Sponsorships: Tax Liability & NCAA Eligibility

Sports have always been a powerful platform for showcasing talent, determination, and resilience. Today, I want to shine a bright light on a new and complex landscape: the world of sponsorships and their impact on athletes' finances and, for some, their athletic eligibility. Accepting sponsorship payments is an incredible opportunity, but it comes with a new set of responsibilities.

Let’s dive into the world of sponsorships, focusing on a crucial question: What happens with taxes and eligibility when a sponsorship is paid to an individual versus a nonprofit organization such as a team or a school? Let's explore this new frontier of financial and athletic responsibility!

The Rise of the Sponsored Athlete

From youth sports to professional leagues, athletes are increasingly leveraging their talent and platform to secure sponsorships. This journey is nothing short of inspiring, and the opportunities are vast.

Take, for example, a high school track star with a local shoe company deal, or a competitive dancer who receives payments for promoting an activewear brand on social media. These are not just athletes; they are entrepreneurs building their personal brands.

Why does this matter? Because their success creates a new set of considerations, especially around taxes and, for student-athletes, their eligibility. It shows that with dedication and smart planning, anything is possible.

Understanding Tax Liability: Individual vs. Non-Profit

When an athlete receives a sponsorship, the money is considered taxable income. This is a critical point that every athlete and parent needs to understand.

1. When Sponsorship is Paid to the Individual

When an athlete signs a direct sponsorship deal with a company, the payment is considered self-employment income. This means the athlete is an independent contractor, not an employee.

• Taxable Income: The athlete is responsible for paying federal and state income taxes on their earnings. This includes cash payments as well as the fair market value of non-cash benefits like free gear or travel.

• Self-Employment Tax: For net earnings over $400, the athlete must also pay self-employment taxes (Social Security and Medicare), which is currently a rate of 15.3%. Unlike a regular job, where this is split with an employer, the athlete pays the full amount.

• No Withholding: Taxes are not withheld from these payments. Athletes are often required to make quarterly estimated tax payments to the IRS to avoid penalties.

• Deductible Expenses: As an independent contractor, athletes can often deduct business-related expenses, such as equipment, travel to competitions, and agent fees.

This is a significant change from the traditional athlete model and requires careful financial planning.

2. When Sponsorship is Paid to a Non-Profit Organization

Some athletes, particularly those in Olympic sports or who have a community-focused platform, may have their sponsorships paid to a non-profit organization. While this may seem like a way to avoid taxes, it's not a magical solution.

• The Athlete's Perspective: Even if the payment goes directly to a non-profit, if the non-profit then pays the athlete for services (e.g., public appearances, social media promotions), that payment is still considered taxable income to the athlete. The tax liability doesn't disappear just because the money came from a non-profit. The athlete will likely receive a Form 1099 and be responsible for paying taxes, just as they would with a direct sponsorship.

• The Donor's Perspective: This arrangement may impact the donor's ability to deduct the payment as a charitable contribution. The IRS has strict rules on what constitutes a tax-deductible donation. If the donor is receiving a "substantial return benefit" in exchange for their payment—such as advertising their business through the athlete—the payment may not be fully deductible as a charitable donation.

The key takeaway? Whether the money comes from a direct sponsor or a non-profit, the athlete is almost always on the hook for the tax liability on any income they receive.

NCAA Eligibility and Sponsorships (The NIL Factor)

For the student-athlete, the conversation around sponsorships becomes even more complex due to NCAA rules. The recent changes allowing student-athletes to benefit from their Name, Image, and Likeness (NIL) have created new opportunities and rules to navigate.

• NCAA Compliance: The core of the NCAA's policy is that NIL activities must be separate from athletic performance. This means payments cannot be a "pay-for-play" arrangement or a recruiting inducement.

• Reporting Requirements: Many schools and conferences require athletes to disclose their NIL deals. This is a crucial step for both the athlete and the institution to ensure compliance.

• The NIL Collective Conundrum: NIL collectives, which are often structured as non-profits, have emerged to provide sponsorship opportunities to college athletes. However, the IRS has recently challenged the tax-exempt status of many of these organizations, arguing that they primarily provide a private benefit to the athletes, rather than a public one. For the student-athlete, it's important to understand that even with these collectives, any money they receive is likely still taxable income.

  
  

Keep Pushing Forward and Celebrate Every Win

The world of athletic sponsorships is an exciting one, offering unprecedented opportunities. But with great opportunity comes great responsibility. By understanding the tax implications and eligibility rules, you can make informed decisions that set you up for long-term success.

For starters, we recommend that you consult a tax professional who specializes in athlete finances, keep meticulous records of all your sponsorship income and expenses, and utilize platforms like Fundraisher to share your athletic journey and pitch sponsors.