Most student athletes dream of taking home the championship trophy or being drafted onto a professional team. Whether or not this is what their future holds, athletes on well-loved college and even high school sports teams can build a career here and now—thanks to something called “name, image, and likeness” (NIL) rights. A pivotal 2021 court case allowed student athletes for the first name to earn money from endorsement deals, product sponsorships, and other advertising campaigns. This even includes promotions through the students’ own social media accounts.
Since this court ruling, more and more young athletes are taking advantage of these income-earning opportunities. However, for college and high-school students, this is likely the first time they have been responsible for real money—sometimes up to six figures in a single year. Many are underprepared for how best manage their new income, including putting in place a tax strategy that ensures as many of those dollars as possible go toward their future instead of to the IRS. By connecting with a Certified Tax Planner, student athletes can receive expert advice on the savings tactics that will work best for their unique situation. Read on for an overview of key things to keep in mind when it comes to tax planning for student athletes.
Dealing with NIL Income Tax
The first, very simple thing to keep in mind is that income from NIL deals is taxable, just like all other income. The student athlete should view their work as no different than running a marketing business where the use of their “name, image, and likeness” just happens to be the sole product. Typically, most of the income received by student athletes will be 1099-NEC income—the IRS form for nonemployee compensation. Essentially, the students are functioning as independent contractors who receive payment from whatever organization or business wants to strike up an NIL deal.
Why is this important to know? With 1099-NEC income, there is no automatic tax withholding when the student receives payment. When a worker does have taxes withheld, they are required to make estimated tax payments. This means the student is responsible for both estimating how much they owe in taxes and making those payments to the IRS quarterly. For many young athletes, this is the first time in their lives they have had to pay income tax and file returns. This is yet another reason that working with a tax planner can be a saving grace. A professional can help the student athlete set up systems for tracking their income, tax payments, and opportunities for tax deductions. Any travel, training, equipment, marketing, or social media fees related to their business of engaging in endorsement and sponsorships can be deductible. A Certified Tax Planner can help coordinate these tax planning tasks and recommend when to hire other contractors (like a bookkeeper) to make sure the athlete is able to put as much of their earnings as possible in the bank.
Another key strategy for tax savings is to think about what type of business entity the student athlete should select. Setting up an official business entity may sound like an intense next step for an 18-year-old or 20-year-old, but the reality is that if you don’t select an entity type, the IRS will do it for you—and it may not be the most tax-advantaged option.
If the student does not formally apply to create a business, the IRS will treat them as a sole proprietor. This means they will pay personal income tax on any money they earn, as well as the 15.3% self-employment tax. Even with these tax rates combined, a sole proprietorship is a fairly simple setup and may be the best option for a student athlete. However, this really depends on the student’s overall income, types of revenue streams, and long-term financial goals. In some situations, another entity type may generate more tax savings while also meeting other needs.
Though a sole proprietorship comes with certain benefits, this entity type also has drawbacks. The IRS views student athletes’ work as a specified service, trade, or business (SSTB). This can create some obstacles if the student is earning a high income within the six-figure range, which is very possible for top athletes. Sole proprietorships typically qualify for a qualified business income (QBI) deduction, allowing them to deduct up to 20% of eligible income. However, for a specified service, trade, or business, the 20% is not available if you earn $197,300 in income or more (for tax year 2025). The available deduction decreases—or “phases out”—at this income level, reaching zero for those who earn $247,300 in a year. This may mean that high-income athletes will want to consider electing a different entity type.
One alternative is to set up an S corporation. This entity type comes with a requirement called “reasonable compensation,” which means that the S corporation must pay the athlete a “salary” that falls within certain guidelines. This salary does not count as qualified business income. For a high-income athlete, this could actually be helpful because the student will have less QBI and therefore be more likely to qualify for that full 20% deduction.
If a student athlete’s income is too high to qualify for that QBI deduction in either of these cases, another option is to set up a C corporation. This entity type comes with tax-free fringe benefits that could prove helpful and can come with its own tax deduction opportunities.
Writing Off Expenses
Keep in mind that the more that an athlete operates as an actual business, the more deductions are likely to be available to them. This is especially true when it comes to business expenses. The IRS allows businesses to deduct expenses related to business travel, home office setup, and even the interest on loans taken out for the business. This means that if a student lives in an apartment, rather than a dormitory, where they can set aside space that is dedicated to managing their business activities, they could qualify for a home office deduction. If they book a plane ticket or rent a car to go to a paid publicity-related appearance, they could deduct that as a travel expense. Again, this requires careful documentation of when these expenses were incurred, how much they cost, and why they were required for the needs of the business.
Other benefits a typical business might set up could open the door to more tax deductions, such as setting up a retirement plan and using those contributions to reduce taxable income. If the student has widely varying income streams, they might also benefit from setting up multiple entities. If they make a high income from engaging in brand endorsements, maybe it makes sense to set up an S corporation to allow the possibility of a larger QBI deduction. If they are also doing consulting on a video game or selling merchandise online via their social media following, this could qualify as non-SSTB income and be open to different tax benefits.
Summary
As student athletes enter the world of income-earning, they are also entering the world of taxation. The only question is whether they are prepared to make the most of these money-making opportunities by creating a solid tax strategy. Athletes may be more interested in excelling at their sport than running a business, but they need to realize that from the viewpoint of the IRS they are already a business if they are getting paid for NIL deals. Rather than spending time learning about tax deductions and entity types, student athletes can outsource this work to a trusted professional and continue investing their energy into athletic and academic success.
To take the next step toward developing your tax strategy, reach out to a Certified Tax Planner today.
