NIL Deals and Tax Implications: A Guide for College Athletes

Historically, college athletes have been prohibited from monetizing their name, image, and likeness. That changed in 2021 when the National Collegiate Athletic Association (NCAA) introduced interim rules allowing athletes to leverage their personal brands for financial gain.

While the rule change has opened up new opportunities for athletes to earn money while in school, some important tax considerations surround NIL deals.

Introduction to NIL Deals and Tax Implications

NIL deals allow student-athletes to benefit financially from the use of their name, image, and likeness, regardless of where their school is located. Introduced in 2021, the NCAA’s NIL policy permits the following:

• Athletes can engage in NIL activities that are consistent with the laws of the state where they attend school.
• Students who attend schools in states that lack NIL laws can still take part in NIL deals without violating NCAA rules.
• Student-athletes may use professional service providers for NIL activities.

The NCAA requires schools that are located in states with NIL laws to ensure that any deal-related activities are compliant. Most states have such laws in place or have proposed legislation to address NIL deals.

Student-athletes are expected to report NIL activities to their school. Under the policy, any money, goods, property, or services college athletes receive from NIL deals are considered to be taxable income.

Taxability of NIL Income

As mentioned, the Internal Revenue Service (IRS) considers any money, goods, property, or services that a student receives from NIL-related activities to be taxable income that must be reported on their tax return. In that sense, NIL income is no different from income that’s reported on a W-2 or a Form 1099.

Examples of NIL deal income that must be reported and is subject to taxation include:

• Free products or services that an athlete receives in exchange for endorsing a brand or business
• Fees earned through student-focused activities, such as signing autographs or making promotional appearances
• Compensation from brand ambassadorship or sponsorship deals, including brand marketing conducted on social media channels
• Fees paid for public speaking engagements
• Money earned from appearances in televised advertisements
• Ad revenue generated through a YouTube channel, blog, or podcast that the student owns
• Royalties or fees earned through a licensing or merchandising agreement

Licensing via non-fungible tokens (NFTs) also falls under the umbrella of taxable income for NIL deals. If a student athlete enters into a licensing agreement for NFTs, any compensation they receive for publicity rights is taxable.

Payments received from NIL collectives are also considered taxable for athletes. The IRS has recently turned its eye to the tax status of NIL collectives, many of which have registered as 501(c)(3) organizations to enjoy tax advantages. Regardless of an NIL collective’s tax status, students who receive income from these organizations must pay tax on it.

Reporting NIL Income on Tax Returns

Athletes who receive NIL income will need to determine if they’re considered to be employees or independent contractors to report that income on their tax return. The organization providing the income to the student should be able to answer this question.

If a student athlete is an employee, they should complete Form W-4; student athletes who are independent contractors will need to submit a Form W-9. These forms allow the entity that’s making payments to the student to keep track of them and withhold tax if required.

Whether a student athlete needs to file a federal tax return to report NIL income from independent contractor activities will depend on how much income they made and whether their parents can claim them as a dependent.

Under IRS rules, some athletes are required to file a federal return to report self-employment income and pay federal taxes if they have net earnings of $400 or more in self-employment income from NIL deals, or if their income exceeds the standard deduction. Self-employment income of $600 or more is reportable on Form 1099.

If a student is filing a tax return to report NIL income from self-employment, they’ll need to complete the following:

• Schedule C, Profit or Loss from Business
• Schedule E, Supplemental Income and Loss, if they earned money from royalty payments

These forms will need to be attached to the student’s Form 1040 to determine their taxable income for the year.

Tax Withholding and Estimated Tax Payments

If a student is treated as an employee by an organization that’s paying them NIL income, their employer would be required to withhold taxes from their earnings. Again, students would need to complete a Form W-4 advising the employer how much to withhold.

Athletes with independent contractor status, however, are responsible for making estimated tax payments against their expected tax liability. Individuals are required to make estimated tax payments four times a year if they anticipate owing $1,000 or more in taxes when they file their return. Students must also pay estimated taxes at the state level if their state has an income tax.

The NIL income tax rate is the same as the self-employment tax rate. As of 2024, the self-employment tax rate is 15.3%. The rate includes a 12.4% Social Security tax and a 2.9% Medicare tax. An additional 0.9% Medicare tax may apply when your income, including income from self-employment or NIL deals, exceeds certain thresholds.

Here’s a quick example of how it might work: Say you earn $100,000 in compensation from NIL deals for the year. Without taking into account any deductions you might be eligible for, you would owe $15,300 in self-employment tax. It’s important to note that self-employment tax is separate from any income tax that you must also pay.

Deductions and Expenses for NIL Income

Tax deductions reduce taxable income, and students who receive NIL income may be able to claim them for certain expenses paid out of pocket. Eligible expenses can include:

• Travel expenses, such as hotels, airfare, or rental cars
• Meals
• Marketing expenses
• Mileage
• Equipment and supplies, such as a laptop or video equipment
• Website hosting
• Home office deduction

Students should keep accurate records of any expenses they plan to deduct. Examples of acceptable documentation include account statements, receipts, invoices, canceled checks, and credit card statements. Any documentation should clearly identify what the expense was for, when it was paid, and the amount.

State and Local Tax Considerations

In addition to federal tax, student athletes may be obligated to pay state taxes on NIL income. Whether a student athlete has to worry about that depends on where they attend school, not where they live. If they go to school in a state with NIL laws on the books, they must abide by the tax laws of that state.

Tax rules can get trickier when the student’s residency status comes into play, or when students earn NIL income in multiple states. Students who live in a state with a personal income tax would have to pay tax on any NIL income earned. Additionally, any state where the student earns NIL income but is not considered a resident could tax them as well.

In states that charge income tax, the upper tax rate tops out at 13.3%. Rules for tax deductions and what a student can write off for NIL expenses can vary from state to state.

Tax Planning Strategies for Athletes

Navigating the tax landscape may be confusing for student athletes and parents alike when NIL income is in the picture. Here are a few tips that may be helpful for managing tax liability associated with NIL deals.

• Keep accurate records of all NIL income received, as well as any expenses paid out of pocket associated with NIL activities.
• If you anticipate owing more than $1,000 in taxes at the end of the year, schedule estimated quarterly tax payments to avoid underpayment penalties.
• If you���re not comfortable handling your tax filing yourself, consider working with an accountant or tax expert who’s experienced in filing returns with NIL income.

Students may also consider opening a traditional individual retirement account (IRA) to enjoy an additional tax break. Traditional IRA contributions are tax-deductible, which could help to reduce a student’s taxable income for the year (and help them start saving for retirement).

Impact on Financial Aid

NIL income is treated the same as any other type of student income for financial aid purposes. This means that students who complete the Free Application for Federal Student Aid (FAFSA) must report NIL compensation as part of their adjusted gross income.

The amount of income that an athlete receives from NIL deals might affect the amount of aid that a student is eligible to receive. This may be one of the biggest drawbacks of NIL income, as student athletes who rely on financial aid to pay for higher education costs may receive less funding than they expect or need.

Parents and students may want to discuss the potential implications of NIL deals with the school’s financial aid office. Keep in mind that NIL deal income would not prevent a student from seeking private student loans if necessary.

Revenue-Sharing May Present New Tax Implications

In May 2024, the NCAA announced that it had reached a historic settlement with the nation's five biggest conferences. The settlement, estimated at $2.8 billion, stems from a court case brought by former students who argued that now-defunct rules prevented them from earning money through sponsorship and endorsement deals during their college careers. The case would require schools to pay money to athletes who competed before the current NIL rules were introduced.

Additionally, the ruling would allow student-athletes to benefit financially from both NIL deals and direct payments issued by their school going forward through a revenue-sharing model. The court's ruling would allow, but not require, schools to set aside up to $21 million in revenue which would be distributed among student-athletes. It's unclear, however, how schools would choose to share revenue and what the implications would be for athletes concerning Title IX.

Should schools decide to share revenue with students, that would have additional tax implications for athletes. Meanwhile, students who receive payments from the settlement may need to consult a tax professional as those amounts are generally considered taxable income by the IRS unless an exception applies.

The Bottom Line

NIL deals can offer students a chance to capitalize on their athletic fame, but the IRS has specific rules in place that they must follow for tax reporting. Students who fail to properly report NIL income run the risk of incurring tax penalties.

When in doubt, college athletes and their parents may benefit from speaking to a certified public accountant (CPA) or tax attorney to ensure that any NIL income is properly reported.