If you’re a college athlete profiting from your name, image, and likeness (NIL), your tax situation can be a complicated topic. Sometimes it’s hard to know where to start — that’s why we’ve put together a list of seven tips to help you prepare for your next tax season.
1. Get in touch with the experts.
If you’re in the dark about how NIL income might affect your taxes, financial aid, and more, you’re not alone. This is new territory for everyone — students, schools, and even the IRS.
NIL compensation is taxable income. Because of this, you’ll need to report this income on your FAFSA, potentially impacting your eligibility for need-based financial aid packages. Before signing any NIL deals, it would be wise to contact your school’s financial aid office for answers on how this type of income could impact different kinds of financial aid, such as scholarships or Federal Pell Grants.
How certain scholarships might be affected by NIL income is entirely dependent on the institution and its individual policies.
As a student-athlete, you are now allowed to hire an agent for professional representation. If this is in your budget, an experienced agent can be an invaluable asset to help negotiate marketing deals, educate you on NCAA rules, build your brand, and navigate your personal finances.
2. Consider forming a legal business entity.
Depending on how many endorsement deals you plan on signing, you may want to consider forming a legal business entity such as an LLC or corporation.
Each business structure has unique tax implications, so you’ll want to pick the one that works best for your business goals. A formal business can provide valuable benefits like personal liability protection and tax deductions for qualified business expenses.
Starting a business may sound complicated, but forming an LLC or corporation can be fairly straightforward. It’s not a decision to make lightly, however. Becoming a business owner is a big responsibility, and you’ll need to pay close attention to your state’s compliance requirements and tax laws. Many entrepreneurs opt to hire a registered professional agent to help them handle the ins and outs of running a business.
3. Know how NIL income can affect your dependency status.
Many parents claim their college students as dependents on their tax returns. However, your dependency status is contingent on how much financial support your parent provides you.
The IRS generally allows your parents to claim you as a dependent if they provide more than half of your financial support, such as your education expenses, healthcare, food, lodging, etc.
If your NIL sponsorship income outweighs the financial support provided by your parents and you use the income to support yourself, your parents will probably not be able to claim you as a dependent. This could make you eligible for tax credits or deductions you wouldn’t otherwise qualify for (more on that in the next section).
4. Find ways to lower your tax bill.
You may be making more money as a college athlete capitalizing on your NIL, but you can still find ways to lower your taxable income and save some hard-earned cash.
As we mentioned above, forming a business or operating as a sole proprietor can open the door to valuable tax deductions that can help you lower your taxable income. Business-related expenses such as travel costs, meals, equipment, advertising fees, and more could all be potential tax write-offs.
Other tax benefits for student-athletes include education credits. As a student, you could qualify for the partially refundable American Opportunity Tax Credit or the Lifetime Learning Credit, as long as you can’t be claimed as a dependent on a parent’s tax return. You could also set aside some money for future you in the form of retirement contributions.
5. Track your NIL income and expenses.
If you’re earning steady money from NIL deals, it’s time to become a bookkeeping whiz.
The IRS categorizes most NIL earnings to be self-employment income. This means it’s essential to keep track of all your income and business expenses. Make sure you keep your receipts as well. You’ll need this information to accurately record your income (and possibly deductions) on your tax return and to pay any quarterly estimated taxes — more on that below.
When you earn at least $600 in endorsement income, you should receive Form 1099-NEC from the company that paid you. This informational form reports the total income you earned from that company during the tax year. Any 1099s you receive will help you fill out the appropriate fields on your federal income tax return. But even if you don’t receive 1099 from a company you did business with, you should still report that income. So don’t sleep on good recordkeeping!
6. Set aside money for quarterly estimated taxes.
You’ll need to pay self-employment taxes when you earn more than $400 in self-employment income.
In contrast to typical W-2 employees, self-employed individuals don’t have any salary withheld for Medicare and Social Security taxes. This means you’ll need to set aside some money for self-employment tax, which you’ll pay to the IRS every quarter. We cover this topic in more detail in The Tax Realities of NIL Income.
You may also need to pay federal income taxes if you earn more than the standard deduction ($12,950 for a single filer in 2022). Depending on what state you live and work in, you may also owe state taxes.
Here’s an example: If you are a single filer who earned $10,000 in endorsement income in 2022, you won’t owe any federal income tax because you didn’t earn more than the standard deduction. However, you will probably still be on the hook for self-employment taxes.
7. Know how and when to file.
What kind of tax return you file will depend on whether you have a formal business entity or you’re simply filing as an independent contractor.
Each business structure follows different tax rules — for some, you might need to file a business tax return. If you’re an independent contractor, you’ll report your NIL income and expenses using Schedule C. Some types of small businesses also have different tax deadlines.
If you’re self-employed, estimated quarterly tax payments are due on the following dates:
- Q1 payments (income earned Jan. 1 to March 31) are due April 15.
- Q2 payments (income earned April 1 to May 31) are due June 15.
- Q3 payments (income earned June 1 to Aug. 31) are due Sept. 15.
- Q4 payments (income earned Sept. 1 to Dec. 31) are due Jan. 15.
Payments are due on the following business day if any of the above dates fall on a holiday or weekend.
TaxAct is here to help
Being concerned about your taxes is normal, especially when making NIL money for the first time. Thankfully, TaxAct® makes it simpler for you to file by asking you personalized questions about your finances and pulling the necessary tax forms for your unique situation.
When you e-file with us, you also have the option to set up scheduled Electronic Funds Withdrawal for your quarterly estimated tax payments. And if you qualify for a federal tax refund, you can apply all or part of your refund to next year’s taxes if you choose. It doesn’t get much more convenient than that!
This article is for informational purposes only and not legal or financial advice.
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