Just like any other W-2 or 1099 income, money made from name, image, and likeness (NIL) deals is taxable. NIL taxes can be confusing as deals often include non-cash payments and other perks.
This quick guide aims to answer some of the burning questions about NIL deals and tax implications.
Who Can Earn NIL Income?
NIL income is earned by student-athletes who, thanks to a Supreme Court ruling, can be compensated for the promotional or commercial use of their name, image, or likeness. NIL deals have increased in popularity in the age of social media, with some high school and college athletes making millions.
LeBron James’ son, Bronny, is the top NIL earner ($6.8 million), followed by LSU gymnast Olivia Dunne ($3.4 million).
Sponsorships, brand deals, and endorsements were once reserved for elite professional athletes. Now, it is a more level playing field and opportunities are available for all kinds of athletes, whether students or professionals.
The NIL market is currently estimated to be worth up to $1 billion and is expected to grow to $5 billion within five years.
What are the Types of NIL Income?
There are several types of common NIL income, including cash or gift cards, cryptocurrency, NFTs, and merchandise. If any of these items are exchanged for appearances, coaching sessions, autographs, endorsements, social media posts, or any service, they are taxable.
It is important to accurately report NIL income, as the IRS is aware of its popularity, and it is showing up on more student athletes’ tax returns.
What are the Tax Implications of Signing an NIL Deal?
Many colleges advise athletes to consult a tax professional before signing an NIL deal because of the tax implications. The first $600 earned from NIL deals does not need to get reported to the IRS. However, when more than $600 is made, all NIL income must be reported on a 1040 tax return.
There are additional tax forms, for example, if a student-athlete is paid via cryptocurrency or receives any gifts as part of an NIL deal.
How do You Report NIL Income on Your Federal Tax Return?
When you receive payment for your NIL deals, you are essentially an independent contractor and are considered self-employed for tax purposes. Remember, you will receive a Form 1099-NEC for each NIL deal over $600.
It is important to accurately report all NIL work as there are relevant deductibles that can help save money in the long run.
Can Expenses Be Deducted from NIL Income?
Yes! There are many tax-deductible expenses associated with NIL income. Some of the most common include travel expenses, hotel stays, rental vehicles, marketing, and agency fees. It is important to document everything related to NIL work as it should be treated like any other kind of self-employment.
What is the NIL Income Tax Rate?
For 1040 returns, the IRS taxes NIL income at the self-employment tax rate of 15.3%. For state returns, the NIL tax rate depends on the state. Also, some states may tax up to 13.3% percent and they each have different rules about what deductions can be applied.
It is important to consult a tax professional to find out what taxes you will pay for your NIL deal, what deductions you can apply, and what is eligible as expenses.
What are the IRS Penalties for Failing to Report NIL Income?
If a student-athlete fails to report their NIL income, the IRS charges late filing and late payment penalties just like they do for other self-employed individuals. For example, you are charged 5% of your unpaid taxes per month if you file your NIL income late.
Thankfully, this penalty gets capped at 25% of the total tax you owe.
How Does the IRS Help Student-Athletes Who Can’t Afford to Pay NIL Taxes?
Some options include setting up a monthly IRS payment plan, requesting penalty relief to reduce the NIL tax debt, or settling your unpaid taxes via an Offer in Compromise for less than you owe.
It is important not to panic if you fall behind with your NIL taxes, as help is available. If you need more help, you can start online by answering 6 simple questions. We never charge for ‘investigations’ or consultations.
You can also call us at 866-568-4593.
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