In the world of high school and college sports, NIL has opened up a new world of financial opportunities for athletes. However, with new income streams comes the responsibility of managing taxes effectively. Athletes, particularly those new to NIL, need to be aware of the potential tax implications to avoid trouble with the IRS. Here are several strategies that can help athletes avoid tax trouble associated with their NIL earnings.
How to Avoid Tax Issues with NIL Earnings
1. Understand Your Tax Obligations. The first step in avoiding tax trouble is understanding your tax obligations. NIL earnings are considered taxable income by the IRS. This means that any money earned through endorsements, sponsorships, or other NIL activities must be reported on your tax return. It’s important to keep detailed records of all income sources, including any expenses you might incur, to ensure accurate reporting come tax season.
2. Set Aside Money for Taxes. One of the biggest mistakes athletes can make is failing to set aside money for taxes. Unlike traditional jobs or employment where taxes are withheld from your paycheck, NIL earnings are usually paid in full without any taxes taken out. To protect yourself and plan for tax season, set aside at least 30% of your NIL income for federal and state taxes. This will help prepare you with the funds or savings needed for when tax season arrives.
3. Hire a Tax Professional. Navigating the complexities of tax law can be daunting, especially for young athletes with substantial NIL income. Hiring a qualified tax professional, such as a certified public accountant (CPA) with experience in sports or entertainment, can provide invaluable assistance. A tax professional can help ensure you are in compliance with tax laws, identify deductions and credits you may be eligible for, and plan for future tax liabilities. Even though it costs extra money, it’s well worth hiring a professional to help guide you.
4. Keep Detailed Records. Keeping meticulous records of your income and expenses is crucial. This includes contracts, invoices, receipts, and bank statements. Detailed records not only make it easier to prepare your tax return but also provide essential documentation in the event of an audit. To save time, I keep all of my income records in one folder so that I can easily upload those files when it’s time to file taxes.
5. Understand Deductible Expenses. Athletes can often deduct expenses related to their NIL activities, reducing their taxable income. Common deductible expenses may include marketing costs, professional fees (such as for accountants or agents), travel expenses related to endorsements, and even a portion of home office expenses if you conduct business from home. Understanding what expenses are deductible can significantly lower your tax liability.
6. Consider Forming an LLC. Forming a Limited Liability Company (LLC) can offer several benefits, including potential tax advantages. An LLC allows you to separate your personal and business finances, providing liability protection and possible tax deductions. It can also simplify the management of income and expenses related to your NIL activities. Consult with a tax professional to determine if forming an LLC is the right move for you.
7. Stay Informed About Tax Changes. Tax laws and regulations can change frequently. Staying informed about these changes is crucial to maintaining compliance and minimizing your tax liability. Subscribe to tax newsletters, follow reputable tax advice websites, and maintain regular contact with your tax professional to stay updated on any changes that could impact your NIL earnings.
8. Plan for Quarterly Tax Payments. If you expect to owe more than $1,000 in taxes for the year, the IRS requires you to make quarterly estimated tax payments. Failing to make these payments can result in penalties and interest charges. Work with your tax professional to calculate and schedule these payments, ensuring you stay on track throughout the year.
9. Be Aware of State Tax Obligations. NIL earnings can be subject to state taxes, which vary significantly by state. If you earn income in multiple states, you may have to file multiple state tax returns. Understanding the tax laws in each state where you earn income is essential. Here is where a tax professional can help you navigate these complexities and ensure you meet all state tax obligations.
10. Educate Yourself and Seek Advice. Finally, taking the time to educate yourself about tax basics and seeking advice when needed can go a long way in avoiding tax trouble. There are many resources available, including videos, online courses, and seminars that can provide valuable information on managing taxes effectively.
Managing NIL earnings and the associated tax obligations can be challenging, but with careful planning and the right professional guidance, athletes can avoid tax trouble and ensure they are maximizing their financial opportunities. By understanding your obligations, keeping detailed records, and seeking professional help, you can focus on your athletic career with the confidence that your financial affairs are in order.