Tax concerns for the solo athlete

VaselineAugust 30, 2024

0 4 minutes read

Many of us enjoyed the recent Olympics in Paris. You will probably notice that each event is composed of either a team or an individual sport.

What you may not know is that professional athletes who compete in individual sports (eg boxers, mixed martial arts fighters, golfers, tennis players) face a much different tax protocol than team athletes, as be it professional baseball, football, basketball or hockey. players. These solo athletes are usually classified as self-employed because they only play for themselves and do not play for a team.

Tax challenges and opportunities for the self-employed

Being self-employed comes with both advantages and disadvantages for taxes. The main disadvantage is that individual athletes have to pay self-employment tax. Self-employment tax is made up of taxes paid for Social Security and Medicare. Generally, the first 92.35% of the athlete’s net self-employment earnings are subject to self-employment tax. The athlete must pay a 15.3% tax on the first $168,600 of net earnings and a 2.9% rate on earnings above $168,600.

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On the other hand, an athlete playing for a professional sports team would only have to pay 7.65% FICA, Medicare taxes on the first $168,600 of income, and a 1.45% Medicare tax on the excess. The advantage of having self-employment income as a solo athlete is that, unlike W-2 wages, expenses can be taken against self-employment income to reduce tax liability.

These individual athletes can deduct several expenses, including:

Training costs. Most individual athletes have a group of people to train with. Deductible expenses include payments to trainers, gym memberships, gear, equipment and other training-related costs.
Travel expenses. Events do not normally take place in the player’s hometown. So travel is necessary. Expenses paid for travel to and from these events, training camps and promotional events are deductible. Costs paid for hotels for the athlete and his training team are also deductible.
Medical expenses. Medical expenses can be deducted from the athlete’s income. Health insurance is a big deduction for individual athletes. In addition, costs related to injuries, rehabilitation, personal training and so on can be deducted.
Management and promotion fees. Fees paid to managers, agents and promoters are also deducted from the athlete’s income.

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Keeping track of all these expenses can be onerous. The best course of action for an athlete would be to have a separate bank account and/or credit card just for sports expenses. A credit card can be very advantageous to use because instead of tabulating all of your expenses one at a time, the athlete can just give their accountant the annual credit card statement at the end of the year.

Another factor for these athletes is tax exposure for the various states in which they play. Every state—except Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire—has a tax on wages earned in that state. This means that if an athlete plays in that state and earns wages, they will have to pay taxes and file a separate tax return for that state. This can add a high level of complexity to an athlete’s tax returns.

For example, in 2024, the PGA held events in more than a dozen income tax states. That means a PGA Tour golfer playing in all of these events would have to file more than a dozen separate tax returns and pay taxes in more than a dozen separate states. Allocating expenses and earnings in these states can be very difficult and difficult.

Don’t forget retirement

In addition to keeping track of expenses, it’s important for athletes to save for retirement. Most sports careers (barring major injury) are “at the finish line” by the time the athlete reaches their 30s. Two of the most popular vehicles for the self-employed without employees are the Solo 401(k) and the SEP-IRA.

For the Solo 401(k), the maximum contribution that can be made in 2024 is the lessor of $69,000 plus a catch-up contribution of $7,500 if the individual is age 50 or older. The deferral works like this: The self-employed person can contribute $23,000 up to 100% of their compensation. The individual can also contribute an additional 25% of net self-employment earnings, up to $46,000, for a total contribution of $69,000.

For SEP-IRAs, the maximum contribution that can be made in 2024 is $69,000 or up to 25% of net self-employment earnings.

Contributions to the Solo 401(k) and SEP-IRA are deductions on the athlete’s tax return. For both the Solo 401(k) and the SEP-IRA, net self-employment earnings are calculated as net profit less half the self-employment tax and plan contribution.

Staying on track

For many individual athletes, sports are not profitable. Every dollar is crucial. That’s why they need to keep track of every expense so they don’t overpay in taxes.

The tax rules for individual athletes can be complex. They should always consult with a tax advisor to tailor their tax needs to their specific situation.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice regarding your specific situation.

VaselineAugust 30, 2024

0 4 minutes read

Tax challenges and opportunities for the self-employed

Vaseline

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