The Economic Environment, Contracts and Taxes

Key topic

Personal financial planning is affected by several macroeconomic factors.  Therefore, when student-athletes plan their financial lives, they should take into account conditions in the wider economy and in the markets that make up the economy. Since student-athletes may be signing their first professional contract soon it is important that they learn some basic information about contracts and how taxes affect their income.  NIL taxation as well as NIL contracts are dealt with in depth in subsequent modules of this course.

Learning objectives

• It is important to develop your own understanding of the economy and the factors shaping it and have an idea of where the economy is headed so that you can plan your finances and your career accordingly.
• There are several indicators of financial health through which you can understand the trends of the economy.
• Despite the fact that most sports contracts are negotiated by sports agents, athletes should have a general knowledge of the contract terms and how they affect them and their finances.
• Taxes affect your take-home pay; a basic knowledge of taxes along with the right advice from a suitable tax professional can end up in substantial tax savings.
• Unforeseen circumstances like the COVID-19 pandemic, may lead to contractual issues and financial uncertainty, therefore athletes need to factor these in their financial plan.

Introduction

Generally, financial planning must take into account wider conditions in the national and global economy and the forces that make up and influence the markets. These markets inhabit a dynamic economic ecosystem and its realities should be part of sound financial planning.

History has proven that in the long-run an economy grows, the value of a currency remains relatively stable and investments offer lucrative returns. In the short-run, however, that is not necessarily the case. Periods of economic contraction can upset financial plans, particularly if they last for prolonged periods or occur at a vulnerable time in your life. Being able to identify macroeconomic patterns and understand the factors that indicate the health of an economy, can help you make informed financial decisions. These systemic factors include, the gross domestic product (GDP), employment rates, inflation levels, interest rates and currency values.

Macroeconomic factors that affect financial thinking

Business Cycles

Business cycles essentially describe the stages of the economy and there are four of them: expansion, peak, contraction and depression. Each stage of the business cycle has its own effect on people’s financial plans.  A booming (expanding) economy inspires optimism for the future and businesses develop an anything-is-possible attitude.  Business decisions are made with an optimistic and positive outlook.  A contracting economy, on the other hand, gives rise to feelings of pessimism, even of despair at certain points.  Hence, financial decisions are made with a negative attitude.  Governments and central banks use fiscal and monetary policies to stabilize economic cycles and mitigate downturns through interest rate adjustments and stimulus programs.

An economy’s performance or output is measured by its gross domestic product or GDP, which represents the value of what is produced in a country. GDP measures the value of all goods and services produced in an economy over a specific timeframe. However, modern economic downturns are also assessed by factors such as unemployment trends, industrial output, and consumer confidence. The GPD is also related to the business cycles we described above. When the GDP is rising that is when an economy is expanding, whereas when the GDP is falling, an economy is said to be contracting. An economy that remains in a state of contraction for two quarters (or half a year) is said to be in recession.

Over time, both periods of contraction and expansion are normal. You cannot have one without the other. The economy is said to be cyclical, hence the term business cycle. Cycles occur because of changing realities around the world that distort the economic equilibrium. In essence, that means that events upset the balance between supply and demand in the economy overall. There are many reasons that this could happen, ranging from war to the overthrow of a government on the other side of the planet, but whatever the reasons, buyers and sellers react either positively or negatively to these developments.  Business cycles can affect any industry, including the sports industry which is considered more of a luxury good and not a necessity.

Even though it is difficult to imagine the sports industry suffering the same way that conventional industries do, the last economic downturn in 2008 which is now called the Great Recession, has taken its toll on the sports industry as well.  The recent pandemic has also severely affected the sports industry and we will discuss its adverse effects on the sports industry in the next section of this lesson. While the sports industry was traditionally seen as recession-resistant, recent economic downturns have demonstrated its vulnerabilities.

For decades, the sports industry had been largely impervious to economic cycles.  No matter what the state of the economy, sports leagues were expanding, sports stadiums were built and sports sponsorships were soaring. During the last recession, things changed; sponsorships funds, match day attendance and match day spending declined.  Sports teams and leagues have become increasingly reliant on revenue from corporate sponsorships, advertising, luxury boxes and suites, and as a result they have suffered a considerable decline in their revenues during the last economic downturn.  The truth is that digital transformation has introduced new revenue streams, including streaming services, eSports, and sports NFTs, which help offset losses from reduced sponsorships or ticket sales.

Sports Salaries

The lower revenues of sports franchises and clubs have a direct, negative impact on player salaries. In the United States, leagues salary caps are set up as percentages of prior league revenues, so the overall player compensation is affected perhaps not in the short term but definitely in the long term. Usually in times of a recession or a financial downturn, sports franchises and clubs try to realign things in their favor and secure a profitable future.  Sports contract duration is usually shortened and the values of such contracts are cautiously lowered.

Endorsement Revenue

Professional athletes may feel the pains of a recession in their endorsement deals as well.  Corporate sponsorships of sports professionals and endorsement revenue take a hard hit during a recession because corporate budgets and especially marketing budgets are squeezed. Athletes should be prepared for such a predicament and they should perhaps have their endorsement contracts insured so as to secure this source of income in the event their corporate sponsors terminate their endorsement contracts prematurely. By building a strong online presence and engaging directly with fans, athletes can create additional revenue streams that are less dependent on traditional corporate sponsorships.

Investment Portfolios

A recession will most probably have a negative effect on your investment portfolio, at least in the short term. Downward stock and real estate market corrections usually come with a recession. At times like this, you should remember that building wealth over time is all about taking the long view and not getting bogged down by short term losses.  Instead of focusing on the ups and downs of each individual investment, you should step back and look at the big picture.  With the help of a financial advisor, you should evaluate your portfolio and implement appropriate strategies which will lead to an eventually balanced and profitable investment portfolio.

Economic storms are part of life and we all go through them. When planning your financial life, you should take into consideration the wider economic conditions and the conditions in the markets that make up the economy. Becoming familiar with the patterns of the economy will enhance your ability to make sound financial decisions.

Employment Rate

The Employment rate is a very important economic indicator since it tracks the number of people who are willing and able to find a job. People participate in the labor market by trading their labor (time, skills, knowledge, etc.) in exchange for monetary compensation. Most people rely on wages and salaries as their main source of income.

The employment rate, shows the ability of an economy to create and sustain opportunities for people to sell labor and its efficiency in utilizing its human capital. A healthy economy provides plenty of employment opportunities and uses its labor productively and efficiently.

The unemployment rate depicts the proportion of people who are actively looking for a job but are not able to find one. This is usually expressed as a percentage. There is always some unemployment which is called natural, because of unemployment that does not depend upon the market. For example, when someone moves between industries or countries or wants to take some time off to be with family. When the only unemployment in an economy is natural unemployment, then the economy is said to be at full employment, since zero unemployment does not exist. The idea behind natural unemployment is that it is temporary. Natural unemployment is consistently low and does not affect the productivity of the country’s economy.

The employment market for elite sports professionals has traditionally been rather inelastic except in the recent pandemic which saw elite sports professionals take substantial salary cuts of 30% or more.  However, the employment market for lower-tier-income sports professionals is negatively affected by high unemployment. High unemployment is usually the result of a recession and when faced with financial difficulty, sports franchises tend to lower player salaries and make reductions in their playing rosters. Athletes should strive to negotiate longer term contracts which include hefty penalty clauses for premature termination so as to ‘bulletproof’ themselves as much as possible during periods of high unemployment.

Currency Value and Inflation

A stable currency is another important indicator of a healthy economy and even more important for financial planning. Like all other things, the value of a currency depends upon its usefulness as expressed in the demand for it. We use currency, among other things, as a medium of exchange, so the value of a currency depends on how and to what extent it can be used in trade, depends on what the economy is producing. If a country does not produce much that consumers want, then the country’s currency has little value relative to other currencies, because the demand for it will be low.

When the value of the currency falls, then an economy will experience inflation. Since the currency is less useful and has lower value, prices rise and less can be bought with it as a result.  It takes more units of currency (money) to buy the same amount of goods. For example, let’s assume that $1 can buy you a chocolate bar made in the UK. If the value of the dollar falls then that same chocolate bar may cost $1.50. The chocolate bar hasn’t changed in terms of quality or quantity but is now more expensive. When the value of a currency rises, an economy may experience deflation; prices falling; the value of the currency increasing and thus more can be bought with it; that chocolate bar may cost $0.50. The price fell once again without changes in quality or quantity.

Inflation and currency value may affect athletes in different ways. Currency exchange rates largely affect the real value of the sports contracts of international sports professionals.  A number of sports professionals who are employed abroad, sign contracts in currencies other than their home country currency. As a result, their contracts are sensitive to currency exchange fluctuations, especially because they may be sending money back home to their families or for investment purposes.  Therefore, international athletes need to be aware of the currency trends of the country they currently reside vis-à-vis the currency trends of their home country and they should try to use currency fluctuations to their benefit rather than to their detriment.  By working with financial advisors who specialize in international markets, athletes can safeguard their income against unpredictable currency changes.

Other Indicators of Economic Health

There are other indicators that give us clues as to how our economy is currently doing and if we should expect growth in the future. These indicators include such things as, consumer spending, construction spending, number of houses constructed, number of home sales, industrial production, and so on. However, GDP and unemployment are the two most important and therefore most closely watched indicators, because they are at the core of an economy’s objectives; to provide opportunities for people to take part in the economy, to create jobs and to satisfy consumer demand.

Contractual issues arising from suspension of play

At every hard stroke of fate, like the 9/11 attack or the 2008 financial crisis, sport competition (college and professional) has served as a depressurizing outlet for people and a turn-to pillar of support; unfortunately, this was not the case in the COVID 19 pandemic. The coronavirus pandemic caught the globe by surprise, let alone the sport industry and caused unprecedented disruption, the likes of which has not been experienced since World War II. The pandemic reshaped the entire sports industry, forcing leagues, teams, and athletes to adapt to new financial realities. While some industries transitioned to remote work, the sports world had no equivalent alternative, leaving many professionals in financial distress. Even post-pandemic, leagues and clubs continued to adjust their financial models, incorporating pandemic clauses in contracts to safeguard against future disruptions.

The suspension of play and practice is a highly effective tool for the protection of public health and the avoidance of further spread, but at the same time it is a forceful hit on the income of athletes, teams, professional leagues and college sport programs, not to mention the media and broadcasters involved with sport rights all of whom are in great danger of losing substantial third-party licensing and advertising revenue, and experience severe pressure from distributors, which is ultimately passed on to all stakeholders.

During the pandemic we witnessed the suspension of play in all active professional and college leagues, but what made the situation worse is the total cessation of practice sessions for a prolonged period of time.  As student athletes you very well know that the plan to stop games and practice for a full month and then casually reconvene is almost utopic.

In light of the uncertainty, and given the consequences of the pandemic, athletes need to make informed decisions, altering their short- and medium-term financial and life plans. The athletes who faced the biggest challenges were Olympic athletes and individual sport athletes. These athletes mostly generate revenues from competition and sponsorships alone. The Olympics had been postponed, whereas individual competition such as tennis, golf tournaments and impact-sport competition had been suspended for a prolonged period.  To remain financially stable, many individual sport athletes turned to personal branding, online coaching, social media monetization, and direct-to-fan engagement through platforms like Patreon, Twitch, and Cameo to supplement lost income. This trend has continued post-pandemic, with athletes leveraging digital platforms for financial resilience.

The MLS is one of the professional Leagues with the lowest player salaries, thus the suspension of games had definitely affected players who were earning normal-working-type salaries.  NBA players were expected to forfeit 1.08% (1/92.6th) of their salary for every game missed, as stipulated by the NBA Collective Bargaining Agreement, even though the Players’ Association was pushing for full pay regardless. In Ice Hockey, there is no provision for reduction of salaries, however the League and team owners rely heavily on gate-receipts (instead of TV rights) and that had caused severe damage, which had snowballed down to affect the players.

Truth be told, suspension or cancelation of games and tournaments were a major financial blow to the industry. Insurance policies, collective bargaining agreements, or provisions in personal contracts can only help so much. No games, means no ticket sales and reduced media payments. No games, means shifting of public attention, which leads to reduced following along with weakened and reduced fan association with the product or teams, reduced interest and TV audience, all of which could take a long time to rebuild, with whatever financial effects this might incorporate.  Post-pandemic, many teams have restructured their financial models, focusing on diversifying revenue beyond ticket sales and TV deals. Digital subscriptions, team-owned streaming services, and blockchain-based fan engagement tools (such as Fan Tokens) have become key revenue drivers to hedge against future disruptions.

The bottom line is that when such unforeseen events occur, athletes should revisit and adjust their short-term financial plans. Given the uncertainty and the high probability of revenue losses, athletes should safeguard their liquidity, avoid investments, especially those associated with the stock exchange market and, all in all, approach their short-term financial plan with a wait-and-see approach. Even though market prices may drop, that doesn’t mean it’s a good time for large asset purchases, extravagant life-style expenses or new business opportunities.

Given that from every hardship rises an opportunity, one can argue that athletes should make the past COVID-19 experience a learning point in life and take necessary steps to safeguard their future. Perhaps take up a personal insurance policy to safeguard earnings in time of a future crisis, or increase their savings for a time of force majeure.

Sports contracts

For athletes who are just starting their careers, dealing with contractual issues can be overwhelming. While in theory they can negotiate contracts on their own, most athletes hire sports agents who negotiate on their behalf. Agents are usually attorneys who are experienced with the particulars of sports contracts and are able to identify and negotiate the most lucrative deals for those who seek their services. With the rise of digital platforms and global sports markets, some athletes are now leveraging AI-driven contract analysis tools and financial advisory firms that specialize in athlete wealth management to ensure optimal contract terms. Additionally, blockchain-based smart contracts are emerging as a way to automate and enforce contract conditions transparently.

Athletes and Labor Economics

There is no doubt that being a professional athlete is one of the most financially rewarding jobs out there.  In addition to the sports employment contracts of athletes, sports sponsors often pay hundreds of thousands of dollars to them to promote their products.

In terms of Labor economics, there is a simple explanation as to why athletes earn such high salaries; what athletes do, not everyone can. There is therefore a very limited supply of Labor in the football world for example. And once you start considering all the different playing positions that exist within the game such as Center-backs, Left Wingers etc, then the supply becomes even more limited. Today there are thousands of lawyers in this country. Some do corporate law, others criminal law and so on. If those thousands and thousands of lawyers were to become 100 then you can understand how that would impact their wages. That is partly why athletes receive so much. There are of course other reasons as well, related to the demand side of things—ie the popularity of sports but broadly speaking, that is how Labor economics are related to the world of sports.

Sports Agents and Contracts

Sports agents occupy an important place in sport. They are mainly responsible for securing and negotiating contracts on behalf of pro athletes. Sport lawyers who represent athletes tend to be trained and experienced in the fundamentals of contracts and are familiar with the market for sports, especially when it comes to the market value of athletes. Nonetheless, it should be noted that having a lawyer or an agent on the payroll is not a requirement. Some athletes prefer not to hire an agent for several reasons, including the various fees and commissions associated this service. To bypass traditional agents and reduce commission costs, some athletes are now opting for independent legal consultants, online contract advisory services, or even negotiating contracts themselves with the help of AI-driven contract analysis tools. While this approach can work for experienced professionals, younger athletes may still benefit from having a seasoned agent manage negotiations and career development.

Since the occupation “athlete” is a unique one in terms of skills, abilities and talent, their contracts are categorized as personal services contracts.

Sports Contracts Categories

There are two general types of contracts that athletes usually utilize: Professional services contracts and NIL contracts.

Professional Services Contracts

Contracts for the employment of athletes are always in writing and have clauses that oblige the athlete to refrain from certain activities and behavior, such as going out before a game competition past midnight, or engaging in violent activities and they generally set the framework for professional behavior.

These are the standard contracts that athletes sign when they agree to compete for a team. For some organizations and leagues, standard player contracts establish the basic salary for all players, though in others, each salary is addressed individually in addition to the contract. These general, multipurpose contracts are delivered to all athletes without negotiated salaries or bonuses. The wording of these contracts is very similar for all with the exception of financial incentives. Athletes usually negotiate gross amounts (before the deduction of taxes and contributions). Taxes and contributions withheld include federal income tax, state income tax and social security contributions.

NIL Contracts

NIL contracts can be appearance or endorsement contracts. Appearance contracts refer to contracts that athletes sign to make public appearances for additional monetary compensation. These contracts allow for additional compensation for athletes who choose to appear at public functions. For instance, an athlete may be invited to speak at a graduation ceremony or to be interviewed by someone. These contracts establish compensation, parameters and requirements for both parties. Beyond traditional public appearances, athletes are increasingly monetizing virtual meet-and-greets, personalized video messages (via platforms like Cameo), and live-streaming Q&A sessions to connect with fans and generate additional income.

Endorsement contracts govern relationships between athletes and sponsors who work with the athlete instead of the athlete’s club. The purpose of these contracts is to allow sponsors to use an athlete’s name, image and/ or likeness in advertising, in exchange for monetary compensation. While there are some limitations – legal and ethical – on the endorsement of certain products, such as medical supplements, tobacco and alcohol, athletes are generally free to sign contracts with a wide range of organizations regardless of their professional contract. However, in the age of social media, athletes must carefully manage their personal brand. Many endorsement-deals now include morality clauses, performance-based bonuses, and digital engagement requirements, ensuring that athletes actively promote the brand through their online platforms.

NIL contracts are discussed extensively in a subsequent module of this course.

What is included in a sports contract

As previously stated, sports contracts, especially professional services contracts, are usually formulaic with standard clauses. Since it is a legal contract in nature, a sport contract is detailed, and written with the purpose of being exhaustive and very specific regarding what an athlete’s obligations and rights are while in contract with a sport club. In recent years, contracts have evolved to include performance analytics-based bonuses, and data privacy clauses to protect athletes’ biometric and performance-related data. Additionally, contracts are increasingly incorporating force majeure clauses, detailing how unforeseen events (like pandemics or league shutdowns) impact contractual obligations.

They also contain common clauses and describe the parties involved in any given negotiation. These clauses set the framework of the contract. Sports contracts must lucidly describe the length of the contract, as well as set out any renewal options and how they are to be executed.

Next, contracts must describe the precise duties that a player will be expected to perform while employed by their franchise. These can include game time, practices and public team appearances. It is also important to indicate whether an athlete is required to hold limited employment with a particular organization, and whether options for additional incentives, compensation, and employment exist.

With these major sections addressed, the remainder of the contract tends to focus on individual salary details, options for bonuses and the steps to be taken in the event of early contract termination. A growing trend in sports contracts is the inclusion of loyalty bonuses, social media engagement incentives, and post-retirement financial planning clauses to ensure long-term financial security for athletes. Furthermore, contracts now commonly specify mental health support provisions, acknowledging the increasing awareness of athlete well-being. Sometimes, athletes choose to break a contract before their term has finished. It is very important for agents to be clear on contract specifications to determine whether their client is permitted to leave, and what kinds of penalties the athlete may be required to pay should they choose to breach the terms of the contract.

Comparing Contracts

While they may seem complex, sports contracts are largely similar to business contracts. Given the role of many athletes as highly visible figures, the key differences are in the specific compensation requirements, possibilities for sponsorship from external companies and potential for public appearance at a variety of functions.

With an experienced agent, familiar with these types of specifics, athletes can rest assured that the complexities of sports contracts will become clear in time, ultimately allowing them to play the sport they love and be well-compensated for their efforts.

Taxes

Tax is a fee charged by a government on a product, income or activity. There are two types of taxes – direct taxes and indirect taxes. If tax is levied directly on the income or wealth of a person, then it is a direct tax e.g. income-tax. If tax is levied on the price of a good or service, then it is called an indirect tax e.g. excise duty. In the case of indirect taxes, the person paying the tax passes on the incidence to another person.

Why are taxes levied and different types of taxes

The reason for the levy of taxes is that they constitute the basic source of revenue of governments. Revenue so raised is utilized for meeting the expenses of the government like defense, provision of education, healthcare, infrastructure facilities like roads, dams and so on.

After income taxes, indirect transaction taxes usually affect taxpayers more than any other type of tax. In many countries, transaction taxes are even more important than income taxes. Following, are some of the most common types of taxes:

Employment Taxes: As imposed by governments, these taxes include Social Security taxes and their proceeds finance retirement and medical costs. Usually, a percentage rate is withheld from the employee’s salary and the employer matches the contributions. Self-employed people pay both the employee and the employer portions.

Death Taxes: Levied by governments on a person’s estate upon death. This is intended to prevent vast accumulations of wealth. These taxes are imposed on the deceased whereas inheritance taxes are imposed on the recipient. The tax base is usually the fair market value (FMV) of the property owned by the deceased at death, minus allowable deductions (e.g., funeral costs, administration expenses, other taxes, philanthropic contributions, liabilities of deceased, etc.).  High-net-worth individuals, including athletes, often use estate planning strategies such as trusts, gifting exemptions, and life insurance policies to mitigate estate tax burdens and ensure wealth transfer to beneficiaries.

Gift Taxes: Imposed on the transfer of property during the owner’s lifetime. Some governments impose gift taxes. The base of the tax is usually the FMV of the property transferred, at the day of gifting.

Property Taxes: They are levied on property owned by an individual or a legal entity. The most common example is the tax you have to pay on a piece of real estate (house/apartment etc). This tax is an ad valorem type of tax which translates to, at value taxes. These taxes are usually imposed by local governments in the US and form an important source of revenue for state authorities.

Taxes on Privileges and Rights: Examples of these taxes are Custom Duties which are taxes on the right to move goods across national borders and franchise and occupational taxes. These are basically taxes on the privilege of practicing a specific profession or doing business in a state/ local jurisdiction.

Income Taxes: They are levied by governments. They are generally imposed on corporations, individuals, estates, and trusts. Most jurisdictions use a pay-as-you-go system for collecting taxes. The most common tax formula for all taxable entities is rather similar across jurisdictions. Income is usually included in the tax base, whereas deductions must be specifically provided for in the law. Also, tax rates are progressive meaning that the more money you earn, the higher rate you will be taxed on, and they differ for individuals and corporations. Apart from progressive, taxes can be either proportional (same percentage no matter how much you make) or regressive (the more you make the less you pay).

Income Taxation of Businesses

Proprietorships – This is a simple type of business and is not considered a separate entity from the individual. Profits have to be reported on the taxpayer’s personal return. Many athletes launch small businesses, such as sports academies, fitness brands, and consulting firms, under sole proprietorship structures to maintain control over earnings and reduce corporate tax compliance requirements.

Corporations – Corporations are separate legal entities and separate taxable entities as well. Corporations are required to file tax returns and pay tax at corporate rates. Any remaining income after taxes are paid can be distributed to the shareholders of the corporation as dividends

Partnerships – A partnership is not a separate taxable entity and therefore not subject to taxation, despite the fact that it requires to file a return. The financial results of the partnership flow through to its different partners and they are included and taxed on their personal tax returns using their personal tax rates.

Jock tax

Professional athletes have to pay both federal and state income taxes, as any other US citizen. Under the “jock tax” they are required to pay income tax in each state they compete. The logic behind this tax is that athletes should pay state income taxes in the state they earn the particular income. That means that if a professional athlete earns income in various stadiums, in different states, they should pay income tax to each state accordingly.  In order to calculate how much income tax an athlete should pay in each case, states have adopted the “duty day” method to calculate how much income athletes earn in their state.

Real-Life Examples The beginning of the jock tax In 1991, the Los Angeles Lakers lost the N.B.A. finals to the Chicago Bulls. Following the defeat, California officials decided to demand tax payments from Michael Jordan and his teammates from the income earned while competing in the golden state. Illinois officials responded with their own tax laws that specifically targeted visiting athletes, such as the Lakers. The Illinois response became known as ‘Michael Jordan’s revenge.’ Following the actions of these two states, over a dozen states, including Massachusetts, Pennsylvania, Maryland, Arizona, Ohio, and Colorado have enacted regulations to collect taxes from visiting athletes who earn income there as part of their travel schedule. Some localities, including Cincinnati, Cleveland, Kansas City, Pittsburgh and St. Louis, have taken similar measures. Only a handful of major state have not adopted this bizarre tax (Florida and Texas included).

This is generally calculated as the percentage of duty days spent in the respective state, compared to the total duty days the athlete had during a particular tax year, multiplied by the athlete’s salary.  If the athlete is part of a team, then the team usually takes care of this, through a tax withholding from the athlete’s salary which is remitted to the relevant state tax authorities.

For instance, if an NBA player earns $10 million per year and spends 10% of their duty days in New York, they owe New York state tax on $1 million of their earnings. Similarly, a tennis player competing in a single tournament may owe taxes to that state even if they are only there for a few days.

Athletes competing in solo-sports vs team sports – a tax perspective

With the increasing globalization of sports, tax laws have evolved to account for cross-border earnings, residency complexities, and endorsement income structures. Athletes must work closely with tax professionals to ensure compliance and avoid unexpected liabilities.  The tax obligations of sports professionals vary depending on whether they are competing in individual or team sports.  The method of compensation of team athletes and athletes competing in individual sports is different, and so is the method of taxation.

Solo-sport athletes are compensated by receiving prize money based on their success in the various tournaments or competitions they participate in.  Such fees are calculated and paid to the athlete, by the tournament or competition organizer.  Additionally, solo-sport athletes, especially the famous ones, may receive appearance fees in order to come and play at a tournament or competition so as to raise the prestige of the particular event and attract a large audience.  Also, the income of high-rank athletes is quite often supplemented by endorsement/sponsorship agreements from third parties.

On the other hand, team athletes are employees of a particular sports club, most of them have guaranteed salaries and, they are paid on the basis of their employment contract.  The salary and success bonuses received by team athletes are subject to employee tax withholdings and social security contributions. Endorsement/sponsorship income received by team athletes is taxed separately and is not subject to employee tax withholdings and contributions.

Athletes in solo-sports are taxed on their net earnings, as persons carrying on a trade or profession.  Their income usually consists of athlete personal awards, appearance and participation fees, grants, sponsorship and endorsement revenue, merchandising revenue for sale of products, royalties from licensing activities, other fees such as writing articles for various publications, etc.  These athletes are allowed to deduct expenses from their gross income and these expenses usually include agent commissions and manager’s fees, travel and accommodation for competitions, touring costs, equipment, clothing, training facility and trainers/coaches costs, etc.

Usually, solo-sport athletes have their own companies, through which they provide their individual services.  These personal services companies are called sports consultancies in Europe whereas the equivalent in the United States is the “loan-out” corporation through which the athlete ‘loans out’ their sports services.

Sports professionals competing internationally have to be aware that they may incur tax obligations, both in terms of tax filing and tax liability, in the countries where they are competing.  Most tax authorities all over the world, impose tax on visiting sports people based on the principles of residency and source of income.

A very important factor in the taxation of both solo-sport and team athletes is residency. The individual athlete is taxed in the country of their tax residence, usually on their worldwide income, depending on the tax laws of their “tax residency” country.  However, when the individual athlete is competing in another country and they receive income from that particular country, the income from that activity is usually taxed in the country where it arose. If the athlete is a tax resident of a jurisdiction which taxes its residents on their worldwide income, they are normally entitled to a tax credit for taxes attributable to foreign source income paid abroad.  For example, if a U.S. tennis player is competing at Wimbledon in the UK, any earnings from the particular tournament are taxed in the United Kingdom and the tennis player can claim the UK tax paid on their U.S. tax return so as to avoid double taxation.

Therefore, solo-sport professionals should be aware that they will most likely be liable to pay tax and file non-resident tax returns when on tournaments or competitions in foreign countries.  In addition, some countries like the United Kingdom, impose tax to visiting individual sport athletes, on their global endorsement income, in proportion to the time they have spent in the United Kingdom during the tax year.  For example, if a U.S. professional tennis player competes in ten events worldwide in one year out of which two were in the UK, they will be taxed in the UK on 20% of their global endorsement income.  Athletes competing in solo-sports should be aware of this type of taxation and they should plan their tournament/competition participations accordingly.

As mentioned above, athletes competing in team sports are employees of the sports club they play for and they receive a salary and bonus from their team which is subject to PAYE and social security withholdings. Normally, they are not allowed any deductions on their income from salaried services. Residency is also important for athletes competing in team sports. They are also taxed in the country of their tax residency, however, when they compete with their team in a foreign country, any earnings attributable to the particular foreign country will most likely be taxable in that country and athletes can take a tax credit for the tax paid when filing their tax return in their country of tax residence.

Any sponsorship or endorsement income received by athletes competing in team sports is taxed separately.  Usually, these types of income are structured to be received through a corporate entity owned by the athlete, in order to optimize the tax burden.

Taxes and sports contracts abroad

Sports professionals moving abroad have to face a number of challenges when settling and adjusting to the new reality of things.  A new culture, a different language and the change of team and colleagues, are just a few of the things that sports professionals have to deal with when signing playing contracts in foreign countries.  One of the biggest hurdles faced by sports professionals competing abroad is dealing with the tax obligations that arise from their foreign sports contracts. With increasing tax scrutiny and financial regulations worldwide, many countries have implemented stricter reporting requirements for foreign income. Professional athletes must carefully structure their contracts to avoid excessive taxation and ensure compliance with international tax treaties. As previously mentioned, the fact that athletes are competing in foreign countries does not relieve them from their tax obligations back home and their foreign contracts may give rise to income tax in their home countries, in addition to the tax paid in the foreign country where they are playing.

Solo-sport professionals competing internationally, have to be alert that they may incur tax obligations, both in terms of tax filing and tax liability, in the countries where they are competing.  The tax obligations of sports professionals competing internationally vary, depending on whether they are competing in individual or team sports.

When signing a sports contract abroad, you need to understand the types of tax liabilities that may arise from such a contract, both in your home country and the country where you are competing. A common mistake that many athletes make is, believing that their tax obligations end by paying taxes in the country where they are currently employed. You should take note that you must always comply with both the tax laws of your home country as well as the tax laws of your country of residence, when employed and earning money abroad.

Your country of citizenship or domicile, is the country where you come from. Your country of residence is the country where you currently live in. In most countries, in order to be considered as a resident you have to live there for a period over 183 days within a calendar year.

There are four different ways through which countries apply taxation in terms of residency/citizenship and these are:

1. Taxing both their Citizens and Residents on their Worldwide Income no matter where they live (for example the United States where citizens and green card holders are taxed in the US despite their actual country of residence)
2. Taxing their Residents on their worldwide income (for example the United Kingdom)
3. Taxing their Citizen Residents only on their worldwide income and not the foreign residents of their country (in the case of a non-domiciled tax regime)
4. Taxing their residents on their local source income but not on their foreign source income (territorial tax system)

There are also a few countries which have specific regulations providing tax incentive packages to foreign sports players moving into the country. These incentive packages usually differ from the country’s standard tax regulations, like the ‘Beckham’ tax law of 2005 in Spain. The so called ‘Beckham law’, basically allowed foreign employees living in Spain to be taxed at the rate of 24,75% instead of a progressive tax scale ranging from 24% up to 43%.

It is therefore quite important that you are aware of the tax treatment of your earnings in both your country of citizenship and country of residence. As a US Citizen, or a US green card holder, you have to consider that even if you are a resident of another country, you still have to file a tax return in the U.S. and pay any applicable taxes.

To ensure tax compliance it is vital that you maintain records of the following documents:

• Official pay slips
• Official Earnings Statement and Tax Declaration/Tax Return
• Copy of your sports contract
• Proof of payment and invoices of any sports related expenses (such as agent fees)

By keeping a record of the above documents, you make it easier for your CPA or tax advisor to prepare your tax return and take advantage of any deductions that will minimize your tax liability.

Other income such as sponsorships, endorsement revenue, dividend income from companies etc, must also be taken into account when preparing and filing your tax return. Athletes are in the spotlight and they tend to have the attention of both the press and the Tax Authorities. Therefore, practices, such as having offshore companies and accounts which aim at hiding your income should be avoided, in order to steer clear of any penalties or criminal charges from the relevant tax authorities

A common practice with team athletes playing in Europe, is that social security contributions and income taxes arising from the playing contract are assumed by sports clubs and the athletes are paid on an agreed upon net amount. Therefore, an understanding of the tax treatment of their contracts and the allocation of the resulting tax burden is helpful to players during the course of contract negotiations with clubs.

The complexity of tax systems has a heavy toll on sports professionals especially the ones competing internationally.  A lot of preventive planning has to be done from the athlete’s part to optimize their overall taxation and be tax compliant wherever they are competing.  In conclusion, it is vital that you get assistance from an experienced CPA/tax consultant who will advise you how to handle the different tax obligations which may arise when you sign a sports contract abroad.

Action Steps – Exercise 1 (20 minutes):

Answer the following quiz to find out your level of knowledge regarding taxes and we will then go over your answers vis-à-vis the correct answers:

Types of Taxes Quiz by Quizizz

1. Income tax is

1. Money your employer pays to you
2. Money you earn and put into the bank
3. tax paid on the money you earn each year
4. FREE MONEY!!

2. Payroll Tax is

1. the amount of money you actually get to take home
2. FREE MONEY
3. tax taken out of your paycheck by your employer or boss
4. tax when you buy something

3. Sales Tax is

1. Tax on things you buy or purchase
2. tax on the house you own
3. tax taken out of your paycheck
4. tax that you pay once a year on your income

4. Property Tax is

1. Tax on things you buy or purchase
2.  tax on the house you own
3. tax taken out of your paycheck
4. tax that you pay once a year on your income

5. Billy gets charged tax every time he buys a new pair of shoes. What kind of tax is this?

1. Income
2. Property
3. Payroll
4. Sales

6. The county charges the Henry family a tax on the value of the house they own. What kind of tax is this?

1. Income
2. Property
3. Payroll
4. Sales

7. Mrs. Cyrus earned $74,750 last year working as an accountant. She paid the federal government $12,000 in taxes on the money she earned. What type of tax is this?

1. Income
2. Property
3. Payroll
4. Sales

8. Mr. Keen earns $4,350 each month. However when he gets his paycheck it is always less than $4,350, because taxes have been taken out of his paycheck. What type of tax is this?

1. Income
2. Property
3. Payroll
4. Sales

9. Mr. Carrier is starting his own business. He will hire 12 people. He will have to take taxes out of each person’s paycheck to pay the government. What type of tax is this?

1. Income
2. Property
3. Payroll
4. Sales

10. Travis county charges tax each year on the house that Jennifer owns. She pays around $6,500 in taxes each year on the house that she owns. What type of tax is this?

1. Income
2. Property
3. Payroll
4. Sales

11. The cost for the new Fallout 4 game is $59.99, but the cashier asked for more money, because of tax. What type of tax is this?

1. Income
2. Property
3. Payroll
4. Sales

12. Mr. Johnson receives $1,750 on his paycheck every two weeks. He has $275 taken out of his check for taxes and $125 taken out for insurance. The amount he has left is called ______ income.

1. Gross
2. Net
3. Payroll tax
4. Sales tax

13. Tony bought a new boat. He had to pay which kind of tax on his new boat?

1. Property Tax
2. Income Tax
3. Payroll tax
4. Sales tax

14. The first baseman for the Texas Rangers makes $625,000 every year. He has to pay taxes on the money he earned for the year. What type of tax must he pay on the money he earned?

1. Property Tax
2. Income Tax
3. Payroll tax
4. Sales tax

15.  Madison earned $432 for two weeks working at Cici’s Pizza. This is the amount she makes before taxes. The amount of money she makes before taxes is called?

1. Property Tax
2. Net Income
3. Gross Income
4. Sales tax

16.  Frank’s parents own their house. They have to pay taxes on their house each year. What type of tax do they pay on their house?

1. Property Tax
2. Payroll Tax
3. Income Tax
4. Sales tax

17. Sally owns a gas station. What type of tax will she have to pay on the land that the gas station is on?

1. Property Tax
2. Payroll Tax
3. Income Tax
4. Sales tax

18. The amount of income you earn BEFORE taxes are taken out is called ?

1. Gross Income
2. Net Income
3. Income Tax
4. Sales tax

19. The amount of income you actually get to take home, AFTER taxes are taken out, is called?

1. Gross Income
2. Net Income
3. Income Tax
4. Sales tax

20.  Madison makes $432 a week working at Cici’s Pizza. After taxes and deductions she actually only gets $287 to put in the bank. What type of income is the $287?

1. Gross Income
2. Net Income
3. Income Tax
4. Sales tax

Answer Key

1.c    2. c       3. a         4. b
5. d    6. b      7. a         8. c
9.c    10. b    11. d      12. b
13.d    14. b    15. c      16. a
17.a    18. a    19. b      20. b

Salary caps in the United States

What are Salary Caps, where do we see them and how do they work?

Salary caps are a tool utilized by various leagues, mainly in the United States, to promote competitive balance and assure that teams within a league are able to compete with each other. The issue of competitive imbalance is something that leagues have long been trying to resolve and in altering this issue, leagues have introduced various forms of salary caps.  Despite what many people believe, salary caps are not essentially limits on team or player salaries. They set a band for both the upper and lower salary limits to payrolls for each team within a league. They take different forms according to the league, based on the league’s goals, and they can be categorized as soft or hard salary caps depending on how drastic they are. Salary caps are found in nearly all the major leagues in the United States, including the NFL, NBA, NHL and MLS but not in Major League Baseball.

In the following table, we present information on each individual league’s salary caps accompanied by any exemptions that might come with them:

League	2023/24 Salary Cap (Million USD)	2024/25 Salary Cap (Million USD)	Exemptions	Hard/Soft Cap
NFL	$255.4	$279.2	No material exemption – Salary caps set firm limits.	Hard Cap
NBA	$136	$140.6	Yes. Main exemptions are: 1)      Rookie exemption – A team can sign a rookie to their first contract even if it’s above the salary cap limit. 2)      Mid – level exemption – A team can sign one player at the league’s average salary even if it’s above the salary cap limit. 3)      ‘Larry Bird’ exemption – A team can re-sign a player it already has on its roster even if it’s over the salary cap limit.	Soft Cap
NHL	$83.5	$88	No material exemption – Salary caps set firm limits.	Hard Cap
MLS	$683,750 (per individual)	$743,750 (per individual)	Yes. Main exemptions are: 1)      Designated player rule – Allows an MLS team to sign up to three players that will be considered outside the team’s salary cap. This rule is also known as the ‘David Beckham Rule’.	Soft Cap

Luxury Tax

With regards to the MLB, instead of using salary caps, the league has imposed a luxury tax also known as ‘Yankees tax’. The way the luxury tax works is that when a team exceeds a certain cap, it has to pay tax to the League for the amount by which it has exceeded the cap.  As any other tax system, there are different tax brackets and as a team spends more above the cap, they pay higher taxes. About 75% of the money collected by these taxes go to players’ benefits and the rest go to an industry development fund.

Do salary caps really serve their purpose? Do they increase competition?

Undoubtedly, salary caps have had an impact in reducing competitive imbalance between teams but it’s highly arguable as to the extent they’ve achieved that. In certain leagues such as the NBA and the MLS, whose salary caps are filled with exemptions, they have done little to prevent the concentration of talent in a few teams. Considering the trades of the Golden State Warriors a few years back and the formation of a super-star team composed of all-star players, it seems that imposing salary caps and then giving lots of exceptions undermines the salary caps themselves and reduces their effectiveness. On the contrary, leagues such as the NFL and the NHL that implement hard salary caps are more effective in preventing teams to buy their way to the top by massively spending on acquiring super-stars.

Nevertheless, salary caps by themselves cannot and will never be able to tackle the issue of competitive imbalance amongst teams. In simple words, salary caps, together with the revenue sharing system, the drafting system as well as other systems put in place, are able to reduce competitive imbalance but will never be able to fully remove it. By themselves, salary caps are a step amongst different measures taken to promote competition and, in that sense, they do promote competition.

How do salary caps affect the compensation of sports professionals?

Salary caps do not have any real effect on the compensation of elite sports professionals since teams can allocate the largest part of their allowable payroll funds towards the acquisition of such players. However, for lower-tier sports professionals these salary caps do have an impact, in the sense that lower-tier players have to share in terms of salary what’s left after the fat salaries of star players.  Another effect of the salary cap is the release of many higher-salaries veteran players to other teams once their production starts to decline from the elite level. Therefore, mature sports professionals playing in the United States, need to take this into account during their financial planning process.

Collective bargaining agreements

Professional sports in the United States are almost a world by themselves when it comes to labor relations. Professional sports franchises usually have separate owners but the interests of the owners are unified as a league. The collective bargaining process in the US sports industry began as a tool to protect the welfare and rights of professional athlete-employees and currently the three most popular sports in the US, baseball, basketball and American football, are heavily unionized. Beyond financial considerations, recent CBAs have incorporated clauses addressing player well-being, including mental health resources, load management policies, and social justice initiatives. The rise of digital revenue streams, such as sports NFTs and global media rights, has also led to discussions on equitable revenue distribution.

A collective bargaining agreement for a specific league sets forth a set of agreed upon rules regarding the split of league revenues between the teams and the players, the level of salary caps imposed to teams, player transfers restrictions, player safety issues, player drafting provisions, free agency requirements, disciplinary rules, etc. With the expansion of streaming platforms, CBAs now address revenue sharing from digital rights, such as live-streaming deals, YouTube content monetization, and NIL (Name, Image, and Likeness) rights for athletes. These elements have become crucial as sports leagues shift toward global audiences and direct-to-consumer models. Collective bargaining agreements play a substantial role in shaping how a specific league operates because they constitute the core authority of a specific league, its players and their agents, its team owners and the league’s management.

CBAs must cover mandatory subjects such as player salaries, work conditions, contract guarantees, medical coverage, and grievance procedures. Additional topics like free agency rules, transfer policies, and personal data access are also negotiated to protect players’ rights.

In addition to the mandatory subjects, the parties may also discuss any other subjects which are called ‘permissive subjects’.  It should be noted though that either of the parties involved in the collective bargaining process may lawfully refuse to negotiate over permissive subjects.

The US and the European sports models are entirely different when it comes to the labor relations between leagues, clubs and players. Under the US model, the players are owned by the league with contracts that are the result of collective bargaining. In the European sports model, there exists a system of leagues with member clubs which have independent control of themselves and they are the owners of the individual players.  In Europe other than a few basic terms, playing contracts and compensation terms are freely negotiated between the individual players and the clubs and there is no particular form or process to be followed.

Action Steps – Exercise 2 (20 minutes):

Let’s test what you got away from today’s class through the following quiz and we will then go over all of the questions and discuss your answers vis-à-vis the correct answers.

1.An economy’s output is measured using the indicator known as gross domestic product (GDP).

1. True
2. False

2. How are salary caps in the US worked out?

1. Through negotiation
2. Through collective bargaining
3. Based on percentages of prior league revenues
4. There are no salary caps

3.  A recession will most probably have a negative effect on your investment portfolio.

1. True
2. False

4.  Which of the following is not part of what we call the Natural rate of unemployment?

1. Taking time off for family reasons
2. Being fired due to the economic climate
3. Moving cities
4. Changing career orientation

5. The value of a nation’s currency is an indicator of the strength of its economy.

1. True
2. False

6. Which two of the following are the most closely monitored indicators?

1. GDP
2. Inflation rate
3. Interest rates
4. Unemployment rate

7. Which are the three general types of contracts for athletes?

1. Performance contracts
2. Professional services contracts
3. Endorsement contracts
4. Appearance contracts

8. Direct taxes are those levied on goods

1. True
2. False

9. Estate Taxes are imposed on the recipient of an inheritance whereas inheritance taxes are imposed on the deceased.

1. True
2. False

10. Which of the following is one of the most common mistakes that athletes make in relation to taxes?

1. Tax structuring
2. Believing that they do not have to pay taxes at all
3. Paying more than they should
4. Believing that their tax obligations end by paying taxes in the country where they are currently employed

11. By keeping a record of certain documents, you make it easier for your CPA or tax advisor to prepare your tax return and take advantage of any deductions that will minimize your tax liability. Which of the following are considered such documents? Choose all that apply.

1. Official pay slips
2. Official Earnings Statement and Tax Declaration/Tax Return
3. Copy of your playing contract
4. Proof of payment and invoices of any playing related expenses (such as agent fees)

12. Salary caps are found in nearly all the major leagues in the United states including the NFL, NBA, NHL and MLS but not in MLB. In which of the following are salary caps rather lax?

1. NFL
2. NBA
3. NHL
4. MLS

13. A collective bargaining agreement for a specific league sets forth a set of agreed upon rules regarding the split of league revenues between the teams and the players, the level of salary caps imposed on teams, player transfers restrictions, player safety issues, player drafting provisions, free agency requirements, disciplinary rules and so on.

1.  True
2. False

14. During the collective bargaining process, the parties involved are obliged to discuss the mandatory subjects which include (choose all applicable answers):

1. the players’ salaries
2. Investment opportunities
3. working conditions
4. work hours 

15. The main difference between the European and the US model with respect to how salaries are negotiated and decided is that in the former is much more decentralized in the sense that the clubs that make up the league negotiate with players without any interference by the League.

1. True
2.  False

Answers:

1.  a	6. a,d	11. a,b,c,d
2.  c	7. b,c,d	12. b,d
3.  a	8. b	13. a
4.  b	9. b	14. a,c,d
5.  a	10. d	15.a

Lesson wrap-up

Today we focused on the importance of developing your own understanding of the economy and the factors shaping it in order to be able to foresee trends and be able to understand where the economy might be headed. There are several indicators of financial health through which you can understand the trends of the economy.  By paying attention to these indicators, you will be in a position to plan your finances and career accordingly.

We also looked at sports professional contracts and we covered key elements and tax implications of contracts abroad. Usually, most sports contracts are negotiated by sports agents.  However, it is important for athletes to have a general knowledge of the contract terms and how they affect them and their finances. Taxes affect your take-home pay and a basic knowledge of taxes along with the right advice from a suitable tax professional can save you a lot of money.

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.