“Tax day could be a rude awakening for a lot of college athletes,” said Peter Schoenthal, an attorney and founder of Athliance, which provides NIL management software and consulting to athletic departments including the universities of Kansas and Arizona. “You have students who have gone from July 1 to December 31 making thousands of dollars that didn’t put a penny as aside for taxes. They’re going to be put on tax liens.”
Schoenthal says he personally knows an athlete who was incorrectly advised that any deal under $10,000 didn’t generate tax liability. The student did six of them, spending nearly all the money along the way. Today, of course, is the day to pay taxes on the income—probably in the ballpark of $9,000, based on standard calculations. “He’s engaging more NIL deals to pay for the ones from the year before,” Schoenthal said on a phone call.
Not many athletes earned that much money under the first six months of NIL, but even the average Division I student deal of $594 brings a liability, according to data from Opendorse. Just $400 of self-employed income is enough to require the filing of a tax return in most cases, according to IRS guidelines. States with their own income tax likely require a return, too.
Byzantine in practice, the American tax system is built off a simple idea: If you make money, you have to report it and subject it to the tax framework. It quickly gets complicated no matter who you are, but college athletes immediately find themselves saddled with a more complex tax return. That’s because NIL deals are done as a contractor or freelancer. That means a form 1099 is generated for payments of $600 or more in a year—and means the Internal Revenue Service will know who received that money. It’s not just cash that counts as income, either, but also any goods or services received, like a free lease on a $90,000 BMW.
Deductions to offset income are likely fewer than the average sole proprietor, too, given students probably don’t have NIL-only computer equipment or office space to write off. And if their parents claim them as dependents, they won’t even get the full personal deduction.
“My experience over the last 10 months, along with a dozen years on a college campus as an administrator, interacting regularly in a life skills sense with college athletes, is a lot of the preparedness for the ‘real world’ is lacking,” said Andrew Donovan, vice president of collegiate partnerships at Altius Sports Partners, an NIL advisory company that works with schools including Nebraska and Clemson. “It’s not for lack of effort, but there are competing interests on the part of the athlete. They’re trying to excel at their sports, earn a degree and have a social life any 18- to 22-year-old wants to have. Everyone was excited to engage NIL. But the sexy part was not the financial responsibilities and the tax component.”
More bad news for student athletes: Self-employed individuals have to pay the full 15.3% self-employment income tax. Full-time employees only pay half that amount, with employers paying the rest (it’s labeled the Social Security tax on W-2s).
Last year’s endorsement deal is the tax headache that will keep on throbbing: Sole proprietors, like NIL athletes, are more likely to be audited—about 2% of sole proprietor self-employed get audited annually, more than three times the rate of the average American taxpayer. Typically, the IRS has three years to audit a person’s tax return, which in practice means they dig deep on two years’ worth of returns at once when they do an audit. Any underpayment or non-payment of taxes they find (and the people who audit small businesses are incentivized to find more to tax) brings penalties, interest charges and a higher risk of getting audited again.
Unfortunately, for many athletes, there’s only so much their athletic department can do for them, since schools technically are arms-length with an athlete’s individual marketing deal, according to Donovan. “Schools are finding themselves in this interesting space of ‘I need to help athletes and their families understand the responsibilities and risks in this space. But I can’t take on undue liability.’ I don’t think you’re going to find a school out there comfortable doing taxes or giving tax advice for them.”
It’s likely that as the first year of NIL, this tax season will be the messiest. But it also emphasizes the need of the NIL industry to work harder to inform athletes, said Schoenthal. “Unfortunately, the space didn’t do a good enough job educating student athletes on taxes. When you’re making money and entering the real world, there are consequences. And taxes are one of them.”