NFL free agency and the draft are exciting times for the league because of the optimism and hope they bring for a new season or career-changing opportunity. When player contract terms like signing bonuses and performance incentives are announced, sports media commentators often emphasize the importance of playing for a team based in a state with no income tax for players (and coaches) to avoid paying state taxes on their compensation.
That sentiment does not capture the true multistate tax payment and compliance obligations that professional athletes and their coaches face. And as a practicing state tax advisor and passionate football fan, this is my time to shine and geek out in explaining this stuff!
While AK, FL, NH, NV, SD, TN, TX, WA, and WY do not impose broad-based personal income taxes, the remaining jurisdictions in the U.S. do and seek to collect taxes from nonresident athletes and coaches playing games or practicing in the state. Accordingly, a critical question that comes up in this context is how states determine what is considered to be state-source income, i.e. income earned in the respective state to be subject to a personal income tax.
In the context of compensation paid to athletes, coaches and other team personnel, more than 15 states use what is referred to as a “duty-day” allocation formula in determining the proper method for calculating how much income is earned in the state. This method multiplies the player or coach’s compensation by a ratio of the amount of days spent performing services in the state divided by the total days performing services everywhere. The period used in the calculation usually covers training camp, the preseason, the regular season, the Pro Bowl, and the playoffs. Other jurisdictions may allocate income earned by athletes and coaches based on a ratio which looks solely to games played in the taxing state over total games played everywhere.
So, this means that even if a player or coach lives in and plays for a team where there is no income tax, they will still owe income taxes in states (and certain cities with their own separate taxes) where they play games, practice, and train. The type of income or compensation that may be carved out from the allocation and therefore not taxable outside the state of residence includes severance pay, termination pay, contract or option year buy-out payments, expansion or relocation payments, or any other payments not related to services rendered for the team.
The other major bucket of income that gets excluded and not subject to tax outside of where the player or coach lives is the guaranteed signing bonus. If that signing bonus is separately paid and not conditioned on playing or any other contingency, it should not be taxable by states where games are played if the player or coach does not reside in that state.
Hopefully, this article sheds a little light on an area that is often misunderstood and misreported by the media. Additionally, this helps demonstrate the value of living and playing for a team in a state with no income tax, like the Sunshine State.
