Taxing professional athletes presents unique issues and creates opportunities for revenue officials due to the visibility of professional sports. In Part 1 – There's no place like home, we discussed taxing resident athletes, while Part 2 – Visiting athletes get hit to play focused on the issues surrounding taxing nonresident athletes. Taxation of the same income by a taxpayer’s resident state and non-resident states can lead to concerns about double taxation on the same income.
Fortunately, most states generally provide for a system of resident credits and reciprocity agreements to diminish the effects of taxing the same income earned in nonresident jurisdictions. By claiming state tax credits and deducting expenses, athletes are able to alleviate the impact of multistate tax. The athlete faces challenges in complying with his or her multistate tax burden. Mitigating the impact of multistate taxation is critical because many states place an emphasis on enforcement. While athletes are used as an example, this same issue applies to other taxpayers working in multiple states.
Don’t get hit twice—resident state tax credits and reciprocal agreements
Each state has its own method for permitting taxpayers to claim resident tax credits for taxes paid to nonresident states. In Ohio, if a taxpayer qualifies as an Ohio resident during the taxable year and earned income subject to taxation by another state or taxing jurisdiction, then such taxpayer will qualify for an Ohio resident tax credit. The amount of the Ohio tax credit is determined by entering the portion of Ohio Adjusted Gross Income subject to tax by other states. When athletes file their resident tax returns, it is suggested that they list all sources of income on their return, including income earned out-of-state. For example, Ohio requires taxpayers to list states where they file an income tax return, and the Department of Tax regularly contacts taxpayers for a copy of the other state’s income tax return and seeks verification of payment.
Many states maintain reciprocity or reciprocal agreements with other states, which generally allows athletes and other taxpayers to exclude wages earned in reciprocating states. The manner in which such exclusion is accomplished varies among the states. Below are a few examples of states which maintain reciprocity agreements:
- Illinois: Maintains reciprocity with Iowa, Kentucky, Michigan, and Wisconsin. Illinois residents include in Illinois income compensation earned in these states. On the other hand, due to reciprocal agreements between Illinois and these states, these states do not tax the compensation of Illinois residents. If an athlete performs in Illinois and is a resident of Iowa, Kentucky, Michigan, or Wisconsin, they are not required to pay Illinois income tax.
- Michigan: Maintains reciprocity with Illinois, Indiana, Kentucky, Minnesota, Ohio, and Wisconsin. Michigan residents are exempt from income tax imposed by a reciprocal state on salaries, wages, and commissions earned for personal services performed in the reciprocal state. Conversely, if a resident of Illinois, Indiana, Kentucky, Minnesota, Ohio, or Wisconsin performs in Michigan, they do not pay Michigan income tax.
- Ohio: Residents may exclude wages, salaries, tips, or commissions earned in Indiana, Kentucky, West Virginia, Michigan, or Pennsylvania.
An athlete should contact a tax advisor to ensure they obtain the maximum resident state tax credit, include or exclude the correct income, and meet the resident and/or nonresident filing requirements for states in which they reside and/or perform.
Deductibility of expenses
There are many expenses unique to athletes. Athletes who are part of a team are generally considered employees, and expenses will likely be treated as itemized deductions. Individual athletes, on the other hand, are generally classified as independent contractors or self-employed persons, and may be able to deduct athletic expenses as business or hobby expenses. Expenses that are unique to athletes include agent’s fees and certain sports equipment. As we have mentioned, athletes typically maintain multiple residences and may incur larger travel expenses than most taxpayers. Athletes should consult a tax advisor to ensure they are maximizing the deductions permitted by the tax code.
Tax compliance and enforcement
State tax authorities are able to easily enforce these taxes due to the visible nature of professional athletes. Team schedules and player salaries are public information. For example, if Ohio wants to monitor the tax to which NFL athletes visiting Ohio are subject, the tax commissioner can simply pull the schedules of the Cincinnati Bengals and Cleveland Browns, and then obtain a roster of the visiting players who played in Ohio or were part of the team that day. Many states, including Ohio, have revenue agents who deal exclusively with enforcing taxes amongst athletes. Ohio’s “athlete tax team” regularly obtains rosters and tax records to verify withholding. Ohio’s tax enforcers are able to quickly spot discrepancies, and generate letters to resolve the matter. Thus, an athlete’s returns are subject to a heightened scrutiny, and there is greater importance that their returns are prepared accurately.
Tax compliance can be extremely burdensome on athletes, especially if the athlete is not highly compensated. Each state maintains its own unique tax rules, and an athlete may end up filing in 10 or more states. An athlete must first determine whether they are a resident or nonresident. For each nonresident state the athlete plays or performs in, they must determine the correct method to apportion their income, whether to use the “Duty Days” or “Games Played” method and how to apply each method, and then determine which income to include in the calculation. Income from bonuses and endorsements presents a variety of tax issues. Finally, the athlete must determine how to limit their tax exposure from earning income in multiple tax jurisdictions. When it comes to multistate taxes, athletes are best leaving it to the pros.