The IRS is taking action against collectives that profit from the use of an individual's NIL
Image by Andy Hu
The IRS has issued a memorandum warning that NIL collectives may be subject to taxation. NIL collectives are organizations that pool money from donors to provide athletes with payments in exchange for their name, image, and likeness (NIL).
In 2021, the NCAA changed its policy regarding the use of college athletes' face, name, or other identifying features. This allowed them to receive compensation for such usage for the first time. As a result, university collectives were formed to receive donations specifically intended to pay student-athletes. Many schools in Power Five conferences have established these collectives, which have already generated millions of dollars to support eligible students' NIL activities.
Typically, these collectives are organized and designed as tax-exempt charitable organizations. However, on Friday, June 9, the Internal Revenue Service issued a 12-page memo stating that donations to NIL collectives are subject to federal taxation. The Office of the IRS Chief Counsel emphasized in the document that these donations are not tax-exempt because they provide benefits that are not incidental to any exempt purpose, both qualitatively and quantitatively. Furthermore, the memo highlights that these collectives primarily serve the private interests of student-athletes.
Student-athletes who engage in Name, Image, and Likeness (NIL) activities should take certain tax considerations into account. Since student-athletes are not classified as employees of their school, the collective, or the NCAA, they may be responsible for paying self-employment tax as independent contractors. To ensure compliance, student-athletes should fill out a Form W-9 before participating in NIL activities.
Furthermore, by January 31 of the year following their NIL work, student-athletes should expect to receive a Form 1099-NEC, which reports their nonemployee compensation, if their total earnings exceed $600.
In addition to these requirements, student-athletes may need to make quarterly estimated tax payments to avoid penalties. Unlike employees, taxes are not withheld from their paychecks. It is essential to keep in mind that the self-employment Social Security and Medicare rate stands at 15.3%.
Depending on their income, filing status, and personal circumstances, student-athletes may be eligible for certain tax credits. Exploring these options can help them optimize their tax situation.
If you have any questions about the recent tax-related matters discussed in this blog, please contact us. We would be happy to discuss your situation with you and help you understand your rights and options.
Olena Ruth | Tax Defense Attorney
Olena represents the taxpayers in federal and state tax audits, collection matters, administrative appeals, and the U.S. Tax Court’s cases. She is actively engaged in Tax Sections of the American Bar Association and Colorado Bar Association. She serves as Colorado Bar Association’s pro-bono attorney and liaison to the Internal Revenue Service. Her speaking engagements include presentations on tax matters in family law, employment tax issues, and communication with the IRS.
Olena can be reached at olena@ruthtaxlaw.com
