College sports generate approximately $19 billion in annual revenue. Yet until July 1, 2021, college athletes could not profit from their name, image, and likeness, or NIL. As a result of recent state laws and an interim policy from the National Collegiate Athletic Association that allow student athletes to receive compensation for their NIL, collegiate athletes across the country are earning revenue by signing NIL deals with major companies and brands. It is estimated that the NIL market will exceed $500 million this year. However, NIL compensation may be a curveball for collegiate athletes paying taxes—many for the first time—and qualifying for financial aid and grants.
History of Rules
Individuals typically have the right to control the commercial use of their identity, including their name, image, and likeness, which is known as the right of publicity or personality rights. Historically, NCAA rules prohibited athletes from profiting from their name, image, and likeness. After facing mounting pressure from state and federal lawmakers, colleges, universities, and student athletes, the NCAA adopted an interim policy suspending NCAA NIL rules for all student athletes at NCAA member institutions. At the same time, several state laws went into effect that allow student athletes to profit from their NILs. To date, nearly 30 states have NIL laws in place. While federal legislation has been introduced by members of Congress to establish NIL standards for collegiate athletes nationwide, none has gained meaningful traction.
The NCAA’s new constitution, which goes into effect in August 2022, requires each division and member institution to have a NIL policy. Now that athletes in every state have a green light, states that already implemented a name, image, and likeness law may revise theirs as the playing field shifts. Universities and conferences can also set their own reporting requirements and adopt additional policies, according to the NCAA.
Tax Day likely presented a new set of considerations for student athletes who received NIL compensation in 2021. For taxation purposes, a student athlete will likely qualify as a self-employed, independent contractor. Compensation earned by a self-employed individual is assessed an income tax in addition to self-employment taxes that amount to 15.3% comprised of Social Security and Medicare taxes. Commonly, 92.3% of a tax-filer’s net earnings from self-employment are subject to self-employment tax. Self-employed individuals are required to report their income if their net earnings exceed $400.
Monetary compensation received for NIL deals, including making appearances and social media partnerships, is not the only taxable income that college athletes are required to report. Also taxable are free cars, trips, athletic wear and even cryptocurrency, provided it exceeds $600. Although a company providing collegiate athletes with free goods in excess of $600 must issue annual 1099 Internal Revenue Services forms for the value of such goods, the ball is also in the court of the recipient collegiate athlete to report the same. The taxable nature of non-cash compensation—cars, apparel and similar goods—may come as a surprise for student athletes.
NIL income could also impact the taxation of college athletes’ biggest fans—their parents. Collegiate athletes’ NIL earnings could affect whether their parents can claim them as dependents. Parents should analyze this closely with tax or accounting experts.
Collegiate athletes earning NIL income will want to think carefully about organizing a sole proprietorship, a limited-liability company, or other entity for NIL income generation, and the tax implications of each. For example, an LLC may provide the opportunity for a student athlete to write-off certain expenses, such as travel costs to an appearance, while attributing potential liabilities to the LLC, rather than the individual that owns the LLC. A sole proprietorship also permits pass-through taxes, allowing the sole-proprietor to file taxes as an individual and still deduct business expenses, although, potential liability is not attributed to the entity, but rather to the individual.
Effects of Taxation
Since NIL compensation is taxable, such compensation must be reported on a collegiate athlete’s Free Application for Federal Student Aid or FAFSA, which is a need-based financial aid application to assist with college tuition and expenses. Accordingly, an athlete that generates income from NIL deals may be less likely to qualify for need-based and other financial aid to assist with college tuition payments.
Students receiving NIL income may also become ineligible to receive grants, which do not need to be repaid. For example, the Federal Pell Grant is awarded to college students who have an exceptional financial need and can be used for expenses a scholarship would not cover. The National Association of Student Financial Aid Administrators reported that in 2015-2016, 48.5% of students on athletic scholarships also received need-based aid and 31.3% of scholarship athletes received a Federal Pell Grant. Any income received by a college athlete from NIL deals could affect FAFSA and grant eligibility, and students should consider this carefully.
While NIL was a welcomed change for many, its quick and unregulated implementation is sure to present unwelcome surprises to some student athletes. Collegiate athletes and their families should frequently consult with tax and accounting experts regarding the potential consequences of NIL revenue. Moreover, colleges and universities should refrain from providing advice to their students on this topic other than flagging that there are likely complicated tax issues to consider and providing the general advice to consult with a tax or accounting specialist.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Sarah Wake is a partner at McGuireWoods LLP in Chicago. She previously served as associate general counsel and interim associate vice president for equity at Northwestern University and is a former member of the NCAA Division I Committee on Infractions.
Addison Fontein is an associate at McGuireWoods LLP in Dallas.
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