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How To File NIL Taxes For Your Clients

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How To File NIL Taxes For Your Clients

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How To File NIL Taxes For Your Clients

Name, image, and likeness (NIL) reshaped the way college athletics operates in the U.S. Now, athletes are able to earn money through endorsements as a result of their athletic talent and their ability to market themselves. As a knowledgeable accountant, you have a unique opportunity to play a pivotal role in guiding college athletes through the complex tax landscape of NIL earnings. 

This article dives into the significance of NIL and explores your role in helping clients navigate the complex tax landscape.

Understanding NIL and Its Significance

Name, image, and likeness represents a revolutionary shift in the sports and entertainment industries, allowing college athletes and other public figures to monetize their personal brands. For college athletes, this means they can finally profit from their talent, name, and reputation while maintaining their amateur status. 

The emergence of NIL marks a seismic shift in the traditional notions of amateurism and celebrity endorsements. For years, college athletes displayed extraordinary talent on the field or court, only to be barred from capitalizing on their fame due to NCAA regulations. 

With the introduction of NIL legislation, the stage has been set for a flourishing ecosystem where athletes are free to embrace their personal brands and turn their charisma into thriving revenue streams. 

This new landscape is brimming with opportunities that beckon accountants to the forefront – offering expert guidance that could substantially impact the financial trajectories of their clients. Your role as an accountant is not only to ensure your clients are tax-compliant but also to help them capitalize on this lucrative landscape. By understanding the following key tax considerations, you can guide your clients toward financial success.

How do college athletes earn income through NIL? 

Understanding how Name, Image, and Likeness (NIL) income is earned is essential for both accountants and their clients. In this section, we will explore some examples of the revenue streams available to college athletes.

Endorsement Deals

Endorsement deals form the bedrock of NIL earnings, offering an array of opportunities for college athletes. Companies, ranging from global brands to local businesses, seek to align themselves with influential personalities to boost their products' visibility. Athletes can secure deals with sportswear companies, energy drinks, and more.

For accountants, endorsement deals require meticulous financial management and accurate classification of income. By staying well-informed about each client's endorsement ventures, you can ensure that all financial aspects are expertly managed, paving the way for growth and success.

Social Media Collaborations

The power of social media cannot be underestimated in the world of NIL earnings. College athletes can leverage their online presence to engage audiences and build loyal followings. Brands recognize the influence of these personalities and seek to collaborate with them on sponsored content, sponsored posts, and brand campaigns.

As an accountant, you play a pivotal role in quantifying the income generated through these collaborations and navigating the tax implications associated with sponsored content. By identifying deductible expenses related to content creation and management, you optimize your clients' earnings while ensuring compliance with tax regulations.

Personal Appearances and Events

For college athletes, personal appearances at events, meet-and-greets, and promotional activities present exciting opportunities to generate NIL income. Sporting events, fan conventions, and product launches offer platforms for these individuals to showcase their brands and connect with their audience.

As their trusted advisor, you help your clients manage the financial aspects of these appearances, ensuring proper reporting of income and the deduction of related expenses. By adopting a strategic approach, you empower your clients to capitalize on these engagements while preserving their financial interests.

Autograph Signings and Memorabilia Sales

Autograph signings and the sale of memorabilia can be significant revenue streams for college athletes and celebrities alike. Fans are eager to own personalized items signed by their favorite athletes or influencers, creating a thriving market for autographs, jerseys, and other memorabilia.

For accountants, tracking the income from autograph signings and merchandise sales requires precision and attention to detail. By advising your clients on the best practices for record-keeping and expense deduction, you safeguard their financial interests and optimize their earnings from these lucrative ventures.

How can I help clients with NIL taxes? 

As you take on clients who are earning money through NIL, it’s important you follow the right steps to ensure they’re maximizing their earning opportunities while maintaining tax compliance.

1. Classifying NIL Earnings

Determining the proper classification of NIL earnings is a crucial first step. The classification will dictate how your clients report their income and what deductions they can claim. Typically, NIL earnings fall into two categories: self-employment income and miscellaneous income.

For instance, let's consider a college athlete who recently signed an endorsement deal with a local sports apparel company. Their NIL earnings from this deal would be classified as self-employment income. In this case, you would help them file a Schedule C to report their business income and calculate their associated business expenses.

2. Estimated Quarterly Tax Payments

Unlike traditional employment, NIL earnings are not subject to withholding taxes. Consequently, your clients will likely need to make estimated quarterly tax payments to the IRS and, if applicable, to their state tax authorities.

Imagine you are assisting an athlete whose NIL earnings have been growing rapidly through sponsored posts and brand partnerships. To prevent underpayment penalties, you would help them calculate their estimated tax liability based on their projected NIL earnings. Subsequently, you would guide them in making quarterly tax payments, ensuring they stay in good standing with the IRS and avoid potential financial setbacks.

3. Deductible Business Expenses

Identifying deductible business expenses is a valuable service that can significantly reduce your clients' taxable income. By helping them navigate eligible deductions, you enable them to retain a larger portion of their earnings.

Consider a college athlete who actively participates in promotional events, photo shoots, and media appearances as part of their brand partnerships. As their accountant, you would advise them to keep meticulous records of their travel expenses, meals, and other costs directly related to their NIL endeavors. These documented expenses can then be deducted during tax season, optimizing their tax position and increasing their overall earnings.

4. State Tax Considerations

Every state has its own tax laws, and it's crucial to understand how NIL earnings are taxed in each relevant state where your clients operate. This is particularly pertinent for athletes and influencers who may conduct business across various states.

Suppose an athlete resides in California but frequently collaborates with brands based in New York. In this scenario, you would carefully navigate the tax obligations in both California and New York, ensuring the athlete complies with each state's specific tax regulations. Your expert guidance will help them avoid potential tax pitfalls and manage their tax liabilities efficiently.

Conclusion

By now, you should have a solid understanding of the exciting opportunities that NIL earnings present for college athletes, influencers, and celebrities. As a knowledgeable accountant, you play a vital role in guiding your clients through the intricate world of NIL taxes, ensuring their compliance with tax laws, and helping them capitalize on their earnings.

From accurately classifying NIL earnings to assisting with estimated quarterly tax payments, identifying deductible expenses, and managing state tax considerations, your expertise empowers your clients to focus on growing their personal brands and reaching their financial goals.

Embrace the potential of the NIL landscape, position yourself as a trusted advisor, and open new doors for both your clients and your accounting practice. By staying informed and providing comprehensive guidance, you can truly make a significant impact on your clients' financial success in this transformative era of sports, entertainment, and influencer marketing.

How can Taxfyle help? 

There are always moments when having access to more clients can help. Whether there’s a lull during the busy season or you want to leverage portions of your spare time, having access to other income streams can provide a jolt. If you want to find out how you can increase your potential earnings, Taxfyle can help. 

We connect tax practitioners like you to customers and firms looking for help preparing, reviewing, and filing taxes. There’s no micromanagement, no need to collect payments, and you don’t need to spend advertising money. Plus, you can do it on your desired schedule. 

Legal Disclaimer

Tickmark, Inc. and its affiliates do not provide legal, tax or accounting advice. The information provided on this website does not, and is not intended to, constitute legal, tax or accounting advice or recommendations. All information prepared on this site is for informational purposes only, and should not be relied on for legal, tax or accounting advice. You should consult your own legal, tax or accounting advisors before engaging in any transaction. The content on this website is provided “as is;” no representations are made that the content is error-free.

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published

August 2, 2023

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Kristal Sepulveda, CPA

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