It’s about that time.
It’s tax season and if you’re a college athlete making those big NIL checks, it means you’ve got a big tax bill. (And if you’re making smaller checks, you’ve still got a tax bill.)
For most of us that work for a company, taxes get removed when we get paid. If you’ve ever gotten a check and asked “where’s the rest?” you know the deal. NIL is a little different. Money earned through a collective, endorsement money, or even Alston awards are not taxed up front. That means you’re on your own to figure out what you owe. The tax treatment of NIL money may vary depending on how it’s classified (e.g., as self-employment income or capital gains), but no matter what — you’re going to owe something.
Here’s a hypothetical example…
A big name college QB takes in more than $1M in endorsement dollars before the season in June. He buys a few things, invests, takes care of the fam and gets a car. Life is good. He has a great season and knows he’ll make more money — now and in the spring when he’s an NFL draft pick — so he’s not worried about saving…
April rolls around and he’s in the highest tax bracket. He does his taxes and gets some bad news. He owes Uncle Sam nearly $500K that he doesn’t have…. Now what?
Here’s how taxes work: the more money you make, the more taxes you pay (by %).
In April, the government calculates how much money you made the year before and how much is your tax bill. Most times if taxes are already taken out of your paycheck, the tax bill is minimal (sometimes you get money back).
If you didn’t pay anything, you owe what they tell you to pay. There are no reminders or email updates, this is 100% on you.
For 2022, individuals like our hypothetical QB earning more than $523,600 owe 37% in federal taxes and up to 13% additional depending on the state.
By the way, you likely have at least two tax bills to pay: You’ll pay federal taxes depending on your income, and in 42 states, you’ll pay state taxes based on an established percentage rate – add it all up and that’s the percentage of income that you owe.
So what should our QB do?
Figure out what, if anything, you have in the bank that you can provide for payment. You might need to sell assets or liquidate investments to raise cash, but note that could result in capital gains taxes or other costs at some point.
Next, set up a payment plan with the IRS asap. Be up front and transparent with how much you can pay and when. You’ll likely face additional penalties and charges, but you’re gonna have to come up with the cash somehow.
If you’re qualified, consider borrowing money from a bank or other lender. Do your best to avoid the bad actors promising to get you out of a jam. They may front you the money, but they’ll hit you hard on the back end. If you know you have guaranteed income coming soon and need to take a loan in the short term, do so with caution — and a well-vetted and approved source.
It helps to have a trustworthy accountant to help you navigate this process. If you don’t have one or can’t afford one, the IRS provides free resources for taxpayers, including tax preparation software and online tools for estimating tax liability. There are non-profits and financial literacy programs that offer free or low-cost tax preparation services and financial education resources as well. At Scout, we help you keep tabs on what you owe throughout the year so there are no surprises at tax time.
This is a challenging situation and there are tough choices. Don’t duck and hide. Remember that staying on top of your taxes means preparing today so you won’t be paying for it tomorrow, next month, next year and beyond. Have a plan to regain control so someone else can’t dictate your financial future. Taxes aren’t going anywhere. Get your reps in now so paying taxes becomes second nature.
Scout is a financial coaching platform that provides student-athletes with the knowledge and tools to facilitate personal financial success — from investing and saving to budgeting and tax-planning. We work with individual athletes, college teams and athletic programs to empower and protect students in the changing NIL landscape. Black-led, with a deep commitment to diversity, equity and inclusion, Scout is intentional about welcoming, educating, and guiding those from under resourced and marginalized communities.
