Pennsylvania CPA Journal
With allowances for name, image , and likeness income, as well as damage awards for past athletes, many types and sources of income will be coming these students’ way. This feature focuses on the new tax world and all the tax compliance issues that go with it that student athletes face, and for which they may not be ready.
If you watched NCAA Division I football this fall, maybe you heard commentators talk about name, image, and likeness (NIL) revenue for student athletes. With the finalization of the settlement agreement between the NCAA and the students who filed class action lawsuits against the NCAA, the landscape of taxation of student athletes dramatically changed this past summer.
The inescapable conclusion is there has been a major disruption to the business model of NCAA sports and an enormous enhancement to the income student athletes are receiving or expected to receive. This feature highlights the changes that will impact student athlete income and taxes, identifies the general tax schemes applicable to each stream of income, and discusses the federal and state tax issues to be resolved.
Changes
In the U.S. District Court case named “In re: College Athlete NIL Litigation,”1 Judge Claudia Wilken signed an order on June 6, 2025, that resulted in the four significant outcomes that will affect student athletes’ income and taxation. Those outcomes from the settlement agreement are as follows:
- Damages awarded to former and current student athletes.
- Injunctive relief for current students.
- Scholarship caps removed and replaced by team roster caps.
- NCAA’s limited restrictions on the payment of NIL income by third parties were retained but modified.
The settlement agreement identifies three classes of current and former Division I student athletes who are to receive damages and be bound by the settlement agreement:
- Football and men’s basketball
- Women’s basketball
- “All others” or “Additional sports class”
The three classes will share $2.576 billion in damages from the NCAA, net of proportional shares of fees and expenses.
A fourth class of student athletes are parties to the Injunctive Relief Settlement. Schools can provide additional direct benefits to student athletes subject to the Injunctive Relief Settlement worth up to 22% of the average athletic revenues of the Power Conferences’ schools each year, known as the “pool.” The pool will start at $20.5 million2 per school in the 2025-2026 academic year and grow to $32.9 million per academic year in 2034-2035.3
Most of that money is targeted at football and men’s and women’s basketball. The NCAA construes these payments as revenue sharing – the revenues being shared are television royalties. The NCAA will pay those royalties to Big 10 and Big 12 student athletes through PayPal on a periodic basis.4
The NCAA is taking the tax return position that revenue-sharing payments are royalties, and thus will report student revenue-sharing payments paid on a Form 1099-MISC as royalty income.
The third change requires the NCAA to modify its rules and eliminate scholarship limits. This will result in an increase in the number of Division I scholarships on an annual basis.5 Additional scholarships paid per school may go up to $7,969,319.6
Lastly, restrictions on third-party NIL payments were kept in place but modified. The Injunctive Relief Settlement provides that the NCAA may still restrict third-party NIL payments to Division I athletes, but only to the extent the payments are made by “associated entities or individuals.”7 Associated entities are closely affiliated with an NCAA member school for the purpose of promoting the school’s athletics program or student athletes. An associated individual is a member of an associated entity or an individual who has contributed more than $50,000 over their lifetime to a particular NCAA member school, or an associated entity, to promote an athletics program or student-athletes, or who has assisted a school in the recruitment or retention of student athletes.
Payments may be restricted by the NCAA only if the payments are not for a valid business purpose related to the promotion or endorsement of goods or services provided to the general public for profit, with compensation “at rates and terms commensurate with compensation paid to similarly situated individuals with comparable NIL value who are not current or prospective student athletes at the member institution.”8
Taxation
The vast majority of student athletes range between 18 and 23 years old. The taxation of these streams of income may not be top-of-mind for these young adults – or even their parents (your clients!). Taxation of student athlete income can be complex. Here is a summary of some of the income streams and the general schemes of tax that apply to those income streams.
Damage awards – These are generally taxable since the award is replacing foregone income, unless the award is for physical injury or sickness. Students who receive damage awards will be taxed at ordinary graduated income tax rates applicable to their filing status and income levels.
Royalty income – Assuming the NCAA position characterizing payments as royalties will be upheld, royalty income will be taxed at graduated ordinary income tax rates for the student’s filing status and income level. Royalties will not generally be subject to self-employment tax unless the student is required to exert effort to earn the royalties.
Royalties characterized as income from self-employment is taxed as self-employment income generally on Schedule C. That self-employment income is taxed at graduated ordinary income tax rates applicable to their filing status and income level, and that income stream is also subject to self-employment tax at a rate of 15.3%, subject to the income limits applicable to Social Security tax.
Social media – Social-media-affiliated marketing revenue is taxed as self-employment income generally on Schedule C. That self-employment income is taxed at graduated ordinary income tax rates applicable to their filing status and income level, and that income stream is also subject to self-employment tax at a rate of 15.3%, subject to the income limits applicable to Social Security tax.
Scholarships – Scholarships are subject to income tax at graduated ordinary income tax rates applicable to their filing status and income level, to the extent scholarships exceed the qualified costs excludable under Section 117(a) of the Internal Revenue Code (IRC).
Noncash benefits – Noncash benefits received for services rendered must be valued and that income is taxed as self-employment income generally on Schedule C. That self-employment income is taxed at graduated ordinary income tax rates applicable to their filing status and income level, and that income stream is also subject to self-employment tax at a rate of 15.3%, subject to the income limits applicable to Social Security tax.
NIL income from collectives – NIL income from collectives, also known as associated entities and individuals, or from nonassociated entities or individuals is taxed as self-employment income generally on Schedule C. This stream of income is subject to student athlete self-reporting. The newly created College Sports Commission is responsible for enforcement of the reporting requirements. The self-employment income is taxed at graduated ordinary income tax rates applicable to their filing status and income level, and that income stream is also subject to self-employment tax at a rate of 15.3%, subject to the income limits applicable to Social Security tax.
Merchandise sales – The net profit from merchandise sales (either online or at brick-and-mortar locations) is taxed at graduated ordinary income tax rates applicable to their filing status and income level, and that income stream is also subject to self-employment tax at a rate of 15.3%, subject to the income limits applicable to Social Security tax. Additionally, the student athlete may need to collect and remit sales tax.
Federal Tax and General Issues
Federal tax issues will arise from the NCAA changes, and they must be addressed. This section shares a few of those issues.
Many student athletes enjoy a variety of noncash benefits, including clothing, food, and even bed and breakfast services for family members who attend their games. The valuation and reporting of noncash benefits received can be complicated. Some may be excluded from income, while other noncash benefits must be valued and included in income.
The IRS requires associated entities and individuals to pay an amount commensurate with the athlete’s NIL value as determined by the NIL value of “similarly situated individuals” for NIL payments for services. While NIL deals must be reported, the mechanism for valuation may be complicated.
The NCAA’s characterization of the revenue-sharing payments as royalties has gained traction, but a normally staffed IRS may eventually challenge that characterization to stem the leakage of income subject to self-employment tax. The IRS may look at common law tests for independent contractor versus employee classification and construe the income stream as subject to self-employment.
The issue of independent contractor versus employee is a big issue. Universities have been generally adamant that student athletes are not employees. There are numerous cases attacking this position from different perspectives – labor law and collective bargaining, workers’ compensation law, etc. If the IRS applies common law tests for independent contractor versus employee, there could be a surprise for the universities. After all, the students would not participate in any of this income if they were not athletes providing entertainment services to the schools, using school facilities and equipment, practicing and playing at times determined by the university, and so on.
The financial and tax literacy of student athletes is a significant issue. First of all, they are still very young, but also many students come from homes where financial literacy skills are not at their peak nor passed down to the children. Endowing young adults with substantial income can result in poor choices absent a solid financial and tax literacy foundation. A substantial number of professional athletes end up in financial distress or bankruptcy, to provide context.
The lack of tax literacy could lead to failures to file and pay income, self-employment, and sales and use taxes. Tax return preparation, filing, payments, collections, and defense will be dicey enough with obsolete information systems and staffing reductions at the IRS. You may still remember the IRS’s 2019 shutdown and the combined impact of the pandemic. Collegiate Volunteer Income Tax Assistance (VITA) and Low Income Taxpayer Clinics (LITC) programs may be of assistance.
The Congressional Research Service provided a white paper to Congress regarding NIL of student athletes. Additionally, the White House issued an executive order directing the employee versus independent contractor determination issue to be resolved. While a federal NIL statute has been drafted, the progress of that legislation is uncertain. The courts, too, are aware of the issues.
State Tax Matters
With roughly 54 state and territorial jurisdictions (and God knows how many local jurisdictions), state and local tax law is in a constant state of flux. While many states have federalized their tax codes (making state tax laws reflective of federal equivalents), there still exists a lot of variation. Only a state-by-state analysis can get you to anything remotely dependable. While services like Blue J Legal and Bloomberg are starting to provide AI and chart-builder tools, the work is still time consuming and the results of the research can be obsolete quickly.
When it comes to student athletes, there are numerous sticky issues in the state and local tax arena. The first is domicile and residence. How will Pennsylvania tax a student at a university within its borders whose parents reside in another state, like Georgia or Florida, on the different streams of income identified above? Usually, a student’s residence at the university is construed as a temporary residence, and the student’s domicile is usually the parents’ home or homes. (I’ll spare you the introduction of the issue of divorced parents with different homes and custody decrees.)
If the student resides in the university’s state and is likewise domiciled in that same state, no big deal. If not, then the next issue – sourcing of income – becomes crucial. How will affiliate marketing revenue be sourced if the student athlete is domiciled in another state? If the student receives royalties from the settlement agreement, what is the source of the royalties? Will the royalties be taxed to the student at the payor source? Should there be state withholding of tax at the source?
The location of any services provided may end up tempting the states to apply the rules applicable to pro sports, in which case the students may have to do duty-day calculations.
The last issue, but certainly not the least important, is tax planning. Should a student establish domicile in a no/low-tax state? Should the student consider an LLC or royalty holding entity? The scope of this article intentionally omitted international student athletes due to the added complexity of visa restrictions, international tax law, and treaties.
The Tax Playing Field
This article attempts to alert you to the changing landscape of Division I student athlete income and related taxation issues. You may have clients with students who are premier college athletes. You should make sure you lay out the playing field for them and their children so they understand their tax obligations.
The last thing any young adult needs is the IRS throwing a yellow flag.
1 In re: College Athlete NIL Litigation, United States District Court for the Northern District of California, Case No. 20—cv-03919 CW, Docket No. 717 (June 6, 2025).
2 Estimated NCAA Revenue Sharing 2025-26.
3 In re: College Athlete NIL Litigation, page 11.
4 “Big Ten and Big 12 Enter Historic Partnerships with PayPal to Enable Institutional Payments for Student-Athletes in New Revenue Sharing Model.”
5 Ibid.
6 Estimated NCAA Revenue Sharing 2025-26.
7 In re: College Athlete NIL Litigation, page 12.
8 Ibid.
Edward R. Jenkins Jr., CPA, CGMA, is professor of practice in accounting for Pennsylvania State University in University Park, managing member of Jenkins & Co. LLC in Lemont, a feature article model, and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at erj2@psu.edu.