Effective July 1, 2021, the NCAA adopted the Interim Name, Image, and Likeness (NIL) Policy allowing NCAA student athletes the opportunity to benefit from their NIL without jeopardizing their NCAA eligibility.
NIL activities are activities that involve the use of an individual’s name, image, and likeness for commercial or promotional purposes.
Student athletes and parents or guardians of student athletes need to be aware that NIL income students receive is taxable and must be reported on their federal and state tax returns or their parents’ federal and state tax returns.
Any income from NIL activities, including non-cash, is considered taxable income.
Student athletes are making money through NIL activities in a number of different ways, including guest appearances at clubs and schools, autograph signings, exhibitions, sponsorships, endorsements, content creation/influencer, non-fungible tokens, gifts, and giveaways (gift cards).
Student athletes can profit off endorsements, apparel sales, corporate partnerships, charitable appearances, teaching camps, and starting their own businesses. They can also be paid for developing their own merchandise, promoting products or services, and appearing at events due to their personal celebrity. “NIL rights” allow college athletes to profit from sponsorship deals, autograph fees, social media, promotional appearances, and marketing their own brands. Social media and brand endorsement deals are the most popular revenue source for college athletes.
Income/benefits received by a student athlete must be included in taxable income reported on the FAFSA (Federal Student Aid) application and potentially could impact the amount of financial aid granted. Pell Grants are based on a few other factors but can also be impacted by NIL income.
The NCAA has released general guidance for college financial aid offices, but it only states that NIL income should be taken into account in determining the amount of financial aid and does not consider the impact of NIL on student income.
A non-fungible token (NFT) is generally defined as unique digital entries, recorded on a blockchain, that represent objects such as videos, sound, images, or works of art, with ownership rights recorded on a blockchain without the ability to be replicated. Since the emergence of NFTs, many celebrities, athletes, musicians, and artists have licensed their names, images, and likenesses to endorse a wide variety of licensed products including blockchain-based, licensed NFTs. These contracts provide for compensation in return for publicity rights similar to copyright or trademark rights. Property powered by blockchain technology like NFT contracts have unique characteristics that give rise to many unique tax questions. In 2014, the IRS published Notice 2014-21 establishing the IRS’s position that digital assets and virtual currency are treated as property for federal income tax purposes.
Although top-tier athletes may negotiate NIL contracts using a professional services provider, most students will likely engage with groups associated with their colleges. Groups of college boosters – third-party entities that promote an athletic program’s interests – have formed what are known as NIL collectives. NIL collectives can be described as entities affiliated with, yet independent from, a college or university that generates funding to support NIL opportunities for student athletes. These NIL agreements with these collectives vary in structure and can include up front amounts, monthly payments, and other incentives.
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.
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:
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 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.
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.
Do not ignore notices or letters from the IRS. The IRS has the authority to file liens against your property, garnish wages, take money in your bank or other financial account, and seize and sell your vehicle(s), real estate, and other personal property.
If you fail to file required tax returns timely or fail to pay the tax due, you could be subject to penalties and interest.
If you do owe tax or penalty, you should pay the balance as soon as possible to avoid additional penalty and interest. The IRS has various options for making payments (https://www.irs.gov/payments).
If you cannot pay your balance in full you may be eligible for one of the options below:
You may appeal many IRS collection actions to the IRS Independent Office of Appeals.
An IRS Online Account offers immediate access to your individual federal tax information. Your online account may have information you could need before or after the filing of your tax return. Setup Your Online Account.
The Taxpayer Advocate Service is an independent organization within the IRS that helps taxpayers and protects taxpayers’ rights. We can offer you help if your tax problem is causing a financial difficulty, if you’ve tried and been unable to resolve your issue with the IRS, or if you believe an IRS system, process, or procedure just isn’t working as it should. If you qualify for our assistance, which is always free, we will do everything possible to help you. Visit www.TaxpayerAdvocate.irs.gov or call 1-877-777-4778.
Low Income Taxpayer Clinics (LITCs) are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level and who need to resolve tax problems with the IRS. LITCs can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. For more information or to find an LITC near you, see the LITC page on the TAS website or Publication 4134, Low Income Taxpayer Clinic List.
