be considered.”
The Ultimate Goal: A Fair Playing Field
The debate of whether student-athletes should be somehow compensated is complex to say the least. And while there are understandable arguments on both sides, one sentiment remains universal—the desire for an equitable solution.
“I think we recognize it’s just not fair to have these athletes giving the kind of time they give to their sport and not receiving any kind of compensation or remuneration,” Romney recently said on ESPN’s Outside the Lines.
With the converging voices of state and federal lawmakers and now the NCAA, the tide is turning toward allowing student-athletes to benefit financially from their hard work. The question then remains… how?
Whatever solution is reached has to take into account the entire realm of collegiate athletics and be consistent across the board. “It is interesting that schools in the state of California handle tax-withholding from the international student-athletes differently,” said Pritsker. “This will be compounded if schools have to withhold tax for student-athletes under the Fair Pay to Play Act. First and foremost, the NCAA will have to make a determination on what the student-athletes can accept.”
It’s going to take time, thought and education if we want to avoid a botched call on this convoluted issue. “At this point, making a plan or reacting to a developing issue is premature,” said the Power 5 CFO. “There are still too many unknowns, and it will be a process to come to the best solution for the student-athletes.”
And that’s the bottom line: A solution that keeps these students in mind. Tax planning is complicated for anyone. For a young person who has just stepped into the national spotlight, it can be downright overwhelming.
“The current tax rules are for professional athletes receiving endorsements or other compensation,” said Davis. “If these laws are implemented and the tax regulations don’t change to exclude college athletes from these taxable activities (which I think is unlikely), they’re subject to some rather grown-up requirements. That needs to be considered.”
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact the James Moore Collegiate Athletics Services professionals. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.