In a recent visit to an NFL club during their organized team activities, wherein 29 of the rookies and free agents took part in a financial literacy class, the room was queried and only one of the 29 rookies said he had prepared a tax return in the past. While this is not surprising, it is somewhat worrisome as these players have no idea what their new tax compliance obligation is.
Suddenly, these players will be responsible for a “jock tax.” This is an income tax that the various state and local authorities levy on certain traveling professionals, particularly visiting professional athletes. So, if an NFL player is going to play eight home games and eight away games, the player could pay income tax to potentially nine states, including their federal income tax returns! If they reside in a different off-season domicile, they could pay income tax to as many as 10 states!
Let’s look at an example:
Our rookie lives in California in the off-season where he trains for the regular season and, let us assume, plays for the Pittsburgh Steelers. Let’s also assume he makes the 2016 rookie minimum of $450,000. The NFL season runs 166 duty days. Our player allocates two days of the 166 to each of his eight road games, or approximately 1.2% of his overall salary, and pays withholding to those states. Why two days? The teams typically leave for their road game on a Saturday and play their game on Sunday. Most of his income will be taxed in Pennsylvania, as the eight home games, along with practices, are performed in that state. There can be reciprocity agreements with some neighboring states that will not require withholding for those games (or a road game can be played in Florida or Texas where there is no income tax), but for the most part our rookie will now have to prepare a tax return in the each state the road game is played— and have withholding for that state, as well as city or local municipality.
If he is domiciled in California he will also have to file a tax return in California, however he will get a credit for taxes paid to all states he had withholding. Therefore it is imperative that the player have proper planning with his CPA or tax advisor to create a cost effective tax game plan.
If a player participates in an international game, like in London, he could potentially face having to pay taxes offshore. In general, US treaties have a specific clause that addresses athletes playing abroad—largely preventing treaty benefits for such individuals given the larger amount of revenue they earn for even a single game. While a brief service appearance in a treaty country will generally not create taxable jurisdiction, this is not the case for athletes generating income above a certain threshold—which is immediately taxed under treaty provisions.
The current U.S. Model Treaty exempts revenue of only up to $20,000. For example, on October 30th 2016, the Cincinnati Bengals will play a game against the Washington Redskins at Wembley Stadium in London. Let’s assume our rookie plays for the Bengals. Similar to the Model Treaty, the U.S./U.K. bilateral income tax treaty exempts the first $20,000 earned. Assuming our rookie’s earnings are less than the $20,000, he would be exempt from foreign tax, but if another player earns more than $20,000 for the game, those earnings would be taxable to the United Kingdom.
As has been demonstrated, the jock tax isn’t just a U.S. phenomenon; it’s an international one.