Where do athletes actually pay income tax?
If you have ever been sitting around complaining about income taxes, I can assure you athletes feel your pain. While an ordinary citizen can just move to a certain state that does not require income tax, athletes do not have that luxury – they play wherever they can sign a contract or are drafted. And they are frequently travel for work. So that begs the question – in what state do athletes pay income tax? This article will highlight some of the nuances to athlete taxation, but there is a simple answer. Athletes pay where they play.[1]
The tax code is complicated and can fly above many people’s heads. A lot of people just throw some numbers into TurboTax and call it a day. Unfortunately, athletes can be responsible for taxes in every state and city they play in.[2]Athletes two main sources of revenue is from their contract and endorsement deals.[3] In order to shelter those endorsement deals, athletes often attempt to set up domicile in state that has either no income tax or very little tax such as Florida or Texas.[4] I will save you the tedious details on how to set up domicile and how to calculate taxes based on a specific state or city, but just know it is complicated.[5] Another way to shelter endorsements is to set up LLCs in low-tax or non-tax states.[6] This allows athletes to funnel their endorsement deals through another state, shielding that endorsement income from high income tax states like New York or California.[7]
So let’s get to the meat of why you came to read this blog – where do athletes actually pay taxes? The basic answer is that you pay wherever you are completing the activities or games.[8] Let’s unpack that a bit, though. For athletes in individual sports such as golf and tennis, the athlete typically pays taxes on their performance-based income in the state in which their event takes place.[9] Simply put, duty days encompass not only days in which you perform in that state, but also travel, practices and team meetings.[10] The total number of duty days is generally from the start of the preseason through the end of your season and through the playoffs.[11]
Now, how do you calculate the tax? You would look at the number of duty days in a state, divided by the total number of duty days in a year and then take out that ratio or percentage of money from the athlete’s income. [12] So, if 10 out of 100 total duty days were performed in a particular state, 10% of your income could be taxable by that state if they have an income tax. Depending on the sport, an athlete can have different impacts from this. For the NFL, which has only a few games per season, the athlete pays more income tax in the state that their team is located. [13] The MLB, on the other hand, has a lot of away games, so they pay a lot of their taxes in other states, which is more than an NFL player would.[14]
This form of taxing visiting athletes is known as the “jock tax.”[15] Let’s add a layer of complexity to everything. If an athlete is a resident of the state in which they are signed, they must pay that state both in-state and out-of-state.[16] For example, if an athlete plays for the New York Yankees and lives in New York, they must pay New York income tax for earnings both in NY and elsewhere.[17]But, say that same athlete lives in New Jersey instead of New York, they will only pay New York income tax on the number of duty days spent in New York state.[18]
If it feels like athletes pay taxes in two states on the same income, you are not alone – that was my initial thought as well. But most states with an income tax provide a credit for taxes paid in nonresident states, which helps eliminate double taxation.[19]
COVID-19 has had some interesting impacts on all of this.[20] For those of you who do not know, the NHL and the NBA finished out their 2020 season in a bubble. Let’s take the NBA as a quick example. That bubble was in Orlando, FL.[21] For athletes on the two Florida NBA teams, they actually saved a ton of money not playing in any state other than Florida due to Florida being a non-income taxing state.[22] Instead of paying out a bunch of “jock taxes” to other states, those players greatly benefitted.[23]
My basic advice: play for a team in a state with no income tax. Of course, most players do not have the luxury of choice, but if you do, why pay more in taxes than necessary? If given no choice, do everything you can to set up an LLC or domicile in a state with no income tax, or at least low-income tax, to help avoid taxes. Either way, you pay wherever you play.
Footnotes
