Student athletes and potential NIL money
Fall sports season is in full swing in the Region. Football, volleyball, soccer and cross country are the headliners, and when I watch these kids on the field I wonder if they were as big and fast as they are now when I was in high school 40 years ago. I don’t think so, these kids nowadays are amazing.
We have some tremendous athletes in the Region, and some tremendous sports programs. I know how much time, work and money families invest in their student athletes. For some it’s a way of life.
Regardless, if openly expressed, I know as a dad myself, somewhere deep in a parent’s heart is the hope their student athlete will be able to compete at higher and higher levels, and eventually perhaps even be recognized for their abilities and hard work through scholarships, and in the past few years increasingly through the “NIL” program of compensating college athletes.
The NIL is an acronym for Name, Image and Likeness, and it refers to the set of athletic rules which enable athletes to be compensated for the use of their personal likeness. The practice started in college, but I now understand high school athletes in some states are receiving NIL compensation as well.
I am not going to get into the merits, pros and cons of this practice in this column. The NIL is here to stay, and last summer additional rules and guidance were developed following a legal settlement between athletes and the NCAA. These rules established new control structures and further defined payment practices, moving the NIL in my mind from a murky system to one which is much more clearly defined.
Now, as some client families have begun to participate in NIL payments, the financial planning pertaining to these revenues is evolving as well. So, for all those young athletes and their families working hard this fall in hope of attaining NIL compensation, particularly at the college level, let’s go through some planning and tax tips I think it helps to be aware of.
NIL payments now come from two sources. Payments can come directly from colleges themselves in a form of revenue sharing based on the school’s athletic department revenue derived from ticket sales, sponsorships and media rights. This revenue flows through a system call CAPS (College Athlete Payment System) and is monitored by a new system called the College Sports Commission, which subjects the payments to limits on the school level.
The schools pay this revenue to the athlete as a royalty payment, reported on tax form 1099-MISC and filed on the tax return under the Schedule E (rents and royalties). This income is considered passive and is subject to income taxes, but not subject to 15.4% payroll taxes (Social Security and Medicare). Some limited expenses such as agent commissions, legal and professional fees, insurance, taxes on the rights, and management costs can be deducted from these revenues for tax purposes.
The other source of revenue payments is the updated version of the original NIL structure, which is comprised of third-party sources such as branding, local advertising and boosters. These (somewhat murky) collaborations of interests are known as NIL collectives, and any payment over $600 from a collective to an athlete must flow through the NIL GO program administered by accounting firm Deloitte. These payments are still monitored by the College Sport Commission, but they are not subject at this time to limits and caps.
Generally, revenue from this source above $2,000 is reported to the athlete on tax form 1099-NEC, non-employee compensation, and is filed on the Schedule C (self-employment income) on the tax return. Net income on the Schedule C is subject to income taxes and self-employment taxes but the Schedule C facilitates a much broader range of expenses to be deducted against this revenue. Some examples of potential expenses that can be deducted on the Schedule C are agent fees, travel expenses, athlete paid athletic and fitness trainers, equipment, communications costs such as a portion of cell phone expenses, laptops used to administer the athlete’s activity and other reasonable expenses that enable the athlete to be competitive. Net income reported on the Schedule C can also be used to fund tax advantaged retirement plans and help the student athlete begin to prepare for the long term.
For young athletes with prospects of receiving NIL payments in the future, or for athletes already engaging in NIL agreements, the first thing we recommend is the creation of an operating LLC (Limited Liability Company) which can be used to receive revenue and operate the small business that is the athlete’s career. We also suggest working with a qualified and experienced tax advisor, and often an attorney who can help set up business structures and help draft control agreements if necessary.
The NIL creates entrepreneurs out of young athletes, and like any other business venture the stronger the controls and processes, the cleaner and more productive it will be to operate the enterprise. If the journey down this road for an athlete begins to get serious, I recommend engaging professional assistance, such as agents, tax advisors, financial advisors and attorneys as early as reasonable. Sometimes hard work pays off and dreams to come true. It’s smart to be ready if it does.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.
Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com .
Securities offered through LPL Financial, member FINRA/SIPC.
