Completing a Form W-9/W-4
Before you start receiving income from an NIL deal, you should be aware of steps to take prior to receiving income. In most instances, you will be required to complete Form W-9, Request for Taxpayer Identification Number and Certification, so that the entity paying you can report the income that you received to the IRS. The IRS uses this information to match your reported income when you file your tax return. In situations where you are deemed to be an employee, you will be required to complete Form W-4, Employee’s Withholding Certificate, so your employer can determine how much federal income tax to withhold from your wages.
Federal Tax Reporting Requirements
Student-athletes may need to file a tax return depending on their gross income and whether their parents can claim them as a dependent. Find out if the student-athlete needs to file a tax return and if they can be claimed as a dependent.
Student-athletes are considered independent contractors for tax purposes. They will be regarded as self-employed and receive a Form 1099 if their income is more than $600. Being self-employed requires the following actions, among others:
- File a Schedule C, Profit or Loss from Business, with Form 1040 to determine taxable income.
- File a Schedule E, Supplemental Income and Loss, (from rental real estate, royalties, partnerships, S corporations) with Form 1040 to determine taxable income.
- Document and track all expenses incurred in generating NIL income.
- Remit both the employee and employer portions of the Social Security and Medicare taxes.
- Calculate and remit estimated quarterly payments for all tax liabilities.
A student-athlete who files his or her own tax return will have to pay federal income tax if his or her income is more than $12,950 for single filers (or $25,900 if married and filing taxes jointly) since that is the standard deduction for 2022. All athletes have to fill out a tax return to report and pay their self-employment taxes if they make at least $400 in NIL activities.
Student-athletes and/or parents of student-athletes may be eligible for certain credits, depending on income, filing status, and other life situations. These include the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit, which can be claimed for qualified education expenses for up to four years and $2,500, with as much as 40 percent potentially refundable.
Estimated Tax Payments
Estimated tax is the method used to pay Social Security and Medicare taxes and income tax because student-athletes do not have an employer withholding these taxes for them. Form 1040-ES, Estimated Tax for Individuals, is used to figure these taxes. Form 1040-ES contains a worksheet similar to Form 1040. Individuals will need their prior year’s annual tax return to fill out Form 1040-ES. If it is the first year being self-employed, individuals will need to estimate the amount of income they expect to earn for the year.
Individuals generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.
If student-athletes didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, they may have to pay a penalty for underpayment of estimated tax.
See the Estimated Taxes page for more information. The Self-Employment Tax page has more information on Social Security and Medicare taxes.
State Tax Implications
As of August 2022, 32 states have NIL laws, 26 of which have laws currently in effect. These states modeled their laws on California’s “Fair Pay to Play Act,” which was the first state NIL law enacted.
Under the NCAA’s interim NIL policy, student-athletes who attend school in a state with an active NIL law must comply with that law, in addition to any institution and conference policies. Students who attend school in a state without active NIL legislation must only comply with any institution and conference policies. Student-athletes could also owe income taxes on NIL earnings in their state of residency unless that state does not have an individual income tax. Income tax rates and deductions vary substantially from state to state.
Complex issues could arise with respect to the student-athlete’s residency status. A student-athlete’s “home state” normally will remain his or her state of residence even if the athlete leaves that state to play for a university in another state. For example, an athlete who is a resident of California but attends the University of Texas will generally remain a California resident for state income tax purposes. In addition, those college athletes who go to more than one state to earn NIL will also have to contend with multiple state income tax laws and tax filings. Student-athletes will need to understand the domicile and statutory residency rules and the factors for establishing residency for the state in which they attend school and their “home state” if they intend to change their residency to the state where the university is located.
Not all states impose income taxes, but other states can impose tax at rates up to 13.3 percent, and the rules on tax deductions can vary. If a state imposes a personal income tax, the student-athlete’s residence state will tax the athlete’s income from all sources while nonresident states (including the state where the athlete’s university is located and states where the athlete plays games or makes appearances) could tax a portion of the athlete’s NIL earnings.