The Tax Bill for NIL

Athletics programs, particularly football and basketball, bring universities a huge amount of visibility and revenue. The marketing and promotion of prominent student-athletes drives quite a bit of that notoriety and money. 

Traditionally, the National Collegiate Athletic Association (NCAA) prevented student-athletes from receiving money, endorsements, or “perks” under the premise that student-athletes should be “amateurs” and, therefore, shouldn’t be “paid” while in college. Athletes could only be compensated with scholarships covering tuition and room and board. 

But after immense pressure to let student-athletes share in the immense revenue and exposure their personal brands generate, the NCAA lifted its prohibition on student-athletes monetizing their name, image, and likeness (NIL) in 2021. Today, student-athletes receive a staggering amount of NIL money. For example, University of Texas quarterback Quinn Ewers has NIL deals worth around $2 million and Louisiana State University gymnast Livvy Dunne has an estimated NIL valuation of nearly $4 million.

This massive shift creates lucrative opportunities for athletes and athletic programs. It also raises several interesting tax questions, for athletes and sponsors.

How do NIL deals work?  

Under NIL deals, athletes engage in activities promoting their name, image, and likeness and receive cash or noncash payments in return. These activities could include endorsement deals, merchandising such as T-shirts or other gear, public appearances and autograph signings. There are limitless ways for student-athletes to get paid, but these are the most common ones: 

• NIL collectives are private corporations that raise money from donors and then pay out income to athletes. These NIL collectives, such as 1PACK for NC State University, are usually affiliated with a university but operate independently from the university. They exist because NCAA rules still prevent universities from directly paying student-athletes. 
• Private sponsors, often local or national businesses, can give athletes cash or noncash payments for endorsements or personal appearances. For example, a student-athlete could earn money for attending an autograph signing or get a complimentary vehicle for appearing at a local car dealership. In this case, the payments come directly from the business rather than from a large NIL fund. 
• Charitable NIL collectives, created primarily to promote and support specific 501(c)(c) charities, are another common source of NIL payments for student-athletes. 

What are the tax implications of NIL deals for student-athletes? 

For tax purposes, NIL income functions differently from other types of compensation student-athletes have historically received.

Unlike the scholarships that used to be a student-athlete’s only direct compensation for playing, NIL payments are taxable income. When athletes receive payments from NIL collectives or businesses, they’ll most likely receive a tax document, such as a 1099 form at the end of the year, which the business also sends to the IRS to report the income paid to the recipient. 

And unlike wages from part-time jobs, which some student-athletes may have held while in college, NIL payments probably don’t come with taxes withheld. It’s very important for student-athletes to track their NIL earnings and make periodic estimated tax payments throughout the year. If they don’t—or if they underestimate their income and underpay—they might end up with a large tax surprise (and potentially a tax penalty) at year end.  For example, a college quarterback with $1 million in NIL deals—the average income for a Southeastern Conference quarterback—in 2023 would have owed approximately $325,000 in federal income tax. If he didn’t pay any tax throughout the year, he would have had to write a huge check when filing their tax return. He may have also owed penalties and interest on this underpayment. 

Athletes should also remember that noncash NIL payments constitute taxable income. If a local car dealership lets the athlete drive a vehicle for free that would normally cost $1,000 per month to lease, the market value of the car is taxable income. In this scenario, the athlete would generate $12,000 of taxable income for the year, despite not receiving any cash. Therefore, athletes who receive noncash payments will want to make sure they save some money from their other cash NIL payments for taxes on their noncash income. 

Another important tax matter: Student-athletes who receive NIL income are considered self-employed individuals, so they must also pay the employer and employee portion of FICA and Medicare taxes, which total 15.3 percent of income up to the FICA cap of $168,600 (as of 2024) and 2.9 percent on any income above the FICA cap. 

Self-employed tax status isn’t all bad news for these athletes, as they have the potential to generate tax deductions for their business activities. For example, if athletes need to hire advisors or pay excess travel costs for their business-related activities, these expenses can become tax deductions that would lower their taxable income. Many of these deductions have caveats and require precise execution, so it’s imperative that athletes carefully track their business-related activities and costs.

What are the tax implications of NIL deals for sponsors? 

Prior to the NIL days, college sports supporters could make donations to booster clubs, and their donations were largely tax-deductible as these organizations were tax-exempt. And, until recently, that was true of payments to large NIL collectives, too, since they were often organized as tax-exempt 501(c)(3) organizations. That meant donors could continue having a big, direct impact on their beloved teams by making NIL donations. 

More recently, however, the IRS has asserted that NIL collectives aren’t really charitable organizations and, therefore, should not qualify as tax-exempt. Accordingly, newer NIL collectives haven’t gotten tax-exempt status, and their donors haven’t been able to claim tax deductions for their gifts. For a high-income donor with a marginal tax rate of 37 percent, a $100,000 donation to an NIL collective would save them $0 in taxes, instead of the $37,000 tax savings they got from an equivalent gift to the old booster club. For this reason, some NIL collectives—including 1PACK— have begun partnering with charitable organizations so that donors can make tax-deductible support payments. 

That’s the case for large donors with high incomes. Many taxpayers won’t feel those effects, though. Since the passage of the Tax Cuts and Jobs Act of 2017, only 10 percent of taxpayers itemize deductions each year. So sports enthusiasts who don’t itemize but do want to support student-athletes won’t be affected by the NIL collective’s loss of nontaxable status. 

Taxpayers who own businesses can support student-athletes while saving on their taxes by making payments or providing property directly to the athlete. For example, a local business that pays an athlete to speak or appear can most likely deduct the cost as an ordinary and necessary business expense. Similarly, the business can deduct the cost of a product it lets an athlete use for free as an advertising expense. 

For fans who own businesses, directly supporting athletes  may offer more control over how they support the student than donating to non-tax-exempt NIL collectives—and save them money on their taxes.

Our recommendation to athletes: Plan ahead

NIL deals have changed college sports and opened huge possibilities for student-athletes. But with great possibility comes great tax responsibility—possibly for the first time, since the vast majority of these athletes haven’t had any exposure to or training on tax and other financial considerations. They may be receiving massive payments and have very low living expenses, so they are tempted to spend big. 

We strongly recommend that athletes who receive NIL money consult tax and financial planners to make sure they maximize opportunities for efficient tax planning and don’t end up with tax surprises. We also encourage the universities the athletes represent to provide enhanced resources that prevent players from falling into financial hardships related to their tax bills. 

Finally, it’s important for these young athletes to take a long-term perspective on these potentially massive earnings. If they invest and save their current NIL earnings wisely, they can have a huge jumpstart on growing their wealth for the future. 

Nathan Goldman and Christina Lewellen are associate professors of accounting at the Poole College of Management.