The economic environment, contracts and taxes

Key topic

Personal financial planning is affected by several macroeconomic factors.  Therefore, when athletes plan their financial lives, they should consider conditions in the wider economy and in the markets that make up the economy. Since athletes will be dealing with professional sports contracts, it is important that they know some basic information about contracts and how taxes affect their income.

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 consider 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 the 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 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 cycle 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 vulnerability.

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, which swept the United States first and then the rest of the world, things changed; sponsorships funds, match day attendance and match day spending declined.  Sports teams and leagues have become increasingly reliant on revenue from corporate sponsorship, 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.

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 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 and 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’s 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 where 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, providing 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 has caught the globe by surprise, let alone the sport industry and has 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 also 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 makes the situation worse is the total cessation of practice sessions for a prolonged period of time.  As 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 are Olympic athletes and individual sport athletes. These athletes mostly generate revenues from competition and sponsorship alone. The Olympics have been postponed whereas individual competitions such as tennis, golf tournaments and impact-sport competitions 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 has definitely affected players who are 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 has caused severe damage, which has snowballed down to affect the players.

Truth be told, suspension or cancelation of games and tournaments are 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 mean 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 arises 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.

Occupation “Athlete”

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. 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.

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, e.g., 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 with 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 three general types of contracts that athletes usually utilize: Professional services contracts and NIL contracts.

Professional Services Contracts

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.

What should an athlete look for when signing a contract?

Professional athletes will enter into different types of contracts within the course of their career and ideally these should be reviewed by a legal advisor prior to their execution. Of course, there are a few key points that athletes should look out for when signing a contract:

• Who are you contracting with? This is the party who will be bound by the contract. If you are entering into a contract with a legal entity, ensure it is in good standing and that the person signing the contract on its behalf has the capacity to do so.
• Make sure that you understand the contract: Read and review each and every clause and if you do not understand something, ask what it means; perhaps the language may need to be simplified so that it is clear what obligations the contract places on you, before signing it.
• Do the terms of the contract reflect what was orally agreed with the other party? If you see new terms that were not previously discussed, perhaps you should revert to the other party and ensure that anything that has been agreed has actually been written down to avoid any disputes as to whether it is legally binding.
• The agreed obligations of both parties must be clearly stated: Both payment and performance obligations must be clear (who does and who pays what, when and how). Your obligations should be realistic, avoiding provisions that are making them difficult to meet or are too restrictive, an example being that you may not work for a competitor for a long period of time after the contract is terminated.
• Look out for unreasonable terms: If you feel like the contract is one-sided and in favor of the other party, remember that you can negotiate the terms; the contract is not legally binding until you sign it.
• Are you happy with the duration of the contract? It may be for a specified or indefinite period of time; the key is for you to be comfortable with that duration. For example, the other party may want to lock you into a long-term contract, particularly if you are an emerging talent, and while this may be appealing, you need to check whether you can increase your fees later on. This will ensure that you are not locked into a long-term contract with a very low fee, as was the case with NBA Champion Scottie Pippen and the Chicago Bulls.
• How is the contract terminated? Parties may be able to terminate the contract when a breach of contract occurs, or for whatever reason. If you do not wish to be locked into the contract indefinitely, you should include a provision that you may terminate the contract for any reason whatsoever by providing reasonable notice. Ensure that the notice period you are to provide is not too long and, if the other party may also provide a notice to terminate the contract for whatever reason, the notice they are to give must be adequate for you.
• Negotiate the negotiable terms: While the standard player’s contract (with their professional team) is usually offered to all team players with the same terms, you should negotiate the terms that are specific to you, such as your salary, signing bonus and other benefits like insurance. For example, eight-time Major League All-Star Mike Trout managed to negotiate a $20 million signing bonus on top of his $426 million salary.
• Are your obligations lawful? When entering into an endorsement contract, make sure that you are not prohibited from endorsing that specific product. For example, certain leagues prohibit individual players from endorsing alcoholic beverages or tobacco products, and the NFL has a policy that players may not endorse certain nutritional supplements.
• Are you a minor? You should check how your jurisdiction treats minors entering into a contract, to ensure that the contract will be valid. Some jurisdictions may consider that only contracts which provide necessities for the minor or which are for a purpose benefiting the minor’s employment or business may be valid.

The above are just a few points you should look out for, which however, can make all the difference in your professional sports career.  As a rule of thumb, before you sign any document you should always make sure that you understand exactly what you are signing, and you should make sure that your legal advisor reviews it thoroughly.  The stakes are usually high in professional sports contracts, and you don’t want to risk getting squeezed into long-term uncomfortable situations, just because you did not give the matter the attention it merits!

Taxes

Tax is a fee charged by the 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, on 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/ flat 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 by 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, like 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.

Solo-Sport 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 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 people 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-sports 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 participation 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.

Taxation 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 they sign contracts to play 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-sports 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 understand 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 considered 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 on 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.

Tax avoidance Vs Tax evasion

It is very important that you become aware of the difference between tax avoidance and tax evasion.  Tax avoidance is the legal use of tax laws to reduce one’s tax burden.  Tax planning is the legal process of arranging your affairs to minimize your tax liability. There is a wide range of tax reliefs and provisions that are available to legitimately reduce tax liability without straying into the rather dodgier area known as tax evasion.  Tax evasion on the other hand is the illegal non-payment or underpayment of tax.  Tax evasion entails deliberately misrepresenting your state of affairs to the tax authorities whether this means declaring less or no income or overstating deductions.  This carries serious penalties which may include criminal prosecution.

Proper tax advice is recommended to be sought before entering into any substantial revenue generating transactions. When competing in more than one country or state, you may have to appoint competent tax professionals in various jurisdictions where you earn income in order to take care of your tax affairs along with the proper preparation and timely filing of your tax returns. By appointing competent tax professionals, you ensure that:

• You are not missing out on deductions that would lower your taxes.
• You keep sufficient documentation / evidence in case of a tax audit.
• You lower the risk of penalties and mistakes.

Real-Life Examples The case of Boris Becker German tennis legend Boris Becker was found guilty of tax evasion by the German courts in 2002. He received a stiff punishment, a two-year prison sentence, suspended for three years, a 500,000 euro (£315,000) fine, and the entire cost of his trial. Becker pleaded guilty to evading about 1.7m euros tax by claiming to live in the “offshore” haven of Monte Carlo at a time when his main residence was really in Munich. Becker had paid the tax authorities 6m euros before the hearing. This included the back-tax he was accused of dodging in the early 1990s.

Tax efficient philanthropy for sports professionals

While the main motivation for donating to charity is helping the less fortunate, giving back to the community and contributing to making the world a better place, there is also a significant tax benefit to those who give.  There are tax benefits for charitable giving and in connection with the manner that charitable contributions may be structured for maximum tax efficiency.

Tax authorities all over the world recognize that giving to those in need and supporting a philanthropic cause is important, therefore they provide tax breaks for donations, by allowing such donations as tax deductible expenses. Charitable donations to qualified organizations can be deducted from the athlete’s income thus resulting to a lower tax burden.  The extent to which donations can be deducted from the athlete’s taxable income depends on their nature, their timing, whether they are made in cash or in kind as well as other factors that may arise from local tax legislation.

To fully utilize the tax benefits associated with charitable giving there are several issues that athletes need to be aware of:

The donation must be made to a qualified charitable organization

Not all organizations qualify for tax-deductible donations. Usually, this information can be provided by the charity which will let athletes know whether their donation is tax deductible and in which jurisdiction. In general, tax deductions are not allowed for contributions to individuals, political parties, political campaigns, or international charities which do not have a presence in the athlete’s country of tax residence.

The donation is deductible in the year it is made

The contribution is considered paid and can be thus deducted from the athletes’ taxable income when the payment is made.

The donations must be supported by proper documentation

Athletes need to maintain proper documentation for their charitable contributions.  Such documentation can be the receipt or confirmation that usually the charity will provide or the athlete’s credit card statement showing the relevant donation payment.

Another form of philanthropy that is widely used by athletes and sports professionals is the Charitable Foundation. Creating a private foundation can provide a good strategic tool towards planning the athlete’s charitable giving. The main advantage of donating to a private foundation is that athletes can maintain control over the timing of the charitable contributions and the disbursements from the foundation to charities.  Athletes can make donations to the foundation during the high earning years of their sports careers so that they can take advantage of the relevant tax deduction when their taxable income is at its highest. After contributing the funds to their foundation, athletes have the flexibility to structure the disbursement of their donations to their preferred charitable causes over multiple years.  In this manner, the athlete can secure that they will be able to continue to make payments to their preferred charities even after their playing years are over, when their income might not be that high.

Other than cash donations, athletes may also donate assets to their charitable foundation. Usually, the full fair market value of appreciated long-term assets, such as stocks, bonds or mutual funds can be deducted from the athletes’ taxable income and in addition, there is no capital gains tax. Donating investments instead of cash can be a very effective and tax-efficient way to support a charity. Generally, if athletes own assets which have appreciated in value, it is best not to sell securities to generate the cash needed for a donation; contributing the securities directly to the charity maximizes the amount of the athletes’ gift as well as their deduction.

Like the private foundation is the Donor – Advised Fund.  A Donor-Advised Fund, or DAF, is a charitable giving vehicle established within a public charity to manage donations on behalf of family, organisations and individuals.  It allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time.  Donors can contribute to the fund as frequently as they like, and they may recommend grants to their favorite charities, whenever they feel it is appropriate to do so.

It is advisable, before athletes start making payments to charities, to create a comprehensive giving strategy which will maximize their giving as well as optimize their tax benefit.  In creating such a strategy, athletes need to decide on the preferred type and method of their philanthropic endeavors i.e., Private Foundation, Public Charity, Donor-advised fund, etc, whether they will donate cash or any other types of assets, and the timing of such donations for maximum impact.

Given the complexities of tax laws and charitable giving, it is advisable for athletes to regularly consult with tax advisors and estate planners to ensure they maximize their tax benefits and comply with all regulations.

Tax Basics: What you need to know

For professional and aspiring athletes, financial success isn’t just about signing big contracts or landing endorsement deals—it’s also about managing money wisely. One key area that often gets overlooked until tax season is taxes. Understanding how taxes work as an athlete is essential to protecting your wealth and avoiding costly surprises.  In the following sections, we’ll walk you through the basics of athlete taxation and what every athlete needs to know.

1. Athletes Have Complex Tax Situations

Unlike a typical 9–5 employee, athletes often earn income from multiple sources, in multiple locations, and even in multiple countries. This creates a complex tax landscape, including obligations to pay taxes in various states, provinces, or countries where income is earned.

Common income sources include:

• Salaries or match fees
• Signing bonuses
• Endorsements and sponsorships
• Appearance fees
• Prize money
• NIL/Image rights licensing royalties

Each type of income may be taxed differently, depending on the location and local tax rules.

2. The “Jock Tax”

One of the most significant tax issues athletes face in the United States is the jock tax which refers to state income taxes levied on visiting athletes who earn money while playing in that state. For example, if a basketball player plays an away game in California, California can tax a portion of that player’s salary based on the number of workdays spent in the state.

This means athletes might have to file multiple state tax returns in addition to their federal tax return.

3. International Tax Complications

Athletes who compete or sign endorsement deals abroad can face taxation in multiple countries. Many countries have tax treaties that aim to prevent double taxation, but navigating these treaties can be complicated without expert guidance. Athletes should always consult with an international tax advisor when they begin to earn income overseas.

4. Deductions and Write-Offs

The good news? Athletes can deduct certain business-related expenses. These might include:

• Agent fees
• Travel expenses
• Training costs
• Equipment and uniforms
• Nutrition and supplements
• Legal or financial advisory fees

However, what qualifies as a deduction may vary by country and by employment status (e.g., self-employed vs. employed by a team or club). It’s critical to keep detailed records of all expenses and consult a qualified accountant.

5. Estimated Tax Payments

In many cases, especially for independent athletes (e.g., tennis players, golfers, fighters), taxes are not withheld automatically. This means athletes are responsible for making quarterly estimated tax payments to avoid underpayment penalties. Planning ahead and setting aside a portion of each payment for taxes is key.

6. Retirement and Investment Tax Planning

Athletes typically earn a high income over a short period of time. Proactive retirement planning and smart investing are crucial, but they also come with tax considerations. From IRAs to tax-deferred investments to choosing the right location for real estate purchases, every financial move should be viewed through a tax lens.

7. Work with a Tax Professional

Tax mistakes can be extremely costly, especially when they involve multiple jurisdictions. Working with a tax advisor who understands athlete income and international tax law is one of the most important financial moves an athlete can make. It’s not just about filing taxes, it’s about long-term planning, asset protection, and wealth preservation.  Whether you’re just entering the world of professional sports or are already deep into your career, understanding the tax implications of your income is critical. By being proactive, keeping detailed records, and working with experienced professionals, you can avoid pitfalls and keep more of your hard-earned money.

Managing international income: Tax strategies for global competitors

Understanding taxation is crucial for every athlete. However, when competing on a global stage, tax obligations become even more complex. International athletes must navigate multiple tax jurisdictions, manage income from various sources, and comply with local and international tax laws. Proper tax planning is essential to avoid double taxation and maximize earnings while staying compliant with regulations.  The following are the key tax considerations and strategies to ensure compliance and financial efficiency.

Understanding International Taxation for Athletes

Internationally competing athletes often earn income in multiple countries, which can create tax obligations in each jurisdiction. However, tax laws vary widely and understanding how different countries tax foreign-earned income is essential.

Some key factors influencing an athlete’s tax obligations include:

• Residency Status: Many countries’ tax based on residency. If an athlete resides in a particular country for a significant period, they may be considered a tax resident and subject to taxation on their worldwide income.
• Source of Income: Some countries’ tax income earned within their borders, regardless of an athlete’s residency status. This means winnings, sponsorship payments, or appearance fees earned in a specific country may be taxed there.
• Tax Treaties: Many countries have tax treaties. They prevent double taxation and determine which country has the primary right to tax certain types of income.

Key Tax Strategies for Global Competitors

1. Determine Your Tax Residency

Understanding where you are considered to be a tax resident is crucial. Many countries use the 183-day rule to determine tax residency. This means that if you stay in a country for more than 183 days in a year, you may be liable to pay taxes in that particular country. Some athletes establish residency in low-tax jurisdictions to minimize their global tax liability. Nonetheless, this requires careful planning and compliance with tax laws.

2. Utilize Tax Treaties to Avoid Double Taxation

Many countries have bilateral tax treaties to avoid double taxation by allowing foreign tax credits or exemptions. Athletes should check whether their home country has a treaty with the countries where they earn income.

For example:

• If an athlete earns income in a country which has a tax treaty with their home country, they may only need to pay taxes in one country.
• If no treaty exists, they may need to claim a foreign tax credit in their home country to offset taxes already paid abroad.

3. Consider Tax-Effective Structuring of Payments

How income is structured can impact tax liability. Athletes should consult with tax advisors on strategies such as:

• Receiving payments through corporate entities in case corporate rates are lower than personal tax rates.
• Structuring sponsorship deals to allocate earnings across multiple tax years to reduce tax burden in high-income years.
• Making sure to properly recognize income since different types of income have different rates so as to take advantage of lower tax rates on certain types of income.

4. Keep Detailed Financial Records

Given the complexity of international taxation, keeping detailed and accurate records is essential. This includes:

• Payment receipts from competitions, sponsors, and endorsements.
• Documentation of travel dates to track residency status.
• Tax payments made in different countries to claim deductions or credits.

5. Hire a Cross-Border Tax Specialist

Tax laws for international athletes are highly complex and vary by country. Working with a cross-border tax specialist ensures compliance and helps athletes optimize their tax situation. A cross-border tax professional can:

• Identify applicable tax treaties and deductions.
• Ensure proper tax filing in all relevant countries.

• Develop strategies to minimize tax liabilities legally.

Planning ahead ensures that athletes competing globally can focus on their performance without unexpected tax burdens interfering with their success.

Maximizing deductions: Tax benefits unique to athletes

Let’s face it, pro athletes live a life most of us can’t imagine. Between constant travel, endorsement deals, and competing globally, their finances are anything but simple. And taxes? This is a whole different game. But here’s the good news; with the right strategies, athletes can score big tax savings.

Tax Obligations Across Borders
Ever filed taxes in three countries before breakfast? For international-playing athletes, this is reality. Most countries tax you if you live there or earn money there. The kicker? You might owe taxes both at home and abroad.  You need to consider both the residency rules and tax treaties mentioned above.

Income Structuring for Tax Efficiency
Athletes aren’t just earning paychecks. There’s prize money, sponsorships, and appearance fees. How you handle these can make or break your tax bill:

• Prize Money and Appearance Fees: Individual athletes like tennis players or golfers can deduct expenses related to tournaments (e.g., travel and equipment) since they are often self-employed.
• Endorsements: Sponsorship deals are frequently routed through athlete-owned corporations to optimize taxation. However, these arrangements must have commercial substance to withstand scrutiny from tax authorities.

Team players have fewer deductions on salaries but can still game the system with side gigs like local endorsements.

Deductions for Business Expenses

Athletes incur significant expenses related to their careers that may qualify as deductions:

• Agent Fees: These are often substantial and deductible in most jurisdictions.
• Training Costs: Expenses for personal trainers, gym memberships, and specialized equipment may be deductible.
• Travel Expenses: Athletes traveling for competitions or promotional appearances can claim deductions for unreimbursed travel costs.
• Nutrition and Supplements: These are often considered necessary for peak performance and may qualify as business expenses.

The ability to deduct these expenses depends on the athlete’s employment status (self-employed vs. employed) and local tax laws.

Tax Residency Choice
Choosing a favorable tax domicile can significantly impact an athlete’s net income. For example:

• In the U.S., states like Florida and Nevada impose no state income taxes, making them attractive options for athletes seeking to minimize liabilities.

• Globally, some athletes relocate to low-tax jurisdictions like Monaco or Dubai for similar benefits. However, changing residency requires careful planning to ensure compliance with local laws.

Retirement deductions
Athletes typically earn high incomes over relatively short careers. Proactive retirement planning is critical:

• Tax-Efficient Investments: Municipal bonds or index funds offer reduced tax liabilities while providing steady returns.
• Retirement Accounts: Contributions to IRAs or equivalent plans in other countries can lower current tax bills while securing future financial stability.

Post tax season review to improve next year’s planning

Once tax season is over, it’s a perfect opportunity to reflect, review, and learn from the past year. By doing so, you can create a better plan for the upcoming year, making the next tax season smoother and more efficient. Here’s how to use your post-tax season review to improve your tax and financial strategy for next year.

1. Assess Your Income Sources and Tax Bracket

Athletes often have multiple streams of income, including salary from teams or organizations, winnings from competitions, sponsorships, and personal brand income like endorsements. Reviewing how these sources of income affected your overall tax bracket is a great starting point. Therefore, have your sources of income up to date.  Understanding how your earnings impact your tax rate can help you make smarter decisions when negotiating contracts and sponsorship deals. Going forward, consider working with a tax advisor to explore tax-efficient strategies that might benefit you.

2. Review Deductible Expenses

Post-tax season is a good time to review the deductions you claimed.   Take the time to ensure that you’ve tracked every deductible expense throughout the year. Using apps or software for expense tracking during the year can simplify this process when tax time comes. Consider creating a more detailed system to categorize expenses, making sure you don’t miss potential deductions. Remember, the more organized you are with your expenses, the easier it will be to maximize deductions and lower your taxable income.

3. Evaluate Your Retirement and Investment Contributions

Many athletes start thinking about retirement later in their careers. However, it’s important to plan ahead to ensure long-term financial security. In your post-tax season review, assess the contributions you made to retirement accounts or other investment vehicles

For some athletes, setting up a self-employed retirement plan can be a powerful way to reduce taxable income while building long-term wealth. If you didn’t take full advantage of these opportunities, now is the time to create a plan for the following year. The earlier you start contributing, the better your financial future will be.

4. Organize and Streamline Your Tax and Financial Records

Tax season can often reveal how disorganized your tax and financial records might be, especially if you’re balancing multiple income sources, contracts, and sponsorships. Now that tax season is behind you, it’s the perfect time to get your finances organized for the next year.

5. Review Tax Withholding and Estimated Payments

If you received a large tax bill after filing your taxes, it’s a good idea to review your withholding and estimated tax payments. Many athletes have irregular income throughout the year, which can make withholding tricky.  This is a great time to recalibrate your withholding and ensure that you’re making the proper estimated tax payments to avoid a surprise bill in the future. Working with a tax advisor to estimate your taxes more accurately and adjust your withholding accordingly can help you avoid overpayment or underpayment.

6. Post-Tax Season Follow-Up

Carefully review your tax return for any errors or missed deductions to ensure accuracy and avoid penalties. Use this as an opportunity to adjust tax strategies for the next year, maximizing savings and simplifying future filings. Additionally, maintain organized financial records to streamline the filing process and protect against potential discrepancies or tax audits.

7. Understand the Impact of Changing Regulations

Tax laws and regulations frequently change, which can impact athletes in different ways. Did any new laws or tax reforms affect your taxes this past year? For example, tax changes related to deductions for home offices, business expenses, or tax incentives for athletes could have affected you.  Stay informed about tax law changes and how they might impact your situation in the future.

8. Set Financial and Tax Goals for the Next Year

Once you’ve reviewed your taxes from the past year, it’s time to set financial goals for the next year. Perhaps you want to explore more tax-efficient investment strategies. Setting clear, achievable financial goals will help you stay on track throughout the year and make next year’s tax filing process much smoother.  The most important action you can take though is to speak with a CPA or tax advisor to create a strategy for meeting these goals!

Action Steps – Exercise 1 (20 minutes):

Answer the following quiz to find out your level of knowledge regarding taxes and then we will 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 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.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.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.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.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 must 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 must 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 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
2. d  6. b  7. a  8. c
3. c  10. b 11. d  12. b
4. d  14. b 15. c  16. a
5. a  18. a  19. b  20. b

Preparing for a tax audit: Staying organized and proactive

A tax audit can be an intimidating process, but for individuals, staying organized and proactive can make the experience more manageable. By understanding the requirements, maintaining good records, and addressing any issues early, you can ensure the process goes smoothly and avoid any unnecessary stress.

1. Understand the Purpose of the Audit

A tax audit can be triggered for several reasons. For instance, a routine review of your taxes, a discrepancy in your financial reports, or even a random selection by the tax authority. In many cases, it’s a part of tax compliance to ensure that you’re paying the right amount. You need to understand the scope of the audit, whether it’s focused on income, deductions, or expenses. This will help you gather the necessary documents. Speak with the tax auditor to clarify the specifics and timeline.

2. Keep Detailed and Accurate Financial Records

One of the most important aspects of preparing for a tax audit is ensuring your financial and tax records are thorough and up to date. This includes keeping track of your income, deductions, and any major transactions. Gather all relevant documents, such as bank statements, receipts, tax returns, investment statements, and proof of income. It’s also important to track any charitable donations, business expenses, or other deductions you’ve claimed. Get organized from the start!

Use tools like budgeting apps, spreadsheet software, or cloud-based systems to track your finances regularly. This will make it much easier to locate any records you need when an audit arises. The more organized you are, the less stressful the process will be.

3. Review Your Tax Returns and Financial Statements

If the audit relates to your tax filings, review the tax returns you’ve submitted over the past few years. Ensure that the income reported matches your records and that all deductions and credits are legitimate. Look for any areas that might be flagged during the audit, such as unusually high deductions, unexplained income, or large discrepancies. Be prepared to provide supporting documentation for any claims, such as business expenses or charitable contributions.

If your audit is more general, review your overall financial statements and make sure all accounts, assets, and liabilities are accurately reported.

4. Consult a Professional

Navigating a tax audit can be complex, especially if you’re not familiar with accounting or tax laws. It’s a good idea to consult a professional, such as a CPA or a tax advisor, before the audit starts. A professional can help you organize your records, review your tax returns and financial statements for accuracy, and ensure that everything is compliant with tax laws. They can also guide you in communicating with the tax auditors and represent you if needed.

5. Stay Calm and Be Transparent

During the audit, it’s important to remain calm and be transparent. If the tax auditor asks for additional documents or clarifications, respond promptly and honestly. Avoid being defensive or evasive. Tax auditors are simply doing their job. If you don’t have certain documents immediately available, let the auditor know when you can provide them. Transparency and cooperation are key to building trust with the tax auditor and ensuring that the audit proceeds efficiently. Be patient!

6. Possible Outcomes of the Audit and How to Handle Them

Tax audits can result in a variety of outcomes, and it’s important to be prepared for all possibilities. The best-case scenario is that the tax auditor finds no issues, and everything is in order. However, there are other possible outcomes, including:

Additional Taxes Owed: If the audit reveals underreported income or incorrect deductions, you may owe additional taxes, interest, or penalties. Thus, it’s important to pay what’s owed promptly to avoid further penalties.

Refund: In some cases, an audit may uncover errors in favor of the taxpayer, such as missed deductions or overpaid taxes. If this is the case, you may receive a refund.

Corrective Action Required: If the tax auditor identifies areas for improvement, such as poor documentation or mistakes in your tax reporting, you may be required to correct these issues moving forward. This may involve updating your financial records or improving your accounting practices.

In any case, it’s important to address any findings quickly. If you disagree with the audit’s outcome, you have the right to appeal, so be sure to consult with a professional if necessary.

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 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.  Like 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 goes to players’ benefits and the rest goes 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.

Collective bargaining agreements in professional sports are agreements amongst a sports league’s owners and players. 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, etc. 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.

During the collective bargaining process, the parties involved are obliged to discuss the mandatory subjects which include the players’ salaries, working conditions and work hours.  The mandatory items that are discussed during the collective bargaining process cover the base salaries of players, the number of games they will play per season, whether their contracts are guaranteed by the league, player transfer procedures, their medical coverage, retirement plans, injury and non-injury grievances, club discipline procedures and access to the personal files/data of players.

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 tried to point out the importance of developing your own understanding of the economy and the factors shaping it 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 able to plan your finances and career accordingly. We also looked into sports contracts so that you acquire a basic knowledge of how they work.  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. Therefore, in this lesson we have covered comprehensive tax information specifically tailored for professional athletes.

At this point, we will wrap-up today’s lesson.  First, we will go over the learning objectives of today’s lesson to see whether they have been achieved and then, we will address any questions you may have.  Please feel free to ask anything you’d like in relation to today’s lecture, and we would love to hear how the concepts we discussed today, relate to you and your greater life plan.