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 their income tax situation. Many of the athletes you can name off the top of your head are being paid from multiple sources besides the team they play for.
The complexities of professional athletes’ returns actually vary from sport to sport because states have a different tax for different sports. States do not have the same laws as each other and many states have cities within them that also charge income tax. Imagine an NFL team plays 4 preseason games and 16 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 states tax laws, they could end up receiving several tax letters. Since states have different ways of taxing different sports it is much more complicated than just knowing the state laws for athletes. Many have tax laws where you need to know what time of day the athlete arrived and left the city. Athletes in the NBA can travel up to twice as many states with varying schedules. The intricacy so far derives from their single W-2 from their contracted team. Teams and players’ associations do try to provide some insight to players on the subject and the teams will even whole income tax for each state they play in. Often these amounts are wrong 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 an athlete’s tax situation. What if an athlete has an endorsement? Endorsements are recorded on a 1099 and can be subject to self-employment tax. Now, as you can guess, endorsements are not only paid in cash. Some athletes receive “swag,” items that they receive can range from shoes to watches to tickets to music and athletic events. These items must also be included in the income of the athlete. One recent change to tax law at the national level is the taxability of Olympic medals. If an athlete makes less than $1 million, the value of the prizes received from competing and winning the Olympics would not be taxable. Tax planning becomes essential for these taxpayers as they go through the year. 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 goals.
Cristian Rath, CPA