How the rule changes for NCAA compensation affect the taxation of nonresident student athletes in the US

NCAA NIL policy and nonresident alien athletes

Thursday 1 July 2021 will forever be remembered for the dawn of a new era in US college sports.

Students who participate in National Collegiate Athletic Association (NCAA) competitions are now – for the very first time – entitled to make money from a wide variety of business ventures, without losing their eligibility to compete.

Perhaps the most interesting developments surround what is known as ‘NIL’ rights (name, image and likeness).

A combination of state laws and NCAA NIL policy changes has now removed restrictions preventing athletes from selling their NIL rights.

While these changes do not mean that college football players can suddenly begin to receive big salaries, they do open the door for athletes to claim a bigger piece of the billions of dollars generated by US college sports each year.

However, making money from NIL will not necessarily be straightforward for every student athlete.

There are thousands of nonresident athletes on scholarships at universities around the US.

For many of these international students, it will be advisable to steer clear of NIL income – at least for now – lest they violate the terms of their visa.

In this guide, we will take a closer look at the NCAA rule changes and examine how they affect nonresident athletes in the US.

Note: As the new laws and rule changes have only recently been announced, it is important to keep in mind that exactly how nonresident athletes can benefit from them has yet to be fully determined. Be sure to check back for the latest updates!

What is NIL?

NCAA rules previously prohibited athletes from accepting money from businesses in exchange for the right to use their name, image and likeness – for example for advertising or by computer game manufacturers.

However, changes to NCAA Name Image Likeness (NIL) Rules mean this is no longer the case.

Students are now entitled to use their status as a college athlete to promote their own public appearances or companies for the first time.

What type of activities can athletes pursue in order to generate income?

While some higher-profile college stars will undoubtedly generate more routes to income than other ‘lesser known’ athletes, it is likely that the new rules will offer opportunities to every student-athlete.

This could include receiving smaller amounts of money, gifts or free meals in exchange for the promotion of a local business.

Athletes can appear in national advertising campaigns; partner with brands to advertise through social media channels; start their own youth sports camps or teach lessons; launch their own businesses; sell memorabilia; make paid public appearances for speaking events or autograph signings, and use their NIL rights in a variety of other creative ways.

While colleges will not be able to pay their athletes directly to play sports, schools are entitled to offer additional education-related perks — such as scholarships for graduate school, internships or computer equipment.

How do the NCAA rule changes affect international students and nonresidents in the US?

International student-athletes account for roughly 12% of all Division I athletes in the US.

In fact, as of 2019, 60% of D1 tennis players, 37% of men’s soccer players and 32% of women’s golfers are nonresidents who are participating on F visa status.

The new regulations do not specify which types of student-athletes are entitled to earn income.

With this in mind, it can be reasonably assumed that international students are covered by the new rules.

However, it is not as straightforward for nonresident athletes to earn income as it is for US citizens.

The first factor that international students must keep in mind is their visa.

Remember, in order to qualify for an F-1 visa, a student must agree that they will only pursue one of three types of off campus employment:

  • Curricular Practical Training (CPT)
  • Optional Practical Training (OPT)
  • Science, Technology, Engineering, and Mathematics Optional Practical Training Extension

What’s more, all work undertaken by F-1 students must be related to their area of study and must be authorized by their school before they can start to earn an income.

Importantly, an F-1 visa does not specifically authorize international student-athletes to enter into endorsement agreements to secure remuneration for their name, image, and likeness.

Should a student violate these regulations, they will no longer be in compliance with the terms of their visa.

international student sports scholarship tax

How should schools advise their nonresidents on this issue?

As this issue is ever developing, it can be difficult for schools to properly advise their nonresidents.

While some schools are taking a conservative stance to NIL income for nonresidents, others have opted for a ‘head-in-the-sand’ approach.

Sprintax spoke to Trisha Chaparala Iyonsi, International Employment and Tax Coordinator at Oklahoma State University.

Iyonsi believes that the situation is complicated because schools have to consider visa regulations and also NCAA rules.

“I think that it is really important for schools to keep the communication lines open to their compliance officials and the legal counsel for their Athletics department. In some cases, the Athletics department may not be aware that different rules apply for nonresident athletes.”

As unauthorized employment is prohibited for international students, schools need to properly define what constitutes ‘employment’ before they can advise their nonresidents. In some situations, it may be advisable to seek advice from United States Citizenship and Immigration Services (USCIS) or the Department of State on the matter before the nonresident begins to accept NIL income.

“One of the common types of NIL income opportunities that will be available to athletes will be accepting money to sign autographs,” says Iyonsi. “For example, let’s say a car dealership asks a college football player to appear in their store to sign autographs for customers. If the athlete accepts money for this service, I think it is likely that this would be viewed as unauthorized employment.”

“However, it is also important to acknowledge that the student athlete has to be responsible for the decisions that they make.”

So what type of income are nonresidents entitled to earn?

There are some common types of income that international students are entitled to earn. These include scholarship and income from OPT and CPT.

Any income earned from prize money is not in violation of visa agreements. Of course, the student is required to report this income and it is taxable at 30%.

However, it is important to remember that different sports have different rules. And not every athlete will be entitled to accept prize money.

Iyonsi told Sprintax that schools will also need to advise their students on whether they should accept income from royalties.

“I know that some PHD students publish books and receive royalties. This income is usually fine.”

“But what if a student’s face is used in a video game? Can they accept royalties for this? There are many grey areas like this that we are still waiting for clarification on.”

“This is why it can be challenging to properly advise nonresident student athletes.”

What is the difference between active and passive income? And why does it matter?

In short, work generates ‘active’ income and not ‘passive’ income.

The IRS considers ‘work’ to be any arrangement that results in the payment of wages, salary or other compensation in exchange for services rendered.

Passive income is income that is not effectively connected with the conduct of a US trade or business.

There is no limit on the amount of passive income that nonresidents on F or J visas can earn while in the US.

However, it is important to keep in mind that F and J visa holders are not entitled to trade actively or be considered professionals.

If you do trade professionally, this may be considered as work (effectively connected with the conduct of a US trade or business) and a violation of visa conditions.

There are three main categories of income, according to the IRS:

Active Income (Work)

Income received for performing a service:

  • Wages
  • Tips
  • Salaries
  • Commissions
  • Income from businesses in which there is material participation

Self-employment or anyone with ownership interest in a business if it meets the IRS definition of material participation is also considered active income.

Creating a product, media content, materials, or services with an intent to produce active income at a later time can also be seen as ‘work’.

Passive Income

This is income from a business in which the taxpayer does not materially participate. This includes earnings from:

  • Rental property
  • Limited partnership
  • Royalties
  • Savings Account Interest
  • Other business without active involvement (aka silent investor)

Royalty payments are considered passive income. However, any initial effort or expenditure to produce royalties can be considered ‘work’ (writing a book, creating a product, social media content) so be careful! ‘Material Participation’ can also change passive into active income.

Portfolio Income

Money received from:

  • Investments
  • Dividends (not Passive)
  • Qualified Dividends
  • Interest
  • Capital gains.
  • Royalties from investment property

Note: Students will need to know which tax forms are generated for each income type.

What is the Material Participation test?

Material participation tests are a set of Internal Revenue Services (IRS) criteria which help to determine whether a taxpayer has materially participated in business, rental, or other income-producing activity.

Any passive activity you perform to earn passive income is no longer considered passive income if participation is considered “Material” by the activity meeting any one of the following criteria:

  • Activity for more than 500 hours during the year
  • Activity constitutes substantially all of the participation by all individuals (including non-owners) in the activity for the year
  • Activity takes more than 100 hours during the year, and other individuals (including non-owners) participate less than the total number
  • Activity is more than 100 hours during the year and the taxpayer’s annual participation in all significant participation activities is more than 500 hours
  • Materially participated in the activity for any five years (whether or not consecutive) during the 10 immediately preceding tax years
  • For a personal service activity, the taxpayer materially participated for any three tax years (whether or not consecutive) preceding the current tax year, or
  • Based on all the facts and circumstances, participation is on a regular, continuous, and substantial basis during the year

Can international students earn NIL income from outside the US?

F-1 regulations can only be enforced when the student is on US soil.

If it is a US company paying for services while the student is abroad, it would be on that US company to examine whether they will allow this and what foreign tax implications they must follow.

However, the student would need to be very careful and cease all employment once returning to the US.

They must also make it clear to the company that these services were performed abroad. It would not be good if the company erroneously issued a W-2 or 1099 when the work was foreign sourced.

Finally, nonresident students must remember that they can’t work for a foreign based company while in the US.

The employment regulations in the US are based on the physical location of the employee and not the country of the company.

 

Wait… aren’t sports a hobby? Students can earn income from their hobby, right?

Millions of people enjoy hobbies that are also a source of income. Sports scholars are no different.

In fact, many sports scholars began playing their chosen sport as a hobby when they were a child. But at what point does the IRS stop considering a sport to be a hobby?

In short, the IRS defines a hobby as any activity undertaken for pleasure rather than for profit.

Taxpayers must report income earned from hobbies on their tax return. The rules for how to report the income and expenses depend on whether the activity is a hobby or a business.

 

Is it a business or a hobby?

While people usually engage in a hobby for sport or recreation – and not to make a profit – a key feature of a business is that people do it to make a profit.

In order to determine whether an activity is a hobby, you must consider the nine factors below. No one factor alone is decisive.

You must generally consider these factors in determining whether an activity is a business engaged in making a profit:

  • Whether you carry on the activity in a business-like manner and maintain complete and accurate books and records
  • Whether you have personal motives in carrying on the activity
  • Whether the time and effort you put into the activity indicate you intend to make it profitable
  • Whether you depend on income from the activity for your livelihood
  • Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business)
  • Whether you or your advisors have the knowledge needed to carry on the activity as a successful business
  • Whether you were successful in making a profit in similar activities in the past
  • Whether the activity makes a profit in some years and how much profit it makes
  • Whether you can expect to make a future profit from the appreciation of the assets used in the activity

International students who are in the US on a F or J visa status must be careful when earning income from hobbies.

The Department of Homeland Security could consider this to be income from ‘work’ and in violation of the terms of their visa. Nonresidents should seek the proper permissions before earning a profit from their hobby.

Can students accept income directly from schools in exchange for their NIL?

No.

As things stand and according to NCAA rules, schools are not allowed to pay athletes directly for the use of their name, image and likeness.

However, it is important to point out that the new law does not prohibit the payment of athletes by schools – this rule is enforced only by the NCAA.

The situation remains fluid. It will be interesting to see whether the NCAA adapts this rule as each state begins to implement the new laws through their own legislation.

 

Are schools entitled to arrange NIL opportunities for student-athletes?

Some state laws restrict schools from arranging deals for their athletes. The NCAA rules leave that decision up to individual schools.

However, schools must tread carefully and ensure that they don’t do anything which could be considered paying the players or using NIL payments as a recruiting tool.

 

Are there any other restrictions on how athletes can make money?

Yes – although this can depend on the state or school where the student resides.

For example, in some locations, athletes are not entitled to endorse alcohol, tobacco or gambling products. Others have some restrictions on whether athletes are allowed to use school logos and other copyright material in any paid opportunities.
Most states and schools also prohibit athletes from signing any deals that conflict with the school’s sponsorship agreements.

For example, a basketball player on a team sponsored by one brand would not be allowed to wear the shoes of a rival brand during games. However, in most cases, that athlete could promote whichever brand of sports apparel they prefer during times when they are not playing games or participating in other team activities.

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When can students begin to make money from their NIL?

Right now!

In December 2020, Aquinas College volleyball player Chloe Mitchell became the first college athlete to profit off her NIL. Mitchell became famous on TikTok and started signing endorsement deals. When NIL rules took effect in the NAIA, she was able to continue making money.

Can student athletes hire agents to help them organize their income?

Yes.

Athletes are entitled to hire professional help in the form of lawyers, agents, tax professionals and others.

However, while agents can help student athletes with NIL deals, their contracts can’t specifically stipulate that the agent would represent the athlete in future negotiations should they turn professional.

Are students required to report their NIL earnings to their school?

Simply put, NIL policy for college athletes depends on the state in which the student is attending the school.

Most state laws indicate that athletes need to share details of any potential NIL deals with the school within a particular time frame. There are, however, some states where this is not a requirement.

NCAA rules do not require students to report this income to their school.

How should schools manage payments to nonresident athletes?

In general, there should be no change for schools in relation to the taxation of scholarships or other income paid to athletes.

While the NCAA rule changes are significant, as we mentioned above, they do currently stipulate that ‘at no point should a university or college pay student-athletes for name, image and likeness activities.’

However, should the situation change, and schools be permitted to pay athletes for NIL, such payments should be treated as independent services, royalties and business income etc and taxed as usual.

What will happen next?

It’s unknown whether the United States Citizenship and Immigration Services (USCIS) or the State Department will make changes to the rules to enable nonresidents to earn this income.

Iyonsi, however, believes that the new rules, as they currently stand, could act as a deterrent to international student athletes.

“Every year we have had more and more international athletes. However, I worry that this could hurt the recruitment of nonresident athletes.

“I worry that new students might think ‘well why would I go there? I can’t even make money like my American counterparts.”

Is it really possible that a US sports scholarship will become a less attractive offering for international athletes? Or can the USCIS find a way around these rules – ensuring that nonresidents will have the same right to benefit from NIL income as their US-born teammates.

The NCAA’s response to these issues and the long-term implications for nonresident student athletes will be fascinating.

Watch this space.

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Hey I'm Stacy! I'm dealing with US taxes and can't wait to help you prepare your tax return! I've been working with taxes for like forever, so you can totally trust my expertise. Sprintax can make things much easier for you. Check out my blog posts and feel free to ask me any questions.

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