Top Considerations for an Athlete's Name, Image, and Likeness

As seen in Crain's New York Business

It’s an amazing time to be a college athlete. As of July 1, plenty of athletes have cashed in on the NCAA’s recent ruling, which permits athletes to earn money from their name, image and likeness. A short window exists for these young athletes to cash in on their NIL opportunities, and the process will move quickly from the offer to the payment. It will be crucial for them to receive the right financial guidance to ensure the proper plan is in place and there are no unpleasant surprises.

What are the top four considerations an athlete’s NIL must take into account?
 

1. Independent contractor vs. employee
   Collegiate athletes will likely be treated as independent contractors and their compensation will be reported on a 1099 form for any NIL deals. The obvious and important distinction between being treated and paid as an independent contractor versus as an employee: There will be no tax withholdings at source for independent contractors. It should not be viewed as a negative, but rather as an opportunity for deducting appropriate expenses and other planning opportunities. The ability to deduct relevant business expenses will allow the true economics of the deal to line up with tax liability calculation. Generally, the expense with the most significant impact on the net cash, resulting in the biggest benefit to be deducted, is agent commissions. The athletes will need to talk with their certified public accountant or tax adviser as to what is and what isn’t deductible. In addition, the tax return-filing process will get more complicated with the potential of having to pay tax liabilities on a quarterly basis. These can easily be forgotten and can result in significant interest and penalties if not handled properly.
   
   

2. State and local income tax
   The issue of state income taxes can become complex and burdensome with issues relating to residency, domicile, and income-sourcing requirements. It will be important to understand the structure of the deal, for the services being performed, and the location of services. If the athlete lives in California, attends school in Florida, and signs a deal to work with a national company that requires social media posts, what tax returns should the athlete file? How will the income be sourced? Are there opportunities to structure this deal to reduce tax liabilities? These are all questions that should be answered early in the process to save headaches down the road.

   It is also worthwhile to note that state income tax laws can have a real impact on the decision-making process when selecting a school’s sports program. If there are big dollars on the table, it might be worth exploring a school in a state with no state income tax and working through some of the questions we posed above.
   
   

3. Cash flow and budgeting
   Given the lack of tax withholdings, it is important to talk about cash flow and budgeting. When we read the headlines of these recent blockbuster contracts, the focus is on the total contract dollars. There is not much thought or discussion about the net compensation the student athlete will bring home after taxes and expenses. In most cases, there will be either agents or other representatives or both who are paid a fee for bringing the deal to the table. The fees can range from a few percent up to 20%. When federal and state taxes are added in, it is easy to see how net income can be substantially less than the initial number presented to the athlete in bold. These unavoidable expenses and personal needs are the driving force behind the cash flow and budget conversation.

   One scenario where it’s critical to plan and budget is when an athlete is given a brand-new car to drive for a year. It sounds like fun, but the use of the car will likely be treated as taxable income and, without proper planning, the athlete could very well not have the cash to pay the probable tax liability. While we are focusing on the cash deals, do not lose sight of the fact noncash deals can be problematic if not approached correctly. There are so many variables and personal circumstances that can affect the situation, further highlighting the importance of establishing a clear financial plan.
   
   

4. Wealth management
   After the student athlete signs the deal and determines the net cash after taxes and expenses, we would recommend the savings be invested wisely, keeping both short- and long-term goals in mind. These short-term goals could include allocating a portion of the net proceeds into a traditional investment account, making a large asset purchase such as a new home for the family, or private investments that fit the overall investment thesis. The same emphasis should be placed on long-term goals such as retirement planning. In both situations, the decisions should be based on building and preserving wealth. Whether the student athlete enters a professional league or enters the workforce, the financial benefits received today if invested properly have the ability to compound over time and be worth substantially more in the future.

   This year’s college athlete-entrepreneurs may find it difficult to evade unwelcome opportunists seeking to exploit their new money. With their vast amounts of quickly generated wealth and financial naïveté, they may find themselves needing to deflect attempts to deviate from an otherwise sound investment strategy. These unsolicited intrusions typically present themselves as bulletproof venture capital deals or as startups promising substantial financial gains. By ensuring that the athletes are surrounded by a trusted team that helps build and adhere to a framework on how wealth management decisions are formulated, financial mishaps can be avoided.
   
   As these new financial opportunities grow in size and develop in complexity, it is becoming more important to work closely with advisers to help lay out business and personal goals. It is a great time to engage student athletes and teach or reinforce principles that will prove valuable in their lives. These are opportunities that can easily be squandered through no fault of the athletes. There can be many great people in the lives of young athletes who care deeply about them but lack the financial education to plan for all of these questions. As such, it is crucial to have the right team in place and get the right guidance to set up the right foundation.