Since the NCAA adopted its interim name, image, and likeness (“NIL”) policy last July, college athletes had the opportunity in 2021 to profit from their NIL rights for the first time. As the 2022 tax season is quickly coming to end, college athletes who have earned income from NIL activities in 2021 should be aware of the tax consequences. This article highlights several frequently asked tax questions to help college athletes who have earned income from NIL activities prepare for their tax filings.
What forms of NIL compensation are taxable income?
College athletes can earn various forms of compensation through NIL activities, such as:
Cash payments for services (e.g., endorsements, social medial posts, autographs, appearances, teaching camps or lessons)
Car lease or use of car
Merchandise (e.g., clothing, equipment, electronics)
Non-fungible tokens (“NFTs”)
Any net income from NIL activities—including non-cash compensation—is considered taxable income. For example, if a business pays a college athlete in the form of products endorsed for the business (e.g., clothes, shoes), the athlete should include the fair market value of those products in their taxable income.
Are college athletes paid as independent contractors for NIL activities?
A college athlete who earned income from NIL activities was likely paid as an “independent contractor” rather than as an employee. While there is no exact definition, an independent contractor is generally defined as an individual or entity contracted to perform services for another person or entity. The key difference between an independent contractor and an employee is that the employer has the ability to control the result of the work performed by an independent contractor, but the independent contractor generally has right to direct and control when and how the work will be performed.
A company that hires a college athlete as an independent contractor for NIL activities does not withhold income, Social Security, and Medicare taxes. As independent contractors, college athletes are responsible for making their own estimated federal and state tax payments, which includes both the employer and employee portion of Social Security and Medicare taxes.
How is NIL income reported?
Form 1099-NEC: If a college athlete was hired as an independent contractor for NIL activities and received $600 or more, their income will be reported on Form 1099-NEC. If the college athlete did NIL deals with more than one company, they should receive a Form 1099-NEC from each company.
Form 1099-K: If a college athlete was paid for NIL activities through a third-party payment service, like Venmo, PayPal, Cash App, or credit cards, their income will be reported on a Form 1099-K by that third-party payment service, so long as that service paid them more than $20,000 in payments and processed at least 200 transactions for them in 2021. Beginning in 2022, the payment threshold for Form 1099-K will be reduced from $20,000 to $600 or more and the transaction requirement of 200 transactions will be eliminated entirely.
1099 Deadlines: Form 1099-NEC or Form 1099-K must be filed with the IRS, and the deadline to send a copy of either 1099 form to the college athlete is by January 31 of each tax year. Even if the college athlete does not receive a Form 1099-NEC or Form 1099-K, the IRS still requires them to report all self-employed income, even if it is less than $600.
What taxes are required for NIL income?
Any net income (gross income minus expenses) from NIL activities is considered taxable income. The following are potential taxes a college athlete will have to pay for net income earned from NIL activities:
Self-Employment Tax: The income generated from NIL activities is considered self-employed income, meaning the college athlete must pay “self-employment tax.” Self-employment tax is a tax consisting of Social Security and Medicare taxes. The self-employment tax rate is 15.3% (the sum of a 12.4% for Social Security and 2.9% for Medicare).
State Tax: Generally, in any state a college athlete earns income from NIL activities, the athlete will owe state income taxes (unless that state does not have individual income taxes). The college athlete could also owe income taxes on NIL earnings in their state of residency, regardless of the income being earned in that state. The income tax rates and deductions vary substantially from state to state, so college athletes should consult a tax professional to help them navigate various state income tax rules.
Federal Tax: The standard deduction for 2021 is $12,550 for single filers (or $25,100 if married and filing taxes jointly), meaning that if the college athlete’s income is below that amount they will generally not owe federal income taxes or be required to file a federal income tax return (note: the college athlete will still have to file an income tax return if their net earnings from self-employment were $400 or more). The standard deduction for 2022 increases to $12,950 for single filers (or $25,900 if married and filing taxes jointly).
Should a college athlete pay quarterly estimated taxes for NIL earnings?
If the college athlete expects to owe more than $1,000 in federal taxes for any NIL income for that tax year, they may need to make estimated quarterly tax payments using Form 1040-ES, or else face a penalty for underpayment. This “pay-as-you-go” approach can help college athletes, who earn big NIL pay days, avoid a large tax bill at the end of the year.
Is a tax return required for NIL income?
If a college athlete’s net earnings from NIL activities are $400 or more, they need to file a Schedule C (Form 1040) and pay self-employment taxes. Even if the college athlete’s net earnings from NIL activities are less than $400, they still have to file an income tax return if they meet any of the other requirements listed in Form 1040.
What is the deadline to file a tax return for NIL activities?
The filing deadline to submit 2021 tax returns or an extension to file and pay tax owed is April 18, 2022 (typically, the tax deadline is April 15 each year).
What tax deductions are available for NIL activities?
A tax deduction is an item that can be subtracted from taxable income to lower the amount of taxes owed. If a qualifying expense is related to NIL activities, the college athlete can use that expense to lower their taxable NIL income. A few examples of possible tax deductions related to NIL activities include:
Travel expenses (e.g., hotel, baggage fees)
Internet and phone expenses
If the college athlete elects to deduct any NIL related expenses for taxes, they should keep receipts of all deductions in the event they are audited by the IRS. In addition, college athletes should track all tax deductions for record keeping purposes, which can be done through a monthly spreadsheet or an expense tracker app.
Can parents claim a college athlete that earns NIL income as a dependent?
If the college athlete is a full-time college student under the age of 24, their parents may be able to claim them as a dependent and be eligible for education tax credits like the American Opportunity Credit or the Lifetime Learning Credit. However, if the college athlete’s NIL income (and any other income they earn) provides at least half of their own financial support, their parents generally cannot claim them as a tax dependent.
Does NIL income affect financial aid?
Because income from NIL activities is taxable, it will be reportable on the Free Application for Federal Student Aid (FAFSA), which could affect a college athlete’s “need-based” aid. If a college athlete receives financial aid or a grant, such as a Pell Grant, they should contact their college’s financial aid office or athletics department before engaging in any NIL activities to determine whether any potential NIL income would affect their financial aid.
While the ability to earn compensation from NIL activities is a win for college athletes, NIL earnings for college athletes come with tax consequences. Given the many complexities and nuances in filing and paying taxes, this article does not cover all the potential tax implications associated with NIL earnings. Therefore, college athletes should consult with tax, legal, or accounting advisors to help them navigate taxes applicable to NIL earnings.
THIS MATERIAL HAS BEEN PREPARED FOR INFORMATIONAL PURPOSES ONLY, AND IS NOT INTENDED TO PROVIDE, AND SHOULD NOT BE RELIED ON FOR, TAX, LEGAL, OR ACCOUNTING ADVICE. YOU SHOULD CONSULT YOUR OWN TAX, LEGAL, AND ACCOUNTING ADVISORS FOR TAX, LEGAL, OR ACCOUNTING ADVICE.
Ryan Whelpley is an Associate at Morse in Waltham, Massachusetts, where he is a member of the firm’s Corporate Practice Group and focuses on venture capital financings, M&A transactions, and general corporate work for startup and emerging growth companies. He is a graduate of Albany Law School (2019) and Union College (2016). At Union, Ryan was a member and three-year captain of the Men’s Basketball Team. You can connect with him via LinkedIn.