Many of us have enjoyed the recent Paris Olympics. You’ll probably notice that each event is comprised of either a team or an individual sport.
What you may not know is that professional athletes who compete in individual sports (e.g., boxers, mixed martial arts fighters, golfers, tennis players) face a far different tax protocol than team-based athletes such as professional baseball, football, basketball or hockey players. These solo athletes are usually categorized as self-employed because they are playing only for themselves and not playing for a team.
The challenges and opportunities of taxes for the self-employed
Being self-employed comes with both advantages and disadvantages for taxes. The main disadvantage is that individual athletes must pay self-employment tax. The 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 is subject to self-employment tax. The athlete must pay a tax of 15.3% on the first $168,600 of net earnings and a rate of 2.9% on earnings above $168,600.
On the other hand, an athlete who plays for a professional sports team would have to pay only 7.65% FICA, Medicare taxes on the first $168,600 of income and a Medicare tax of 1.45% on the surplus. The benefit of having self-employment income as a solo athlete is that, unlike W-2 wages, expenses can be taken against self-employment income to lower one’s tax liability.
These individual athletes can deduct several expenses, including:
- Training costs. Most individual sport athletes have a group of people for their training. Deductible expenses include payments for trainers, gym membership, gear, equipment and other training-related costs.
- Travel expenses. Normally, the events are not in the player’s hometown. So, traveling is required. 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 against an athlete’s income. Health insurance is a big deduction for individual sport athletes. In addition, costs having to do with injuries, rehabilitation, personal training and so forth can be deducted.
- Managerial and promotion fees. Fees paid to managers, agents and promoters are also deducted against an 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 a credit card just for their sporting expenses. A credit card can be highly advantageous to use because instead of tabulating all your expenses one at a time, the athlete can just give the credit card’s annual summary to their accountant at the end of the year.
Another factor for these athletes is the tax exposure for the different states where they play. Every state — except Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming and New Hampshire — has a tax on earned wages in their respective 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 states with an income tax. That means that a golfer on the PGA tour who plays in all these events would have to file more than a dozen separate tax returns and pay tax in over a dozen separate states. Allocating expenses and earnings in these states can be very difficult and arduous.
Don’t forget retirement
In addition to keeping track of expenses, it is important for athletes to save for retirement. Most careers in sports (barring major injury) are “at the finish line” by the time the athlete reaches their late 30s. Two of the most popular vehicles for self-employed people with no 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 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 their net earnings from self-employment up to $46,000 for a total contribution of $69,000.
For the SEP-IRA, the maximum contribution that can be made in 2024 is the lessor of $69,000 or up to 25% of net self-employment earnings.
Contributions to the Solo 401(k) and the 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 the plan contribution.
Staying on track
For many individual sport athletes, the sport is not lucrative. Every dollar is crucial. That’s why they need to keep track of every expense so they do not overpay on their taxes.
The tax rules for individual sport athletes can be complex. One should always consult with a tax adviser to tailor their tax needs to their specific situation.
