Name, image, likeness and the tax implications of paying college athletes

 

Custom merch, autograph signings, appearances, and social media partnerships. These are just some of the ways brands are paying college athletes after recent changes under NCAA rules have permitted paid sponsorships for college athlete name, image, and likeness (NIL). With the NIL policy introduced in 2021, student athletes have new compensation opportunities made possible by their name and sport.

Student athlete in college class considering NIL compensation.

And, while there’s a lot of excitement around new NIL deals, there’s more to this monetary game changer for college athletes. Specifically, taxes.

Of course, it’s tempting to brush taxes off for later, but there are several things student athletes getting paid based on the new NIL sponsorships — and their parents — will want to be aware of now. For example, income from the use of a college athlete’s name, image, and likeness may bump some student athletes off of their parents’ tax return. Additionally, student athletes may need to set aside money to cover tax bills due throughout the year.

So, if you’re an NCAA student athletes with sponsorship income, what are the must-know tax impacts? The tax experts at H&R Block have outlined five key ways NIL compensation may affect your tax filing.

Sound challenging? Don’t sweat it—we’re here to help you create a winning tax strategy.

Need expert tax filing help for your student filer now? Review H&R Block tax filing options. Also, see how H&R Block is giving female athletes a fair shot by committing $1 million in sponsorship support.

5 ways NIL income can impact taxes

Paying college athletes for their name, image, and likeness comes with an array of tax complications. Let’s dive into the details.

1. Dependency status

Parents often ask if they can claim their college students as a dependent. While there are several criteria to consider, an important one in the NIL context is financial support. If parents provide more than half of their child’s financial support, they may be able to claim them. Support includes paying for expenses such as food, clothing, lodging, medical/dental care, education.

With that in mind, think about how much money you’re receiving from your sponsorships. If your NIL income outweighs the support from your parents, then you likely no longer qualify as their dependent.

So, what do you need to know about filing on your own? First, your filing status will determine the threshold of income at which you’ll be required to file taxes (more on that in the next section). Then, other facets of your financial life will determine what tax credits or deductions you’re eligible to claim, which can in turn help to lower your tax bill.

Keep in mind, any education credits will shift from your parents return to your own return if you are no longer a dependent.

But there’s much more than just your annual tax return to think about. Read on.

2. Self-employment status and tax obligations

It may come as a surprise, but your student athlete sponsorship income is viewed as self-employment (or independent contractor) income, which means taxes will be different than if you worked as a W-2 employee.

  • Once you’ve made more than $400 as an independent contractor, you’ll be required to pay self-employment taxes. These taxes refer to how you pay into Social Security and Medicare programs. As a regular employee, you pay half of this tax, and your employer pays the other half. You may have heard of this as FICA or payroll taxes. However, when you’re self-employed, you’re on the hook for both halves.  But here’s the good news, you also qualify for a self-employment tax deduction.
  • Outside of paying self-employment taxes, you may also owe income taxes. Your tax obligations kick in when your income is more than the standard deduction for your filing status. An example may be helpful here.

Let’s say your filing status is single and you have $10,000 in income, mostly from sponsorships. Because your earned income is under the 2021 single filer threshold of $12,550, you won’t need to worry about federal income taxes. You’ll generally only need to pay self-employment taxes on the sponsorship income because it’s above the $400 threshold mentioned above.

However, if your NIL deal income is $13,000, the story changes. At that point, you’re over the threshold for the single filing status. How much tax you’ll owe will depend on your specific situation.

3. Paying taxes quarterly and setting aside money for it

As mentioned above, your sponsorship money means you have self-employment income, so the task of keeping on top of your taxes falls on your shoulders.

For comparison, a W-2 employee pays taxes each pay period through paycheck withholding. But there is no withholding for self-employment income, so you have to pay as you go through estimated tax payments.

It boils down to you sending the IRS payments four times a year to keep on top of your tax obligations (same is true for your state taxes).

These payments are important because they help you avoid underpayment penalties and a large tax bill when you file your annual return.

How much should you pay each quarter? That will depend on a few variables, including your tax bracket, any other income you have and tax benefits you may be eligible for, just to name a few.

4. State tax obligations

If your NIL sponsorship deal involves working in multiple states, it may mean multiple state filings. Essentially, you may be required to file resident and non-resident returns.

Here’s a quick breakdown:

  • Resident state. For many students, this is generally the state where you’re from or where your parents live. Unless you’ve officially changed your residency, you’ll file a resident return for your home state.   
  • Non-resident states. This one isn’t as clear cut. You may need to file a return in each state that you’ve earned income. That could be where you’re going to school, or it could be the states you’ve made appearances or worked as part of your endorsement deal (for example, filming a commercial out of state).

Filing multiple state returns doesn’t mean double taxation. There are rules to help keep you from paying tax on the same income twice. In many cases, states have agreements that allow for credits or reciprocity agreements to avoid any double taxation. The rules vary from state to state so each your situation will depend on your unique situation.

5. Financial aid implications

If your financial aid or scholarships are aid-based, such as a Pell Grant or other federal award program, your eligibility could be impacted.

Because your sponsorship money is considered taxable income, you must include it on your Free Application for Federal Student Aid. The additional income may mean a reduction in your amount of aid that you receive. 

Paying college athletes: See the tax implications in play

It’s easy to see that paying college athletes for use of their name, image, and likeness can quickly lead to complex tax situations.  To help illustrate these considerations a bit more, let’s look at an example with Marisa.  

Marisa’s situation

  • Goes to college in North Carolina, where she’s a Division I college athlete playing softball. She is considered a resident of Oklahoma, which is where her parents live.
  • Received an athletic scholarship for her participation on the softball team that covers her tuition and fees.
  • Received $19,000 in support from her parents in 2021 and meets all the other requirements to be her parents’ qualifying child.
  • Received $3,000 in income from a part-time job and $10,000 from a NIL agreement creating a series of social media posts with a local health food store.
  • Did not use the part-time work or endorsement income for support. Instead, she saved this income and only used $1,000 of her own income for living expenses. Her parents paid for the rest of her living expenses.

Marisa’s tax considerations

  • Can be claimed on her parents’ return as their qualifying child. This will allow her parents to claim her for possible deductions and credits for dependents. They can still claim her as a qualifying child even though she must file on her own as outlined in the next two bullets.
  • Will need to file her own federal return to pay her self-employment tax, since she earned more than $400 in self-employment income.
  • Will also need to file her own return because she made more than the threshold for dependents, earned income over $12,550.
  • Needs to check with North Carolina and any state where she earned income from NIL to see if she has a filing requirement because she received endorsement income outside of Oklahoma.

If Marisa paid her own living expenses, instead of receiving most of her support from her parents, she would not be a qualifying child for her parents. In that case, she would need to file a return because her income is higher than the filing threshold for single filers ($12,550) and she received income from self-employment. If Marisa didn’t receive a scholarship (say she was a Division III athlete) and took out student loans to cover her educational expenses, those loans would be considered support provided by her.

Student athletes: Block has the expertise for your complex taxes

Need a winning strategy for your taxes? H&R Block has the expertise to help student athletes with NIL income as well as student filers with any kind of income get their maximum refund — guaranteed.

And if you’re the parent of a student or a prospective student athlete, we can help you too!

Rely on H&R Block expertise to navigate your taxes

File with H&R Block and get your maximum refund. Our tax pros can help you file in person or virtually, or you can file on your own online.

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