On July 1, 2021, the NCAA’s Board of Directors voted to support an interim policy allowing collegiate student athletes to profit off of their name, image and likeness. In essence, the support of this policy allows student athletes to receive compensation for engaging in activities such as endorsement deals, in-kind deals, autograph signings and other forms of payment in exchange for the usage of their name, image and likeness.
As the NCAA, individual schools and state legislators look to provide further guidance on this change in policy, more than 460,000 student athletes, their family members and advisers are left to navigate unchartered waters. As these athletes begin seeking opportunities to build their individual brands, it is important to consider integrating six key items into your playbook for success before selling a student’s name, image and likeness:
- Taxable Compensation Considerations
- Impact on FAFSA and Financial Aid
- Consolidated Record Keeping
- Budgeting Fundamentals
- Proper Due Diligence
- Aligning with a Brand that Supports Core Values
1. Taxable Compensation Considerations
Student athletes should be aware that all forms of compensation are considered taxable, not just a direct payment of funds to an athlete. For instance, in-kind deals, in which an athlete is given merchandise or other “in-kind” value for the use of their name, image and likeness, are taxable.
For example, if a clothing brand were to give an athlete a $500 gift card to spend at their stores, the athlete is responsible for paying taxes on that $500. Failing to do so could catch athletes off guard when they are required to pay a sizeable amount come year-end tax time.
2. Impact on FAFSA and Financial Aid
Any profits generated from name, image and likeness compensation is considered taxable income for the student athlete and can greatly impact their Free Application for Federal Student Aid (FAFSA) and Pell Grant eligibility. The FAFSA form is used to award need-based financial aid to students. By increasing the athletes adjusted gross income through name, image and likeness compensation, the athlete can reduce eligibility for need-based financial aid.
Pell Grant eligibility is largely determined by FAFSA information (along with other factors) granting need-based aid to students whose household income is below a $50,000 threshold. If a student is a dependent on their parent or guardian’s tax return, their name, image and likeness compensation would be included in the household’s income calculation. It is important to note that the FAFSA form uses income earned two years prior to the enrollment of the upcoming school year, thus having the greatest impact on athletes with freshman and sophomore eligibility.
3. Consolidated Record Keeping
It is important to have a centralized source of all contracts and correspondence with any parties who wish to engage in endorsement deals. Record keeping can be a formal or informal process, but having a working file of documentation can prove to be invaluable. Having this will help student athletes prepare for their tax returns and can be used as an essential tool in creating a personal budget. If a student athlete can develop this habit of centralizing all records within one source, they will save themselves future headaches.
Lastly, and perhaps most importantly, good record keeping can prevent any unwanted surprises during tax season. As mentioned, a student athlete must pay taxes on any in-kind value compensation received. Without proper record keeping, this could come as an unanticipated surprise when the IRS expects to be paid for this at the end of the fiscal year.
4. Budgeting Fundamentals
The three most fundamental steps in creating a budget are understanding your sources of income, setting a level of spend per month and defining your financial goals.
To effectively set a budget, one must be able to identify each source of income and determine a reasonable spending limit. Student athletes who are receiving endorsement and in-kind value deals should have a clear understanding of how much compensation they are receiving and when they can expect to receive those funds.
Once the athlete’s level of income is determined, they should be wary of immediately spending funds on large purchases. Determining a reasonable level of monthly spending and defining an athlete’s essential expenses should be the top priority.
Lastly, to best inform the student athlete’s budget, consider their long-term financial goals. Whether an athlete would like to save $10,000 or $100,000 by the time they graduate, they should consider and shape their income and expenses levels to match their goals.
Creating an effective budget can be simple but should be done by keeping these pieces of information top of mind.
5. Proper Due Diligence
Student athletes must be deliberate when exchanging their name, image and likeness for compensation. YOKE, a gaming company, recently paid a number of student athletes $20 in exchange for social media promotion. Within the contract, student athletes unknowingly granted YOKE the worldwide, perpetual and irrevocable rights to their name, image and likeness. Although this is perceived as a way to earn quick and easy cash, student athletes must consider what they are giving up in exchange for this cash, no matter the size of the check. It is best practice to consult an attorney before entering into any legal contract.
6. Aligning with a Brand that Supports Core Values
It is extremely important for student athletes to consider whether their potential branding partners align with their interests off of the playing fields and what they want to represent. A student athlete’s personal brand drives numerous opportunities, so it is paramount that athletes are aligned with brands that communicate their core values. Take tennis superstar Naomi Osaka, who uses brand alignment as a key criterion in evaluating potential sponsorship agreements. When asked about this in a recent ESPN interview her agent, Stuart Duguid of IMG Tennis, stated “There are so many things name, image and likeness that are a bigger priority than the money… Unless it is a good fit, there is no point in being in business.”
With the right partners, student athletes can better equip themselves to fully enjoy the benefits of their name, image and likeness.
Contact Jim Boland at email@example.com to receive a complimentary budgeting template or to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.