The life of professional athletes seems glamorous, and it often is, whether it’s the multimillion-dollar contracts and endorsement deals, the trips around the world, or the ability to earn generational wealth by playing a children’s game. Nothing is ever as simple as it seems, though, and there are plenty of complex legal considerations for athletes, general managers, and agents to take into account when doing their business.
Here’s a look behind the curtain at the legal framework that helps the sporting industry tick.
Breaking Down the Jock Tax
If you’ve ever been employed, you’ve had to pay a number of different income taxes: those at the federal, state, and municipal levels of the place where you live, and, depending on the specifics of your job situation, maybe some other levies like self-employment tax.
For professional athletes, the waters become much more muddy. They don’t just live and work in a single town or state, they’re traveling all over the country to play their games. It may seem like a lot of fun, but they are still on the clock, in a sense. While federal taxes are levied at a flat rate based on your income bracket, state and local taxes can vary quite a bit, from places with no state income tax like Washington, Texas and Florida to states like California where the rates go as high as 14.4 percent.
Sports are a major economic driver with millions of people paying to travel to games, buy merchandise and things of the sort, and state and local governments want to make sure they’re getting in on the action. As such, many places level ‘jock taxes’ on athletes who are on the road. Since they’re working in that location, their business is subject to taxation.
Fees To Keep in Mind
Taxes are a nightmare for the average person to file. When you look at the length of a professional schedule and the number of states and municipalities that a player might play in during a single year, that nightmare is multiplied 100 fold, making personal accountants a must for any high-profile athlete. Many sports leagues play games in other countries too, whether it’s leagues like the NBA that have Canadian teams, or those like the NFL that play promotional games in Mexico and Europe, creating yet another wrinkle. Similarly, many athletes receive compensation for side gigs too, like endorsement deals with businesses like Fanatics Sportsbook.
Taxes pose a labyrinthine challenge for the average person to navigate, but for professional athletes, the complexity reaches staggering proportions. Considering the extensive professional schedules and the multitude of states and municipalities they may play in within a single year, the tax-related challenges become magnified a hundredfold. This complexity mandates the necessity of personal accountants for any high-profile athlete.
Adding another layer to the tax complexity, numerous sports leagues conduct games in different countries. The NBA, for instance, boasts Canadian teams, while the NFL organizes promotional games in Mexico and Europe, introducing yet another layer of intricacy to the tax landscape.
Moreover, athletes often engage in side ventures, such as endorsement deals with prominent businesses like Fanatics Sportsbook, adding an additional dimension to their income streams. The diversification of income sources further underscores the need for meticulous tax management strategies, making accountants an indispensable asset in navigating the intricate financial landscape that high-profile athletes contend with.
Agent fees are another factor that cuts into an athlete’s contract value. Take a look at Shohei Ohtani, for instance, who recently received a record 10-year, $700 million contract from the Los Angeles Dodgers. At least 37 percent of that money will go to the federal government: Ohtani won’t ever sniff it. Another 10 to 20 percent of it will get siphoned away by various state and local taxes, whether the regular kind or the jock variety.
Lastly, his agent, Nez Balelo, will take a cut because of his work in negotiating the contract—often in the realm of five percent. When all is said and done, Ohtani will still take home roughly $300 million dollars, but there’s a lot more that goes into it beyond the lofty numbers that make up the headlines.
Another important legal consideration for athletes comes in the details of the contracts they sign: there’s a reason that many sports agents have a background in law, as you want to make sure all your bases are covered when you’re dealing with millions and millions of dollars.
When one typically thinks of labor unions, blue-collar workers or professions like teachers might come to mind, but unions are an integral part of the sporting industry too.
MLB dealt with a lockout ahead of the 2022 season when the owners and the players association struggled to find a middle ground in their new collective bargaining agreement. Contract details are a common area of dispute in these labor deals, as players want to ensure they aren’t being taken advantage of. Rookie deals are highly regulated, for instance, because players don’t have a body of professional work to prove their talent yet. Instead, both sides agree on a formula ahead of time to standardize the process, making it so that players aren’t taken advantage of and locked into contracts that can take the better part of a decade to expire.
Other contract stipulations look to prevent teams from dealing with unnecessary risk, like prohibiting their players from skydiving or taking part in other risky activities. Michael Jordan was one player to buck that trend, insisting that the Chicago Bulls allow him to play basketball at any time and any place, no matter if it was as part of team activities or an unaffiliated pickup game: because of how much he loved the game, he didn’t want to turn down any opportunity to play, even if it meant he might risk injury.