Recently, the college athletic landscape changed allowing athletes to sell their name, image and likeness (“NIL”) rights without losing their amateur status. While some high-level athletes will certainly profit handsomely from this change, the vast majority of athletes who receive nominal NIL money, and their parent(s), may not be happy with the many tax complications triggered from this change to the college athletic landscape.

– What happened – After years of mounting pressure for college athletes to get a share of the huge money flowing in college sports, the NCAA and some states removed rules that used to prohibit athletes from selling rights to their NIL.

– What can athletes do in this new landscape – Well, businesses can now pay college athletes to feature them (name, image, likeness) in promotions, advertisements for products or services. And athletes can now go out in the marketplace to set up corporate motivational speaking engagements or other public speaking gigs.

So, this is good for college athletes, right? Let’s review some of the tax issues that will land on the laps of college athletes and their parents before we answer this question.

– Are athletes receiving NIL $ required to file federal tax returns, pay self-employment tax, and submit quarterly estimated tax payments? Maybe. NIL money is gross income. In most cases, the athletes will be independent contractors, not employees. So, as independent contractors, they will be issued Form 1099-NEC by January 31 of the year after they receive NIL money. Normally, college athletes receiving NIL $ would report the NIL income on Schedule C and claim related business expenses to reach the final net profit amount. Generally, a dependent with earnings less than the single filing status standard deduction is not required to file a federal income tax return. For 2022, the dependent standard deduction is $12,950. So, an athlete receiving $12,950 or less in NIL $ is not required to file a federal income tax return. However, if net earnings from self-employment (“SE”) is $400 or more, then any taxpayer may still need to file an income return. What constitutes SE and why does this matter? Occasional sources of income, such as a one-time transaction, don’t count as a “trade or business” as the activity does not occur regularly or frequently. And, if there is no effort to continue the activity on a consistent, long-term basis, then the income is “other income not subject to SE tax. If the NIL income is determined not to be a regular, consistent business, then it is not a “trade or business” subject to SE tax. As long as the income is $12,950 or less in 2022, the dependent athlete is not required to file a federal income tax return or submit quarterly estimated tax payments. The athlete, and his/her parents, need to determine whether receipt of NIL $ is a part of the student’s “trade or business” based on the facts involved. This will help determine whether the student-athlete must submit quarterly estimated tax payments and a federal income tax return.

– What are some tax implications for parents of college athletes receiving NIL money? Based on the amount of NIL money received by a student-athlete, his/her parent(s) may no longer be able to claim the “child” as a dependent on their federal income tax return. Depending on the AGI of the parent(s), the receipt of NIL money by the student-athlete may disqualify the parent(s) from claiming tax benefits such as the child tax credit, American Opportunity Tax Credit etc. For example, if the college student athlete receives and spends NIL money for self-support, then this may cause the student-athlete to fail the support test to qualify as a dependent of his/her parent(s). For example, in 2022, if a single parent has a college-student who qualifies as a dependent, then the parent could file using the standard deduction under “head of household” status with $19,400 as the amount allowed for the standard deduction. However, if the college-student receives NIL money that disqualifies him/her from dependent status based on failing the support test, then the unmarried parent can only file as “single” status with a standard deduction amount of $12,950, $6,450 less than the amount allowed under the “head of household” status.

The takeaway is that college-athletes receiving nominal NIL money should huddle with their parent(s) and tax advisor/preparer to consider the tax implications that may very well impact their entire family. And, college-athletes receiving big NIL money should proactively manage their new tax obligations and impact to their family from this new reality in college sports.