In the realm of professional sports, athletes not only battle it out on the field, court, or rink but they also face a unique financial challenge: the jock tax. In this blog post, we’ll explore what the tax is, how it works, and why it isn’t unique to professional sports alone.
What is the Jock Tax?
For starters, it’s important to note that there is no actual tax called a jock tax. You’ll never see this term appear on a W-2 or any other official tax document.
Instead, “jock tax” has become the term used to describe how athletes are subject to tax in the different states and localities that they play in every year. By this definition, anyone who works in multiple states is subject to this tax.
Some states have instituted sports-specific taxes beyond regular income tax on earned income. Notably, Tennessee assessed a “Professional Privilege Tax” on professional sports income. It has since been eliminated.
More recently, the city of Pittsburgh enacted what they called “Non-Resident Sports Facility Usage Fee.” Fortunately, the Court ruled that this tax was unconstitutional.
Who is Subject to the Tax?
In short, anyone who works or conducts business in multiple states may be liable for tax in those jurisdictions. We know that professional athletes, coaches, and team staff travel to multiple states and cities for games every year.
However, musicians, entertainers, and all types of businesses that operate in multiple states also face taxation in those states.
How Does the Jock Tax Work?
Taxable income is calculated based on the “duty days” an athlete spends in a particular state. Duty days include not only game days but also practice days and travel days.
All top-level professional sports teams pay their players and staff as W-2 employees. This means that the team will do the heavy lifting apportioning income to the various states and withholding tax for those states.
Still, athletes and staff should keep detailed records of their daily activities so that duty days can be accurately tracked for tax time.
Choosing Your Tax Home
Like everyone else, athletes are able to choose where they call home. Many professional athletes have homes in more than one state, which can make it difficult to determine where their tax home is.
Generally speaking, someone’s tax home is where they return after their season and where they spend more than half of the year. Professional athletes should consult with a tax professional to help select and establish a tax home.
Tax Home Considerations
Many professional athletes choose to establish their tax home in non-income-tax states. Currently, the following states don’t have an income tax:
For professional athletes whose tax home is in one of these states, they will still need to pay income tax in the states where income is earned (for games, practice, training, etc.). States with an income tax generally tax their residents on all income regardless of where it is earned.
This means that athletes will need to pay income tax in the state where income was earned and in their home state. Luckily, many states offer a tax credit for taxes paid to other states on the same income.
Federal Tax Consequences
The jock tax refers to state income taxes but how does it affect federal income taxes? Before 2018, taxpayers were able to deduct state income taxes as an itemized deduction on their personal tax returns.
For professional athletes, state income taxes can total millions of dollars per year. This deduction significantly reduced federal income tax for high income earners.
After the Tax Cuts and Jobs Act of 2017, the state and local tax (SALT) deduction was capped at $10,000. For professional athletes, this change has resulted in significantly higher federal income tax bills.
CPA for Professional Sports
The jock tax adds a layer of complexity to the lives of professional athletes, forcing them to consider not only their performances on the field but also the intricate tax implications of their travels and where they choose to call home.
If you’re a professional athlete, coach, or staff member, we would be happy to be your tax professional. We prepare tax returns for athletes, coaches, musicians, and multi-state businesses every year and we would love to prepare yours as well. Reach out to us today!