A Guide to Collegiate Athletes’ NIL Taxation
Key topic
This lesson aims to provide a general guidance on NIL taxation for collegiate athletes in the United States. By delving into the nuances of taxable income, deductions, credits, and tax planning strategies, we want to equip athletes with the basic knowledge needed to navigate their tax obligations effectively. Whether athletes are high-profile athletes with significant endorsement deals or mid-level athletes, earning modest NIL income, understanding these tax principles is crucial for their financial success and compliance.
Learning objectives
- Realize that NIL income always comes with tax obligations, no matter in what form it is received
- Understand how to navigate the different types of taxation applicable to NIL income
- Obtain a basic understanding of tax deductions and tax credits
- Learn to be proactive when it comes to their tax obligations so that they are always tax compliant
- Be able to create strategies for optimizing their tax liabilities while ensuring compliance with the applicable tax laws
- Understand the importance of getting help from tax professionals especially when it comes to tax planning and personalize tax advice
Introduction
In recent years, the landscape of collegiate athletics in the United States has undergone a significant transformation. A pivotal development has been the recognition of athletes’ rights to their Name, Image, and Likeness (NIL). Historically, the NCAA (National Collegiate Athletic Association) imposed strict regulations prohibiting athletes from profiting from their NIL through the application and implementation of the so-called ‘Amateurism criterion’. However, a series of legal challenges and public pressure led to a seismic shift in policy, allowing collegiate athletes to monetize their NIL as of July 1, 2021.
This newfound opportunity has opened up a myriad of income streams for athletes, including endorsement deals, sponsorships, social media promotions, merchandise sales, and appearances. These opportunities, while financially rewarding, also introduce a complex array of tax implications. With athletes now navigating contracts, managing income from diverse sources, and meeting tax obligations, the importance of understanding NIL taxation cannot be overstated.
Understanding NIL Income
NIL income refers to the earnings athletes receive from leveraging their personal brand. This income can come from various sources, including:
- Endorsement Deals: Payments from companies for promoting their products. For instance, a shoe company might pay an athlete to wear and advertise their shoes.
- Sponsorships: Financial support from brands in exchange for visibility and association with the athlete. Examples include a beverage company sponsoring an athlete for public appearances.
- Social Media Promotions: Earnings from sponsored posts and partnerships on platforms like Instagram, TikTok, and YouTube. Influencers and athletes often collaborate with brands to create promotional content.
- Merchandise Sales: Profits from selling branded apparel, equipment, or other products. Athletes can create their own merchandise line or partner with existing brands.
- Royalties or fees earned through licensing or merchandizing agreements or NFTs.
- Appearances and Autographs: Fees for public appearances, signings, and events. This can include being paid to attend events, sign autographs, or give speeches.
- Free products or services that an athlete receives in exchange for endorsing a brand or business.
- Payments received from NIL Collectives.
Each of these income streams has unique tax implications that athletes must consider. Properly categorizing and reporting this income is essential for compliance and optimizing tax benefits.
How NIL Income is Earned
Athletes enter into contracts with businesses and organizations to earn NIL income. These agreements outline the terms, including payment amounts, duration, and scope of the partnership. For example, a contract might specify that an athlete must post a certain number of social media posts per month or make a set number of public appearances. The income can vary significantly based on the athlete’s popularity, performance, and marketability. High-profile athletes might secure lucrative deals with major brands, while others might earn income through local businesses and smaller-scale promotions.
Understanding the terms of these contracts and the nature of the income earned is important for accurate tax reporting. Athletes should keep detailed records of all contracts and payments received to ensure they are prepared for tax filing.
Basics of U.S. Taxation
General
The United States has separate federal, state, and local governments with taxes imposed at each of these levels. Taxes are levied on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as various fees. U.S. tax and transfer policies are progressive and therefore reduce effective income inequality, as rates of tax generally increase, as taxable income increases. Taxes are imposed on net income of individuals and corporations by the federal, most state, and some local governments. Citizens and residents are taxed on worldwide income and they are allowed a credit for foreign taxes paid.
Federal Income Tax
As mentioned before, the United States operates a progressive federal income tax system, meaning the tax rate increases as income rises. Federal income tax rates and brackets are established by the Internal Revenue Service (IRS) and are subject to change annually. All U.S. citizens and residents are required to file a federal income tax return if their income exceeds certain thresholds. Tax returns are typically due by April 15th each year.
For 2025, the federal income tax brackets for individuals are as follows:
- 10% on income up to $11,925 (single filers) or$23,850 (married filing jointly)
- 12% on income over $11,925 (single filers) or $23,850 (married filing jointly)
- 22% on income over $48,475 (single filers) or $96,950 (married filing jointly)
- 24% on income over $103,350 (single filers) or $206,700 (married filing jointly)
- 32% on income over $197,300 (single filers) or $394,600 (married filing jointly)
- 35% on income over $250,525 (single filers) or $501,050 (married filing jointly)
- 37% on income over $626,350 (single filers) or $751,600 (married filing jointly)
For 2024, the federal income tax brackets for individuals were as follows:
- 10% on income up to $11,600 (single filers) or$23,200 (married filing jointly)
- 12% on income over $11,600 (single filers) or $23,200 (married filing jointly)
- 22% on income over $47,150 (single filers) or $94,300 (married filing jointly)
- 24% on income over $100,525 (single filers) or $201,050 (married filing jointly)
- 32% on income over $191,950 (single filers) or $383,900 (married filing jointly)
- 35% on income over $243,725 (single filers) or $487,450 (married filing jointly)
- 37% on income over $609,350 (single filers) or $731,200 (married filing jointly)
Understanding these brackets helps athletes estimate their tax liability and plan accordingly.
State Income Tax
In addition to federal taxes, many states impose their own income tax. State tax rates and brackets vary widely, and some states, such as Florida, Texas, and Washington, do not have a state income tax. Athletes must file state tax returns based on their residency and where their income is earned. This can become complex for athletes earning income in multiple states.
For example, an athlete residing in California (which has a progressive state income tax) but earning income from events in Texas (which has no state income tax) would need to understand the tax implications in both states. States like California have high tax rates, while states like Florida have none, which can significantly impact an athlete’s net income.
It is very important for student athletes to determine where their tax residence is. States that impose a personal income tax, generally tax residents on all of their income regardless of its source. The state of residence of students is usually where they grew up and where their family resides. Usually, the various states consider a college student to be a temporary resident while attending college and recognize that their state of tax residency is their home state. Therefore, student athletes earning NIL revenue have a tax obligation in their home state.
However, even if student athletes file a state tax return in their home state, they may still be liable to file additional tax returns in other states as well, depending where their NIL income has been earned. States that tax residents on their income, often tax non-residents on income earned within their borders. Of course, to avoid double taxation, the state of residence will provide a credit for taxes paid to other states on the same income. Student athletes should bear in mind that usually income earned from NIL deals results from performing some kind of personal service. Personal service income is usually sourced where the service is performed. In the case of licensing income though, such income is usually deemed to be sourced to the state of the student athlete’s tax domicile.
Local Taxes
Some cities and counties also levy local taxes. For example, New York City imposes a local income tax on residents. Athletes must be aware of these additional tax obligations, particularly if they reside or earn income in areas with local taxes.
Local taxes add another layer of complexity. An athlete living in New York City, for instance, must pay federal, state, and city income taxes. Understanding the specific tax rates and filing requirements for each locality is critical to avoid penalties and ensure compliance.
Action Steps – Exercise 1 (15 minutes): NIL Deals & State Taxes
Please consider the following case and choose the most tax efficient deal in terms of state tax.
Case: You are a football athlete at USC in California. You originally come from Florida where you grew up and where your parents and family still live. You have two excellent NIL opportunities which are mutually exclusive though since they are in the same industry so you cannot take them both as they both come with industry exclusivity clauses.
- Deal1 is for a three-day event in Florida, with a Florida-based sports venue, which requires your physical presence. The deal gives you $55,000 plus reimbursement of your travel and accommodation expenses amounting to $2,000.
- Deal2 is very similar to Deal 1. It is also for a three-day appearance at a sports venue in California but with a $58,000 compensation plus reimbursement of your travel and accommodation expenses amounting to $1,200.
Answer: Deal 1 is state-tax-exempt since the event will take place in Florida, your tax residency state, where there is no taxation at the state level. Since you are not a tax resident of California, you are there only temporarily to study, plus the event does not take place in California, you have no tax obligation in California either. The total income of $57,000 ($55K compensation & $2K expense reimbursement) is not taxable at the state level
Deal2 on the other hand, takes place in California and immediately creates a tax obligation to pay tax in California. Since the applicable tax rate in California is at 8%, then you incur a tax liability of $4,736 (8% of $59,200) and you are left with a net NIL income of $54,464.
If you compare the net NIL income of Deal 1 at $57,000 with that of Deal 2 at $54,464, it is clear that if you choose the Florida deal (Deal1), you will be $2,536 ahead in terms of state taxes.
Tax Obligations for Collegiate Athletes
Taxable vs. Non-Taxable Income
NIL income is generally considered taxable by the IRS. This includes payments from endorsements, sponsorships, social media promotions, merchandise sales, and appearance fees. Non-taxable income might include scholarships and grants used for tuition and educational expenses, provided they meet IRS criteria.
Under IRS rules, some athletes are required to file a federal return to report self-employment income and pay federal taxes if they have net earnings of $400 or more in self-employment income from NIL deals, or if their income exceeds the standard deduction. Self-employment income of $600 or more is reportable on Form 1099.
If a student is filing a tax return to report NIL income from self-employment, they’ll need to complete the following:
- Schedule C, Profit or Loss from Business
- Schedule E, Supplemental Income and Loss, if they earned money from royalty payments
These forms will need to be attached to the student’s Form 1040 to determine their taxable income for the year.
Once a student athlete’s income from NIL deals exceeds a certain threshold, they can no longer be claimed as a dependent on their parents’ tax return.
It’s important for athletes to distinguish between taxable and non-taxable income. For example, a scholarship covering tuition is typically non-taxable, but a stipend for living expenses may be taxable. Understanding these distinctions helps in accurate tax reporting and compliance.
Self-Employment Tax
Many collegiate athletes earning NIL income will be classified as self-employed for tax purposes. This means they are responsible for paying self-employment tax, which covers Social Security and Medicare contributions. For both 2025 and 2024, the self-employment tax rate is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare. For 2025, the maximum 15,3% employment rate will hit the first $176,100 of net self-employment income. Above this threshold, the self-employment tax’s social security component of 12,4% goes away while the 2,9% Medicare tax component continues for all income. Athletes must report self-employment income on Schedule C (Form 1040) and pay self-employment tax using Schedule SE (Form 1040).
Self-employment tax can significantly impact an athlete’s tax liability. For instance, an athlete earning $10,000 in net NIL income would owe $1,530 in self-employment tax alone. Proper planning and quarterly estimated tax payments can help manage this burden.
Quarterly Estimated Taxes
Athletes with substantial NIL income must make quarterly estimated tax payments to avoid penalties. The IRS requires these payments to cover both income tax and self-employment tax. Estimated tax payments are due on April 15th, June 15th, September 15th, and January 15th of the following year. Athletes can use Form 1040-ES to calculate and make these payments. If athletes expect to have to owe more than $1,000 in taxes, they should make estimated tax payments.
Failing to make quarterly payments can result in penalties and interest charges. Athletes should estimate their annual income and divide the total tax liability into four payments. Keeping up with these payments ensures compliance and avoids surprises during tax season. Athletes should usually set aside about 25% to 30% of their NIL income to cover these quarterly payments.
Action Steps – Exercise 2 (10 minutes):
How much would you set aside in terms of federal tax for the following amounts of net annual NIL income? Please justify your answer.
A: $1,000, B: $6,000, C: $28,000, D: $96,000, E: $137,000, F: $220,000
Answer
| Net Annual NIL Income | Amount to be set aside | Justification | |
| A | $1,000 | $253 | 10% federal tax & 15.3% SE tax |
| B | $6,000 | $1,518 | 10% federal tax & 15.3% SE tax |
| C | $28,000 | $7,654 | 12% federal tax & 15.3% SE tax |
| D | $96,000 | $35,808 | 22% federal tax & 15.3% SE tax |
| E | $137,000 | $53,841 | 24% federal tax & 15.3% SE tax |
| F | $220,000 | $98,616 | 32% federal tax & 15.3% of $176,100 & 2.9% of $43,900 |
Deductions and Credits
General
A tax deduction is an amount you subtract from your income when you file so you don’t pay tax on it. By lowering your income, deductions lower your tax. You need documents to show expenses or losses you want to deduct. A tax credit is an amount you subtract from the tax you owe. This can lower your tax payment or increase your refund. Some credits are refundable — they can give you money back.
Business Expenses
Athletes can deduct ordinary and necessary business expenses related to their NIL activities. Common deductible expenses include:
- Travel: Costs for travel to events, appearances, and meetings. This includes airfare, lodging, and meals.
- Marketing: Expenses for promoting the athlete’s brand, including social media advertising, website costs, and promotional materials.
- Training: Costs for training, coaching, and related activities. This can include gym memberships, personal trainers, and specialized training camps.
- Equipment and Supplies: Purchases of sports equipment and other supplies needed for training and performance.
Accurate record-keeping is essential to substantiate these deductions. Athletes should maintain receipts, invoices, and detailed records of all business-related expenses. For example, if an athlete travels to an event, they should keep records of flight costs, hotel bills, and meal receipts.
Education-Related Deductions and Credits
Athletes may also be eligible for education-related tax benefits, such as:
- Student Loan Interest Deduction: Deduct up to $2,500 of interest paid on student loans. This deduction can reduce taxable income and lower overall tax liability.
- American Opportunity Tax Credit (AOTC): A credit of up to $2,500 per eligible student for qualified education expenses, including tuition, fees, and course materials. The AOTC is partially refundable, meaning athletes can receive a refund.
- Lifetime Learning Credit: A credit of up to $2,000 per tax return for qualified tuition and related expenses. This credit is available for any year of post-secondary education and can be used for an unlimited number of years.
Understanding these credits and deductions can help athletes minimize their tax burden and make the most of their educational investments.
Other Relevant Deductions and Credits
Additional deductions and credits that may apply include:
- Health Insurance Premiums: Self-employed athletes can deduct premiums paid for health insurance. This deduction can significantly reduce taxable income.
- Retirement Contributions: Contributions to retirement accounts, such as a Simplified Employee Pension (SEP) IRA, are deductible. Athletes can contribute up to 25% of their net earnings from self-employment, up to a maximum limit. This not only reduces current taxable income but also helps in long-term financial planning.
Tax Planning Strategies
General
There are various tax planning strategies to manage and minimize the tax liability associated with NIL deals. To devise and implement such strategies, student athletes have to seek the help of a tax professional who will guide them through the specifics of such strategies.
In a nutshell, these tax planning strategies include choosing the appropriate business structure and making sure that you have an accurate recordkeeping and accounting.
Choosing the Right Business Structure
Athletes should consider the most appropriate business structure for their NIL activities. Options include:
- Sole Proprietorship: This is the simplest structure, but offers no liability protection. Income is reported directly on the individual’s tax return, on Schedule C – Profit and Loss from a business and it is taxed at individual tax rates.
- Limited Liability Company (LLC): Provides liability protection and flexibility in taxation. An LLC can choose to be taxed as a sole proprietorship, partnership, or corporation. This structure is usually used by mid to high profile student athletes with a regular flow of NIL revenue.
- S Corporation: Offers potential tax benefits but requires more administrative work. S corporations can provide savings on self-employment taxes by allowing owners to take a salary and dividends. High profile student athletes with considerable revenue may opt for this type of business structure.
Each structure has pros and cons, and athletes should consult with a tax professional to determine the best fit. For example, an LLC might offer flexibility and protection, while an S corporation could provide tax advantages.
Record Keeping and Accounting
Maintaining accurate records is important for managing NIL income and expenses. It is advisable that athletes use tools and software to track income, expenses, and tax obligations as well generate the reports needed for tax filing. Proper accounting practices will help ensure compliance and facilitate efficient tax filing. Keeping detailed records also helps in case of an IRS audit.
Working with Tax Professionals
Given the complexities of NIL taxation, working with a Certified Public Accountant (CPA) or tax advisor can be highly beneficial. A tax professional can provide personalized advice, assist with tax planning, and ensure accurate and timely tax filings.
A CPA can help athletes navigate the intricacies of self-employment tax, quarterly estimated payments, and deductions. They can also provide strategic advice to minimize tax liability and ensure compliance with all tax laws.
Case Studies and Examples
Let’s look into three different cases, to demonstrate how taxes apply to three broad categories of NIL-earning athletes.
Case Study 1: High-Profile Athlete
A high-profile collegiate athlete, such as a star quarterback, may earn significant NIL income from endorsements, sponsorships, and appearances. This athlete would need to:
- File federal and state tax returns, as well as local tax returns if applicable.
- Pay self-employment tax.
- Make quarterly estimated tax payments.
- Deduct business expenses such as travel and marketing.
- Consider creating an LLC or an S Corporation
- Consult with a tax professional to optimize tax planning strategies.
For example, if the athlete earns $500,000 from various endorsements and appearances, they must carefully track all income and expenses, pay estimated taxes quarterly, and ensure compliance with state and federal tax laws. A tax professional can help them maximize deductions and credits to reduce their overall tax liability.
Case Study 2: Mid-Level Athlete
A mid-level athlete might earn a moderate amount of NIL income through social media promotions and smaller endorsement deals. This athlete should:
- Track all income and expenses meticulously.
- Deduct eligible business expenses.
- Ensure compliance with federal, state, and local tax laws.
- Consider forming an LLC for liability protection.
For instance, if this athlete earns $75,000 annually, they should keep detailed records of all income and related expenses, such as travel and marketing. Forming an LLC might offer liability protection and potential tax benefits. Consulting with a tax professional can help ensure all deductions are claimed correctly.
Case Study 3: Lower-Profile Athlete
A lower-profile athlete might have minimal NIL income, perhaps from a few local sponsorships. This athlete should:
- Report all NIL income on their tax return.
- Deduct any business-related expenses.
- Stay informed about their tax obligations to avoid penalties.
Even with smaller earnings, accurate reporting and record-keeping are essential. For example, an athlete earning $10,000 from local endorsements should track all income and expenses and ensure timely tax filings. This ensures compliance and avoids potential penalties.
Action Steps – Exercise 3 (10 minutes):
Take a look at the below NIL revenues of athletes and for each case state whether they should:
- Report all of their NIL income on their personal tax return
- Consider forming an LLC for liability protection
- Consider creating an S Corporation to optimize tax planning strategies
- $12,000, 2. $23,000, 3. $99,000, 4. $125,000, 5. $450,000
ANSWER:
| NIL REVENUE | ANSWER | |
| 1 | $12,000 | A – the revenue is too low and cannot justify forming an LLC |
| 2 | $23,000 | A – the revenue is too low and cannot justify forming an LLC |
| 3 | $99,000 | B – the revenue is rather substantial and probably comes from multiple contracts so you need the LLC protection |
| 4 | $125,000 | B – the revenue is rather substantial and probably comes from multiple contracts so you need the LLC protection |
| 5 | $450,000 | C – the revenue is substantial so you need to both protect yourself and minimize your taxes through tax planning strategies so you need an S-Corp |
Potential Pitfalls and Common Mistakes
General
As already mentioned, with great opportunity comes great responsibility, and many young athletes find themselves navigating uncharted financial waters when it comes to their NIL deals and tax obligations. Below, we spotlight the common financial missteps NIL athletes might make and offer strategies to sidestep these pitfalls.
Failure to Report Income
Failing to report NIL income can lead to severe consequences, including penalties and interest charges. Athletes must ensure all income is accurately reported on their tax returns.
For instance, if an athlete receives payments through PayPal or other online platforms, they must report this income to the IRS. Keeping detailed records and reporting all earnings prevents issues with the IRS and ensures compliance. In addition, if the athlete receives products or other non-monetary compensation such as paid trips or free meals, these are considered taxable at their fair market value. Normally, if the fair market value exceeds $600, the student athlete will receive a form 1099 that reports the value of such products or services.
Misunderstanding Deductions
Misinterpreting what constitutes a deductible expense can result in disallowed deductions and potential audits. Athletes should familiarize themselves with IRS guidelines or seek professional advice.
Common mistakes include attempting to deduct personal expenses or failing to keep proper documentation for business expenses. Consulting with a tax professional ensures that only eligible deductions are claimed and proper records are maintained.
Ignoring State and Local Tax Obligations
Overlooking state and local tax requirements can lead to unexpected liabilities. Athletes must stay informed about the tax laws in their state and any states where they earn income.
For example, an athlete earning income from events in multiple states must understand the tax obligations in each state. Filing state tax returns and paying any required state and local taxes ensures compliance and avoids penalties.
Action Steps – Exercise 4 (10 minutes):
Please go through the case study and answer the question.
Case Study: A friend of yours who is a collegiate athlete, had a deal with a local restaurant near your campus, to eat there for free along with a friend, once a week and in return, she would post on her Instagram, FB and TikTok accounts while there, enjoying the food. The deal ran for 6 months during 2024. At the end of January 2025, your friend received through the mail a form 1099 from the restaurant, stating that she received taxable goods amounting to $1,890. She did not receive any money from the restaurant so she is puzzled and does not understand why she should have taxable income of $1,890.
Question: Can you please explain to her what happened here and why she has taxable income of $1,890?
ANSWER:
The amount of $1,890 is the value of the free meals she was having every week for six months, along with a friend at the restaurant near the campus. Even if you do not receive any money in exchange for NIL activities, you still have a tax obligation on the fair market value of the goods you have received. In our case, if you divide the amount of $1,890 by 24 weeks contained in the 6-month period of your friend’s NIL deal, the weekly FMV of her and her friend’s meals amounts to $78,75 which seems pretty logical.
The Future of NIL Taxation
Potential Changes in Legislation
The landscape of NIL taxation is still evolving. Proposed legislative changes could impact how NIL income is taxed in the future. Athletes should stay informed about potential changes and be prepared to adapt their tax strategies accordingly.
For example, there could be changes in federal tax laws that affect self-employment income or new state regulations specifically addressing NIL earnings. Staying informed about legislative developments ensures athletes can adapt their strategies to remain compliant and optimize their tax situation.
Long-Term Implications for Athletes
Understanding and managing NIL tax obligations is crucial for the athletes’ long-term financial health. Proper tax planning can help athletes maximize their earnings, minimize tax liabilities, and lay a solid foundation for their financial futures.
Long-term planning includes setting aside funds for taxes, investing in retirement accounts, and seeking ongoing professional advice. By adopting a proactive approach to tax planning, athletes can ensure financial stability and success beyond their collegiate careers.
Lesson wrap-up
In this lesson we have explored the multifaceted aspects of NIL taxation for collegiate athletes in the United States. From understanding taxable income and deductions to navigating federal, state, and local tax obligations, athletes must approach their NIL earnings with a well-informed strategy. As collegiate athletes embark on their NIL ventures, seeking professional guidance and staying proactive about their tax obligations is essential. By leveraging the knowledge and strategies outlined in this lesson, athletes with the help of their tax advisors, can ensure compliance with tax laws and optimize their financial outcomes.
At this point the instructor should go over the learning outcomes stated at the beginning of the lesson and take questions from student athletes. An open discussion on the concepts taught and how they relate to the student athletes and their greater life plan should be encouraged.