In early July 2021, the National Collegiate Athletic Association (NCAA) announced an interim policy change (applicable to all three NCAA divisions) to allow athletes to profit off their name, image and likeness (NIL).

This change was prompted by the June 2021 unanimous Supreme Court decision that stated restricting “non-cash education-related benefits” for college athletes violated antitrust law.

Using social media, athletes are receiving money, gifts or free meals in exchange for promotion of local businesses, as well as partnering with brands to advertise through social media channels and launching their own businesses.

Athletes should be reporting their NIL activities to their school and the school is responsible for ensuring the activities are consistent with state law. With the legal side potentially covered, the lurking question is, who is advising student athletes on the tax consequences of these deals?

Congress and the IRS have been rather silent on the issue. Bills have been introduced at the federal level and many states have either passed or also introduced legislation. Without concrete guidance from the IRS, practitioners will need to interpret and apply what is known.

Some of the tax issues student athletes face will be similar to those of professional athletes. But because student athletes cannot currently receive a wage for playing, they won’t have to deal with the nonresident state issues professional athletes encounter, and hopefully will only deal with a single state filing requirement, rather than multi-state filings.

Applying current tax law, the income these athletes are receiving generally will be classified into two categories:

• Nonpassive (personal service)
• Passive income (royalty)

For every revenue activity the athlete is involved in, a determination must be made as to whether the athlete has material participation. One of seven tests needs to be met for there to be material participation in an activity. If there is material participation, the activity is nonpassive and the income generally will be subject to self-employment tax, assuming the student isn’t receiving a W-2.

Nonpassive

This would be personal service-based income the athlete is involved in (think earned income). Activities include revenue generated from commercials and social media. The income generated from these activities would generally be subject to self-employment tax.

It will be important to determine if the activities rise to the level of a trade or business. If yes, then many of the expenses incurred to generate that income may be tax deductible. If no, then the hobby loss rules are applied and the income is not subject to self-employment tax and expenses are not deductible.

If the activity is subject to self-employment income, a tax professional may recommend forming an S corporation and paying the athlete a salary. However, a team of advisors – including parents, attorneys, agents – should determine what is in the best interest of the athlete and to fully understand contract terms.

Passive

If the income is not nonpassive (one of the material participation tests was not met), the income will be passive. A big issue with the athlete’s income being nonpassive is kiddie tax.

The athlete is subject to kiddie tax if all the following apply:

1. The child’s unearned income was more than $2,200 [amount increases to $2,300 in 2022]
2. The athlete meets one of the following age requirements:
   • Under age 18 at the end of the tax year
   • Age 18 at the end of the tax year and didn’t have earned income more than half of the athlete’s support, or
   • A student at least age 19 and under age 24 at the end of the tax year and the athlete didn’t have earned income that was more than half of their support
3. At least one of the child’s parents was alive at the end of the tax year
4. The child is required to file a tax return for the tax year
5. The child does not file a joint return for the tax year

Keep in mind, the kiddie tax rules are not impacted by the dependency rules. An athlete filing their own income tax return will be subject to the kiddie tax if the criteria are met regardless of if they could be claimed as a dependent by their parent(s).

It will be interesting to see if Congress or the IRS provides additional guidance or legislation in this area, as the impact could potentially affect a lot of college and high school athletes. For example, Hercy Miller, an incoming freshman basketball player at Tennessee State, signed a four-year ambassador deal, worth approximately $2 million, with WebApps America (a technology company).

Further issues are also raised concerning how the recent interim policy change will impact nonresident student athletes, especially with the lack of guidance available, For instance, would a nonresident student getting paid for NIL violate the terms of a visa?

Many questions will arise once tax practitioners start working with student athletes (and their parents). The preparer should be familiar with the §7216 disclosure rules and may need to have consent forms signed.