How to live your best (tax) life: Taxes for athletes and entertainers

As a rising star in the sports or entertainment world, you’re not just in the spotlight — you’re also under the microscope of the IRS and state revenue authorities. Navigating the tax landscape can be tricky, but the right game plan can help you dodge the pitfalls and may help you keep more of your earnings where you want them: in your pocket. This isn’t just about surviving tax season; it’s about thriving all year long.

If you're looking for the basics, be sure to check out our Tax 101 article. But if you’re ready to level up, here’s your go-to guide on federal and state income tax considerations for pro athletes and entertainers. But just remember: this is a general summary of some of the tax issues you may face; ultimately, it’ll be important for you to consult with a tax advisor for more info on how these high-level concepts apply to your individual situation.

First up, understand that your taxable income as an athlete or entertainer is often more complicated from an income tax perspective than a salary from a 9-to-5 job. Between salaries, endorsements, merchandise sales, royalties, and performance fees — you could be earning income in multiple jurisdictions. So without further ado, let’s say hello to state income taxes.

State line surprise

If you’re an athlete or entertainer hustling across state lines, you could be hit with the “jock tax,” where states (and some localities) tax your income earned while playing there, regardless of your state of residence. Yes, it’s a thing. Essentially, your income earned while performing away from home — think away games or tour events — may be taxed by each state (and some localities) you play or perform in. Each jurisdiction has its own rules, from counting game days to practice sessions and promo gigs, and it can add up fast. The best way not to get overwhelmed is to stay ahead of the game and keep detailed records of where you earn your money.

Residency rules

Establishing a primary residence in a tax-friendly state can save you big bucks. But beware: states will scrutinize your living situation to determine where you really live. They’ll keep tabs on factors such as where you spend the majority of your time, where your family lives and your children go to school, where you have a driver’s license and are registered to vote, and where you maintain significant personal and business ties — all to decide where you truly call home sweet home. So think twice before claiming you’re a Florida resident when you only really spend a few weeks there per year.

You know how your favorite rapper also has her own wine brand, athleisure company, and fragrance collab? Well, there’s your proof that stars often have multiple income streams. But here’s the thing about those different ways of earning money: each one comes with its own income tax liability.

While salaries and bonuses have their own set of rules, things can get more complex with other items of income. Taxes on royalties can vary greatly based on the contract terms and the jurisdictions involved. Meanwhile, merchandise sales, social media monetization, and international gigs can trigger a mix of federal, state, and even international income tax obligations. And endorsements? Well, more on that later.

Point is: navigating this web of income taxes requires a strategic approach to ensure you're not caught off guard by unexpected tax bills.

Earning from endorsements and sponsorships? Awesome! But remember, Uncle Sam is still going to want his share. And it’s not just the money you get paid that counts as income; those freebies and perks can also add to your tax bill. The IRS may tax you on the “fair market value” (the sale price on the open market) of any free products or services you receive as part of these deals. Whether it's free gear, products, or even exclusive experiences, if it's provided to you as part of your endorsement or sponsorship, you'll likely need to report the products or services received as income. So keep tabs on what you receive and its fair market value to stay on top of your income tax obligations.

Now for some good news: deductions and write-offs. These are exactly what they sound like: things that may help you lower your income tax liability. And as a pro, you may have quite a bit you can write off.

Business expenses

Imagine you’re a singer hitting the road for a world tour. Your business expenses may cover everything from travel costs to agent fees, training expenses to equipment purchases, and those expenses could be tax-deductible if you are self-employed. Even those dazzling costumes that light up the stage or high-tech sports gear for your training sessions could be deductible. These expenses aren’t just part of your job — they’re essential investments in your career. Just remember to keep your receipts for documentation of these expenses!

Home office deduction

Now, picture yourself as an influencer, creating content from the comfort of your own home. If you’re self-employed and regularly using a dedicated space exclusively as your home office, part of your rent or mortgage, utilities like electricity and heating, and even your internet bills may be tax deductible. It’s a potential way to turn your living space into a legitimate business expense, possibly reducing what you owe when tax season rolls around. Again, documentation of your expenses is key.

Per diems

As an athlete crisscrossing the country or globe for competitions or events, your team may give you “per diems” — daily allowances for meals and other incidental expenses. As long as the “per diem” amount does not exceed the federal per diem rate for your geographical area, it is not considered as taxable income, so it’s tax-free for you!

If you want to be a global superstar, chances are you’ll be required to pay foreign income taxes too. For those touring internationally or playing overseas, foreign tax credits can be a lifesaver. Essentially, you can potentially claim a credit toward your federal income taxes for the taxes you've paid to other countries, which may help to relieve the double-taxation headache. The U.S. also has entered into income tax treaties with some countries that offer benefits such as reduced withholding tax rates or exemptions for specific income types. We recommend consulting your tax pro before you jet off.

Tax-Deferred Retirement Accounts

Already thinking of life after your career? Go you! As a pro athlete or entertainer, stashing some cash in retirement accounts like a 401(k), IRA, or SEP-IRA can also be a tax-savvy move. Here's why: these accounts offer what’s called “tax deferral,” which means you can delay paying taxes on the money you contribute and any investment gains until you withdraw them in retirement.

Essentially, the contributions you make now reduce your taxable income for the year, helping you save on taxes immediately. Plus, the money grows tax-deferred over time, potentially allowing it to compound more effectively. Usually, these accounts also offer “Roth” contributions, which are another tax-favorable benefit that allows for after-tax contributions with tax-free earnings and distributions.

Incorporation

Incorporation isn't just for CEOs in suits anymore — it's a viable strategy for athletes and entertainers aiming to protect their earnings by forming an LLC or corporation. But if you’re thinking of going that route, please consult with a tax pro before you organize your new company, as these factors will be unique to each individual.     

When it comes down to it, navigating income taxes as a pro athlete or entertainer can get pretty complex. That’s where having a tax advisor who specializes in your field can really save you. They’re the ones who can tailor a plan to your specific income sources and expenses. Plus, they’ll make sure your tax returns are spot-on and filed without a hitch. And if you ever find yourself under audit by the IRS, your tax pro should have your back. But don’t wait until the clock’s ticking to get help — building a solid relationship with a tax advisor year-round is key to keeping your tax game tight and steering clear of any nasty surprises.

Navigating income taxes as a pro athlete or entertainer is a must. Whether it's mastering state income taxes, leveraging deductions, planning for retirement, or tackling international taxable income, a smart approach to manage your income tax liability may help you keep more of your earnings. Don’t hesitate to team up with a tax pro who understands your world. Now remember, nailing your tax strategy isn’t just about following rules — it’s about making your hard-earned dollars work harder for your future.

CRC# 3815308 09/2024