NIL and Taxes: What College Athletes Need to Know About Their Earnings

March 24, 2025

In honor of March Madness season, let’s discuss the tax implications college athletes face in the Name, Image & Likeness (NIL) landscape.

What is Name, Image & Likeness (NIL)?

Prior to 2021, NCAA athletes' eligibility was at risk if they received any form of income or perks related to their athletic performance. However, athletes can now profit from the use of their name, image, and likeness (NIL). Examples of how athletes have capitalized on this opportunity include, but are not limited to, brand endorsements, sponsorships, merchandise sales, personal appearances, social media promotions, and hosting coaching camps or clinics.

The landscape of NIL deals is diverse, as rules are determined on a state-by-state basis. Some states have placed restrictions or have not allowed athletes at their universities to participate, while others have passed laws permitting universities to pay athletes directly. Additionally, certain states have extended NIL opportunities to high school students.

While NIL deals have provided athletes with a competitive advantage, they have also created a need for education on how to negotiate deals, choose the right opportunities, and effectively run a business. Part of managing a business is planning for taxes, an essential consideration for athletes entering this new realm.

Independent Contractors

Athletes who receive compensation through NIL deals are considered independent contractors, not employees of those who pay them. This classification comes with both pros and cons.

Pros:

You have control over the work you accept.
You can set your own rates.
You can deduct business-related expenses to reduce your taxable income.

Cons:

Taxes are not automatically withheld from your payments.
You are responsible for paying both the employer and employee portions of self-employment taxes on your business income (15.3%).
You must track your income and deductions for tax purposes.
You may need to pay quarterly taxes to avoid penalties and interest.

What is considered income?

Not all NIL contracts involve cash payments. Brand endorsements, for example, may come with products as gifts, and car leases have become a popular form of compensation. So, what constitutes income, and how is it calculated?

Income can include cash, cash equivalents, goods, and services.

Cash refers to deposit-able funds such as checks, credit card payments, or any other form of money that can be readily accessed. In this case, income is simply the value of money received.
Cash equivalents are assets that can be quickly converted into cash. Examples include cryptocurrencies, stocks, money market funds, or certificates of deposit (CDs). While these are fewer common forms of payment, they should still be considered. Income from cash equivalents is reported based on their fair market value (i.e., what they could be resold for).
Athletes may also receive goods as part of their compensation. Examples of these goods include promotional products, apparel, equipment, vehicles, meals, NFTs, or products given in exchange for endorsements. These goods must be included in income at their fair market value. For instance, if an athlete receives a sweatshirt valued at $50 in exchange for an endorsement, that $50 is considered income.
Services refer to anything that someone would typically charge for but is provided for free. Just like with goods, the income is calculated based on the fair market value, which is the amount that would typically be charged for the service.

Companies that pay athletes—whether in cash, goods, or services—should issue 1099 forms at the end of the year, detailing the fair market value of the income received to assist with tax preparation. Athletes should also keep detailed records of all income received throughout the year for easy reference when filing taxes.

Common Deductions

Don’t believe everything you hear about taxes on social media. Deductions must be directly related to your business. It's always a good idea to consult a CPA to understand what you can deduct, but here are some common examples:

Advertising and marketing expenses to promote your brand.
Professional fees, such as those for lawyers, accountants, or agency services.
Certain equipment and supplies.
Travel, mileage, and meals directly related to NIL deals.
In some cases, a home office deduction.

Taxing Income

Different types of income are subject to different tax treatments. In this section, we’ll discuss active and passive income.

Active income requires "work" or material participation. Examples include running camps, managing advertising campaigns, signing autographs, and monetizing social media. These activities all involve substantial effort by the individual. Active income can be offset by the deductions mentioned earlier. This type of income is subject to both the 15.3% self-employment tax and income tax.

Passive income, on the other hand, does not require active participation. An example would be royalties from licensing an athlete’s image for a video game. No deductions can be used to offset passive income. Depending on the athlete’s total earnings, passive income may also be subject to a 3.8% net investment income tax, in addition to regular income tax.

International student-athletes face restrictions on the type of income they can earn based on their visa status. While they are allowed to earn some passive income, earning active income could violate the terms of their visa.

Filing Requirements

All individuals earning money in the United States are required to file a federal individual tax return, typically using Form 1040. Depending on the type of income earned, additional schedules such as Schedule C (for independent contractor work) and Schedule E (for royalties) may also be necessary.

In most cases, there will also be a state filing requirement. Income must be reported in the state where the work is performed (e.g., the state where the university is located). Additionally, depending on the athlete’s residency, they may need to file taxes in their home state as well. Domicile rules will determine where state tax filings are required.

Athletes should also consider their dependency status, and this should be discussed with their parents. If an individual is under 19 or a full-time student under 24, and provides less than half of their own support, they may qualify as a dependent on their parents’ return. Claiming a dependent can provide certain tax benefits and credits to the parents.

Tax Strategy

There are several important steps athletes should take to ensure a smooth tax preparation process when engaging in NIL opportunities. These include:

Set up an LLC and apply for an EIN: An LLC (Limited Liability Company) separates your personal assets from your business dealings and provides personal liability protection. You can set up an LLC through an attorney in your state and apply for an Employer Identification Number (EIN) from the IRS.
Open a business bank account: It’s crucial to keep your business and personal finances separate. Co-mingling the two could jeopardize your liability protection. Open a bank account under your LLC name to manage your business finances properly.
Prepare a W-9: Have a W-9 form ready to send to companies you’re working with. This form provides the necessary information for them to fill out the 1099 form when reporting your income.
Track income and expenses: Keep accurate records of your income and expenses throughout the year and generate financial statements to ensure everything is accounted for.
Pay quarterly taxes: To avoid a large lump-sum tax payment on April 15th and prevent penalties and interest, make quarterly tax payments throughout the year.

An optional tax strategy that can provide savings is electing to file as an S-Corporation. This comes with additional compliance requirements. Instead of reporting all income on your individual Form 1040, your business will need to file its own return using Form 1120-S. There are several rules to consider before becoming an S-Corp, but the benefit is that only a portion of your income will be subject to the additional self-employment tax (15.3%).

NIL has opened up incredible opportunities for young athletes! If you're eligible and interested, take the time to develop a solid plan, consult with professionals in the legal, financial, and accounting fields, and most importantly, continue doing what you love. For additional guidance, contact us today. Larson and Company has developed a suite of services specifically to serve the needs of individuals and companies in a wide range of industries.