Professional athletes have become world-renowned. Their careers and personal lives are splattered across the media each and every day. One thing you may not hear about is athlete income tax situation. Many of the athletes that are household names are being paid from multiple sources beyond the team they play for.
The complexities of professional athlete taxes actually vary from sport to sport because states have a different tax for different sports. Most states do not have the same tax laws, and many states have cities within them that also impose income tax. Imagine an NFL team plays 4 preseason games and 17 regular season games. We can assume half of those games will be on the road. If they don’t play against teams within the state, then a player on the team who played in all the games would likely be filing taxes in 11 states plus at least 2 municipality tax returns. If an athlete hires a CPA who doesn’t take the time to review and research each state’s tax laws, they could end up receiving several tax letters or notices. Since states have different ways of taxing different sports, it is much more complicated than just knowing the state laws for athletes. Many states have tax laws that require information like what time of day the athlete arrived and left the city for games. Athletes in the NBA can travel to twice as many states as NFL players due to varying schedules and more games/teams faced. The intricacy so far derives from their single W-2 from the player’s contracted team. Teams and players’ associations do try to provide some insight to players on the subject, and the teams will often withhold income tax for each state the player and the team plays in. Often, these amounts are incorrect and do not take into effect many of the agreements between states or the tax rates applicable to that particular athlete. It is helpful, though, to have some money taken out rather than none to avoid penalties.
There are a few more items that cause complexities of professional athlete taxes. What if an athlete has an endorsement? Endorsements are recorded on a 1099 and can be subject to self-employment tax. As you might guess, endorsements are not only paid in cash. Some athletes receive “swag” as a part of an endorsement deal – items that they receive can range from shoes to watches to music and athletic event tickets. These items must also be included in the income of the athlete. One change to tax law at the national level is the taxability of Olympic medals. If an athlete makes less than $1 million from competing and winning events at the Olympics, the value of the prizes received would not be taxable. Tax planning becomes essential for these taxpayers as they go through the year because of the assortment of tax issues they can face. Athletes use their money for many things, and showing them how to spend it to maximize tax savings is critical in helping them achieve their goal
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