Taxes and NIL: Things You Need to Know

Jul 05, 2023 | Law Student Blog,

by Jacob Neukirch
University of New Hampshire Franklin School of Law, Juris Doctor Candidate, 2024

The recent rise in prevalence of Name, Image, and Likeness (NIL) opportunities in college athletics has created major financial benefits for college athletes. But as you might imagine, it can also cause some headaches that need to be considered and dealt with. 

According to projections by Opendorse — the leading athlete marketplace and NIL technology company — college athletes in 2023 are projected to collectively make over $1 billion from NIL deals. NIL is a form of the right of publicity, which provides the ability of an individual to profit from their identity. Artists, musicians, and other performers have been able to take advantage of the right of publicity for decades, but until recently, college athletes were unable to do the same. For decades, college athletes were prohibited from capitalizing on their NIL rights due to the NCAA’s focus on preserving amateurism, which stopped athletes from being compensated in connection with their performance. This policy changed in 2021 after the United States Supreme Court ruled unanimously in NCAA v. Alston that the NCAA’s policies were in violation of the Sherman Antitrust Act, and as a result, the limits on college athlete pay for certain expenses were removed. While the Alston decision did not by itself do anything to allow for NIL, it did spur the creation of NIL laws in many places. NIL laws currently are a product of state law and as of now 32 states have passed legislation allowing college athletes the right to receive compensation. Furthermore, the NCAA’s policy states that in states where there are no NIL laws, college athletes can now engage in NIL activities so long as they do not involve the practice of “pay-for-play”. While the rise of NIL has been a great benefit for college athletes, it has also created tax implications that college athletes are now going to have to consider. 

College athletes will be considered self-employed
One of the major issues college athletes face is that they are not considered employees of either their university or whomever pays them for their NIL rights. This means that the athletes are self-employed and are required to file their taxes accordingly. Where this can cause problems is the difference in how taxes are collected from an employee vs. from someone who is self-employed. An employer should withhold the necessary amount from an employee’s paycheck in order to pay the federal and state income taxes as well as the Social Security and Medicare taxes. This allows the employee to not have to worry about ensuring that the proper amount of money has been set aside to cover their taxes. 

In contrast, a college athlete who is self-employed has to be careful to make sure that they set aside enough money to pay these taxes. If the athlete spends all of the money that they receive as part of their NIL deal without setting aside the right amount, they will find themselves needing to pay their taxes with money they may not have. Furthermore, individuals who are self-employed are required to pay not only a federal income tax but also a tax called a self-employment tax (SE). This is simply the taxes that are ordinarily withheld from a paycheck to cover Social Security and Medicare. 

Items other than cash must also be accounted for
While the fact that college athletes would have to pay taxes on any cash payments received through NIL is straightforward, other items received as part of these deals would also have to be accounted for. Instead of cash payments in exchange for the use of a college athlete’s NIL, those who pay for the benefit may instead provide the athlete with other items to compensate them. This type of compensation may be as extravagant as a new car and high-end designer clothes or as small as free food from a restaurant. Regardless, all of this compensation is considered taxable by the IRS and the college athlete is required to account for it when filing their taxes. This could cause issues, especially if the compensation is as expensive as a new car or designer clothes, because the athlete will have to pay taxes on these items while not receiving any cash payments. That again means they may have to pay taxes when they do not have the money available to them to make the payments. This issue is something college athletes must be aware of when accepting such items as payment. 

College athletes may also have to pay taxes in multiple jurisdiction
In addition to having to consider the federal tax issues created by NIL, college athletes must also account for the various states that will be looking to tax them. College athletes regularly engage in competitions in multiple states throughout a season; schools in larger conferences can easily engage in activities in 10 or more states each year. And if the college athlete performs any action in these states that is related to their NIL deal, or if they travel to another state to promote a product or shoot a commercial, they can be subject to tax in these states as well. The first state that will look to tax the NIL income is the state where the college athlete is considered a resident, which would be where the athlete maintains their permanent residence. That state would be able to tax all of the income created by the NIL deal, even if none of the performance of the deal occurred in that state. In addition, each state where the college athlete earned money through the performance of the NIL deal would be able to tax a portion of the total earnings of that deal proportional to the amount of activity performed in that state. 

In rarer cases, the college athlete may also have to consider the international tax implications of their NIL deal. If the performance of the NIL deal involved any actions conducted internationally, an example being a promotional opportunity conducted at an international competition or the Olympics, that college athlete may also have to pay taxes on the income earned in that country. 

Final thoughts
The rise of NIL has finally allowed highly marketable college athletes to capitalize on their positions in the same way that almost every other person in the United States can. Along with this increased ability to monetize themselves, there comes an increased level of diligence that these college athletes must have when handling their taxes. The great variety in the types of NIL deals and the amount of money involved in them means that understanding the tax ramifications of these deals and how to comply with them are crucial. Because of the complexity of the tax issues involved, college athletes should consider having any NIL deal reviewed by a CPA or tax attorney and seek assistance in ensuring they are doing what they are supposed to do. 

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