Here's How Professional Athletes Pay Taxes

Here's why Lebron James pays taxes in 18 states!

This past December, baseball slugger Aaron Judge signed a nine-year deal worth $360 million to stay with the Yankees. This is one of the biggest contracts of all time. Others include Lionel Messi's $673.9 million, four-year contract with FC Barcelona and Patrick Mahomes' $503 million, 10-year contract with the Kansas City Chiefs. As a result of these big pay days, professional athletes often face unique tax challenges. Here's a look at how taxes are calculated for professional athletes.

Taxes on player salaries and bonuses

The largest source of income for most professional athletes is their salary from their team or league. Most teams will withhold taxes from an athlete's paycheck throughout the year. These withheld funds are sent directly to the IRS and applied toward an athlete's total tax bill for the year. Professional athletes may also receive bonuses from their team or league, in addition to their salary. These bonuses are taxed as regular income, and any withholding will be applied towards an athlete's total tax bill for the year as well.

Endorsements and other income streams

Professional athletes often receive additional income from endorsements or other sources. This money is treated differently than salary and bonuses when it comes to taxes because it is considered self-employment income by the IRS. Self-employment income is subject to self-employment taxes, which includes both Social Security and Medicare taxes that must be paid by the athlete themselves (rather than having them withheld).

Depending on where an athlete lives, they may also owe state and local taxes on this type of income. Another complication athletes need to take into account is if their endorsement is not paid in cash but in "swag," like watches, cars, and designer clothing. Athletes are still liable for paying taxes on those items and must have enough cash saved to pay it.

The jock tax

While the average taxpayer will typically only have to worry about federal and state taxes, athletes have an additional tax to pay. Athletes are subject to what's known as the "jock tax," which is when they must file tax returns in all of the jurisdictions where they play that have an income tax. This is one way states try to boost their revenues.

On average, an NFL player will file between eight to 12 non-resident state tax returns, NBA players file 16 to 20, and MLB players 20 to 25. Thanks to the jock tax, one of the most successful basketball players, LeBron James, pays income taxes in 18 states. Visiting professional teams can potentially pay thousands of dollars in state tax revenue for every day they spend in that state.

It's important to note that the jock tax is not limited to professional sports; entertainers and even certain corporate executives may also be subject to a jock tax if they're traveling for their job. Ultimately, it is an additional expense that athletes have to account for every time they travel outside their designated jurisdiction in order to perform their job duties.

International taxes

World-traveling athletes like golfers and tennis stars have an additional layer of taxes to navigate. Not only must they consider the tax laws of their home country and country of residence, but also the countries where they compete. Add to that the tax treaties (if there are any), and it's easy to see why tax season can feel like a huge ordeal for these international stars.

Tax planning and preparation

It can be difficult for professional athletes to keep track of all this and pay all applicable taxes in a timely manner. Professional athletes should consider working with a tax professional who specializes in sports finance to ensure that all relevant taxes are paid correctly and on time each year. They can also help identify potential tax savings opportunities and ways to minimize taxes without being on the IRS's radar.

Navigating taxes can be a tricky process for professional athletes due to their multiple sources of income, including player salaries, bonuses, and endorsements. Athletes also have to worry about additional taxes, such as the jock tax and international taxes. It's a good idea for professional athletes to work with a financial planner or accountant who specializes in sports finance.