With the rise of Name, Image, and Likeness (NIL) opportunities for student-athletes, many parents are left wondering how to handle the tax implications of their child’s newfound income. While NIL presents exciting financial opportunities, it also brings new tax responsibilities that require careful planning and attention. Understanding these tax obligations is crucial to avoid surprises and ensure your child remains compliant with tax laws.
Here’s everything parents need to know about NIL and taxes—from the basics of taxable income to strategies for managing and saving for taxes.
1. NIL Income is Taxable
The first and most important thing to understand is that NIL income is taxable. When your child earns money from sponsorships, social media promotions, or selling merchandise, the IRS considers it self-employment income, just like a small business owner or freelancer. This means NIL earnings are subject to income tax and possibly self-employment tax.
Types of NIL Income That Are Taxable:
- Endorsement deals with brands or businesses
- Social media promotions (e.g., paid Instagram or TikTok posts)
- Appearance fees for events or camps
- Merchandise sales (shirts, hats, etc.)
- Content creation (e.g., YouTube or TikTok channels, paid tutorials)
💡 Pro Tip: Your child must report all NIL earnings to the IRS, even if they are paid in smaller amounts or receive goods or services instead of cash.
2. How to Handle Taxes on NIL Income
As a self-employed individual, your child is responsible for filing their own taxes and paying the required amount. Here’s how to manage those taxes:
1. Set Aside Money for Taxes
A general rule of thumb is to set aside 25-30% of all NIL earnings for taxes. This includes income taxes and self-employment taxes.
2. Self-Employment Tax
Since NIL income is treated as self-employment income, it’s subject to a self-employment tax, which includes both Social Security and Medicare taxes. This is 15.3% of the first $142,800 (as of 2021) in earnings, and your child will need to pay this tax in addition to regular income taxes.
3. Estimated Quarterly Payments
The IRS expects self-employed individuals to make quarterly estimated tax payments if they expect to owe $1,000 or more in taxes for the year. This helps avoid penalties and interest for underpayment when filing their annual return.
💡 Pro Tip: Consider working with a tax professional to help estimate quarterly payments and avoid any surprises at tax time.
3. Understanding Deductions for NIL-Earning Athletes
In addition to setting aside money for taxes, your athlete may be able to deduct certain expenses that are directly related to their NIL activities. Understanding and tracking these expenses is important for reducing taxable income and lowering their tax burden.
Common Deductible Expenses:
- Business expenses related to NIL deals (e.g., marketing or website costs)
- Travel expenses (flights, hotels, meals) for paid appearances or endorsements
- Social media or content production (camera equipment, editing software)
- Agent or manager fees
- Legal fees for contract negotiations or advice
💡 Pro Tip: Keep a detailed record of all expenses and save receipts. Parents should assist in organizing these records to ensure nothing is overlooked.
4. Filing NIL Taxes: What You Need to Know
Filing taxes for NIL income is similar to filing taxes for any other form of self-employment. However, there are key things parents should be aware of when filing on behalf of their student-athlete.
Filing Process:
- Obtain a Taxpayer Identification Number (TIN): If your child doesn’t already have one, they’ll need a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) to file taxes.
- File the Correct Tax Forms:
- Form 1040: This is the standard form for filing individual income taxes.
- Schedule C: This is used to report self-employment income and expenses.
- Schedule SE: This is used to calculate and report self-employment tax (Social Security and Medicare).
- Report All Income: Ensure that all NIL earnings are reported, including payments received via checks, Venmo, PayPal, or other methods.
💡 Pro Tip: If your child earns significant NIL income, consult a tax professional to help navigate the filing process and ensure compliance with tax laws.
5. The Importance of Hiring a Tax Professional
While it’s possible to file taxes on your own, NIL earnings introduce complexities that might require professional assistance. Working with a tax professional who understands self-employment tax, NIL income, and deductions is a wise investment.
A tax professional can help:
- Accurately calculate quarterly estimated payments
- Ensure NIL deductions are correctly applied
- Minimize your child’s tax liability
- Help with tax planning and strategy for future NIL earnings
💡 Pro Tip: Don’t wait until tax season to hire a tax professional—bring them in early to help with planning and quarterly payments.
6. The Impact of NIL on Financial Aid and Scholarships
It’s important to note that NIL income may affect your child’s financial aid eligibility, including scholarship offers. In some cases, significant NIL earnings could reduce eligibility for need-based financial aid, as the income is considered when calculating financial need.
How NIL Income Could Impact Financial Aid:
- Need-based aid: Some universities may reduce financial aid packages if they determine that NIL earnings make the family less “in need” of aid.
- Athletic scholarships: In rare cases, schools may limit the types of NIL deals athletes can sign if they conflict with scholarship agreements.
💡 Pro Tip: Be sure to review your child’s scholarship terms and financial aid agreements to understand how NIL earnings might impact their aid package.
7. Encourage Long-Term Financial Planning
While managing taxes is essential, long-term financial planning is just as important. Teaching your athlete how to save, invest, and plan for the future will set them up for financial success beyond their athletic career.
Financial Planning Tips for NIL-Earning Athletes:
- Start saving for the future: Help your athlete open a Roth IRA or investment account to take advantage of compound interest.
- Teach them about budgeting: Help them develop good money management habits and avoid impulse spending.
- Plan for life after sports: Encourage them to think about their career goals beyond athletics, whether in business, entertainment, or another field.
💡 Pro Tip: The sooner your athlete starts saving and investing, the more their money will grow, even with small contributions.
Final Thoughts: Navigating NIL Taxes Successfully
NIL has opened new doors for student-athletes to profit from their personal brand, but it also brings new responsibilities, especially when it comes to taxes. As a parent, your role in educating and guiding your child through the taxation process is crucial to ensuring they manage their income responsibly. With careful planning, record-keeping, and professional advice, your child can successfully navigate NIL earnings and set themselves up for financial success both now and in the future.
