Name, Image & Likeness has had a seismic shift in collegiate athletics where the athletes and the schools that embrace them have had to make adjustments when it comes to areas like NCAA compliance, marketing assistance, and booster involvement, to name a few.
One area that could certainly be added to the above list is tax issues. We wanted to learn more so we reached out to Morgan Lewis Partner Michael Kummer for an interview, which follows below:
Question: With college athletes making money for the first time from NIL, what tax responsibilities do they have?
Answer: Athletes receiving money for their name, image, and likeness (NIL) generally have the same responsibilities as all taxpayers. Specifically, to determine their federal, state, and local income tax liabilities, report them to the IRS (and any applicable state and local agencies), and pay tax accordingly. But for several reasons, the stakes are both higher and more complicated for athletes entering into NIL deals. First, athletes entering into NIL deals might earn substantially more income than the typical college student working at, for example, a bookstore or local restaurant. And they might earn that income from NIL deals with various companies, as opposed to working at a single bookstore or restaurant. Second, the tax rules applicable to income from NIL deals are both more complicated and less certain than for typical college students. For example, NIL deals can themselves be complex, and the IRS hasn’t yet issued detailed guidance regarding the tax treatment of NIL deals for college athletes. Special federal, state, and local tax considerations might apply depending on (1) how the compensation for NIL is structured (e.g., in cash, property—such as digital assets—or other “in-kind” payments, or otherwise), the requirements and restrictions imposed upon the athlete, and when the compensation is paid; (2) whether the athlete is a U.S. citizen or a foreign citizen; (3) the location of the company with whom the athlete enters into the NIL deal; and (4) the various states and local jurisdictions in which the athlete lives, attends school, and competes or trains. Third, most young athletes entering into NIL deals will be in uncharted territory—they likely have little to no prior tax experience or knowledge and may not have ever filed a tax return. For these reasons, athletes should enlist an independent tax advisor (a CPA or tax attorney, for example) for assistance and guidance on their tax obligations arising from NIL deals. Finally, athletes should also keep good records. Under the tax code and regulations, athletes entering into NIL deals have the responsibility—like all taxpayers do—to keep records “sufficient to establish” their tax liabilities and to keep the records “so long as [they] may become material in the administration of any internal revenue law.”
Q: Is the school required to withhold taxes similar to employers?
A: Not necessarily. As a general rule, “employers” are obligated to provide their “employees” with Forms W-2 that report the wages paid to the employees and the federal income tax withheld on those wages. But NIL deals have several important differences from the typical employer-employee relationship. First, athletes enter into NIL deals with organizations other than their schools—such as apparel companies, food and beverage companies, car companies, organizations indirectly affiliated with the schools, and many more. These arrangements alone—often with private or public companies and not the athlete’s school—do not make the school the athlete’s “employer” or the athlete the school’s “employee.” Second, these arrangements also do not necessarily make the athlete the “employee” of the company with whom they enter into the NIL deal. While it may be possible for an NIL deal to create an employer-employee relationship between the company and the athlete, the typical example would cause the athlete to be a self-employed “individual contractor” of the company. Instead of a Form W-2, these companies would be obligated in most cases to provide the athlete (and the IRS) with a Form 1099. The athlete, on the other hand, might be liable for income tax and self-employment tax, and required to make estimated tax payments on a quarterly basis throughout the year. But the devils in the details, and the tax treatment of the athlete and company entering into the NIL deal might change depending on the facts and circumstances of how the deal is structured and the residency of the athlete.
Q: Where are potential enforcement or litigation risks from this new tax landscape?
A: There are several. First, the uncertainty and complexity above create pitfalls for aspiring athletes grappling with tax compliance obligations that are likely new to them. Second, the Inflation Reduction Act will provide approximately $80 billion of additional funding for the IRS over 10 years. The bulk of this funding is expected to be deployed in IRS “enforcement” initiatives (e.g., audits). While the enforcement focus is expected to target the wealthiest taxpayers, extremely successful athletes receiving NIL deals should expect some additional enforcement focus. Third, there is some precedent for the IRS pursuing tax litigation against athletes earning income from endorsements. For example, the IRS previously litigated cases regarding the tax treatment of NIL deals against the professional golfers Sergio Garcia (Garcia v. Commissioner) and Retief Goosen (Goosen v. Commissioner). And one of the most talked-about tax cases from the Supreme Court in recent memory—Mayo Foundation for Medical Education and Research v. United States—dealt with an IRS regulation governing the tax treatment of medical school students working in hospitals and earning taxable income during their residencies. So, as questions emerge about the tax treatment of college athletes and NIL deals, they’re likely to arise during audits or, ultimately, in tax litigation.
Q: Any regulatory changes you’re watching that could affect this space?
A: Keep an eye out for action from Congress. NIL deals for college athletes were made possible by a Supreme Court case (National Collegiate Athletic Association v. Alston), not legislation. So, Congress may chime in with legislation at some point soon. Indeed, Senators John Thune and Ben Cardin recently proposed bipartisan legislation (the Athlete Opportunity and Taxpayer Integrity Act) that would have amended the tax law to deny a charitable contribution tax deduction for donations to various organizations and collectives that fund NIL deals. While the legislation has not been enacted, it is possible that it—or other legislation—might be enacted at some point. Guidance from the IRS would also be helpful—both for athletes and companies.
Q: Anything to add?
A: I’d echo the comments that University of Kentucky men’s basketball coach John Calipari posted on Instagram recently. Specifically, that athletes should get educated on “taxes [and] financial empowerment” and “work with compliance to maximize their opportunities yet work within the spirit of [the] rule[s].” Aspiring athletes should treat tax compliance like other aspects of their training regimes. Just as they do in the weight room or on the field (learning and seeking guidance from trainers and coaches), athletes entering into NIL deals should seek and rely on professional tax advice. Doing so will best set them up for long-term success.
