Justin Jones, a third-round pick of the San Diego Chargers in 2018, faced professional hurdles in the transition to the NFL, from adjusting to the speed of the pro game to having to earn a starting role after starring in college. Far down the list was making sure his taxes were correct.
“Back in California, I had situations my first two years, when I had a different CPA, where I owed 50, 60 grand, and I’d be sick come April,” Jones said in a phone call. The withholding and tax calculations provided on the federal W-2 form provided by the team didn’t mean his annual obligation to the government was covered, something he and many other players believe, according to Jones. “Most people, when they get a W-2, they assume it’s right.”
Unfortunately for players, the latest collective bargaining agreement, approved in March 2020, instituted a new pay schedule that went into effect this past season, making tax time even more complicated for NFL players.
Athletes have had tax complexity for decades because of the so-called “jock tax.” Such laws, which require people to pay state income tax on days worked in the jurisdictions, took off in the 1990s as player salaries skyrocketed. Everyone is subject to them, but most states just care about collecting from high-paid athletes; they generate more than $200 million a year in tax to California alone, according to various estimates. NFL teams issue W-2s and typically attempt to do some of the math, but the good intentions can’t cover every player’s circumstances.
“I’ve done tax returns for players with every NFL team, and they all do it differently,” said Jarrett Perry, a CPA in Florida who works with numerous athletes. “Some of them account for preseason, others don’t. Some include OTAs [organized team activities, which are offseason workouts]. It all depends. They all have their ways of calculating the days [for the W-2s].”
The teams mean well, but the variance among calculations means plenty of players are paying too much in taxes, Perry said. Some instances are so obvious, players do catch the overpayment. For example, Perry has another football player client who had about $500,000 in state income taxes withheld on a signing bonus (Perry asked details be withheld so the player can’t be identified), but never lived or played in the state.
More typical—and often overlooked by players—are small math errors on assigning “duty days” that add up to thousands of dollars of too much tax withheld.
A simplified, theoretical example of the most common error, according to Perry: A player for the Atlanta Falcons (Georgia has state income tax) plays an away game in California and an away game in Florida, where there isn’t income tax, during what is, for him, a 100-day season. The team will assign two days away to California to account for its taxes. But because Florida has no income tax, the team doesn’t allocate anything for time spent in that state. Instead, the days are treated like they were played in Georgia.
The net result is the player has tax withheld on 2% of his income—those Florida days—when he shouldn’t. “I would estimate 90% of players are overpaying state income taxes because they don’t allocate for non-taxable states,” said Perry.
All of the withholding can be recouped at tax time if players reconstruct their own duty days and don’t rely on the W-2s—but very little attention is paid to it by players, and little advice comes from teams of the NFL Players Association, said Jones, who, after switching to Perry, ended up refiling his early tax returns to reflect his correct taxes. “We don’t really go into it as much as we should. I feel like it’s doing the players a huge disservice, especially with the younger players, that we don’t talk about things like this.”
For its part, the NFLPA says that as a union it can’t provide tax advice, but has had tax lawyers make presentations and answer player questions in annual seminars, NFLPA senior communications manager Brandon Parker said in an email. “We realize there are a number of financial complexities that come with being a professional athlete.”
NFL players’ taxes have only grown more complicated this year. Each season’s pay schedule is now 34 weeks, with the last third of checks issued from January to March of the following year. In the past, players were paid for their season as it was played. The change was made in the latest collective bargaining agreement at the preference of most players.
“One of the issues that our union’s player leadership often heard from its membership was how players had difficulty making it through the offseason, when they were no longer receiving paychecks,” said Parker. “In response to this, our player leadership proposed and passed a resolution to adjust the pay period so that their paychecks would be spread into the offseason, better allowing players to manage their money and be more financially responsible”
While the change helps with cash flow, the downside is the spread-out payments mean players face additional tax complexity around being paid in 2022 for work performed in 2021.
“Some [teams] are treating it as deferred compensation and making the contract amount subject to Medicare tax even though it hasn’t been paid out yet, and only paying federal tax on what was received during the tax year,” said Perry. That is, some players have already paid 2.9% Medicare tax on their entire 2021 season contract before they’ve received it, as required by rules around deferred compensation, but have only paid federal income tax on the portion of the actual paycheck received in 2021. About half of NFL teams don’t treat the payments as deferred compensation, which means players owe 2.9% Medicare tax with the 2022 returns they will file next year.
Layer on the jock-tax issue, and the NFL pay schedule has created even more tax questions. The main one: What is the proper tax treatment for players who live in a no-income-tax state but played last year in a state with income tax?
“This is going to cause a lot of issues with the states,” said Perry. “The majority of them state that your tax is based on the year the income is paid out and the duty days for the same year. So [teams] have taken out state income taxes [in 2022’s paychecks]. But what if the guy never plays again, or gets traded to a different state? They took out taxes for that state and reported it erroneously. There’s a way to fix it, but the majority of players, they don’t even know that there’s a problem.”
With assistance from Jacob Feldman.