Federal Tax Bill for MLB, NFL, and NBA players is $3 billion

(Colin Checcio/Fields of Green)
(Colin Checcio/Fields of Green)

Professional athletes are among our nation’s highest-paid employees and, as such, a huge chunk of their income is plowed into the government via the IRS. In fact, federal taxes owed by professional baseball, football, and basketball players will exceed $3 billion in 2013, according to tax experts who specialize in representing athletes.

And, like every other U.S. taxpayer, their bill is due today.

That’s $3 billion of the $2.5 trillion paid in federal taxes by all Americans, contributed by a select but paltry work force of about 3,000. On average, every MLB, NFL and NBA player pays $1 million in federal taxes.

According to data bases compiled by USA Today, players in these three major leagues alone earned nearly $9 billion in 2013. Most of that income is taxed at the highest rate of 39.6 percent, and for the first time a surcharge of .9 percent was added to the previous 1.45 percent Medicare tax employees pay on income that exceeds $250,000 to help pay for Obamacare.

Even though the overall federal tax burden of nearly 42 percent for these athletes is reduced by deductions, experts say most can only claim enough in agent fees, mortgage interest, dependents and charitable donations to whittle the bill down less than 10 percent. So assuming deductions reduce the overall tax burden to 33 percent, the amount paid in federal taxes on $9 billion of earnings is still $3 billion.

“You definitely look at the bottom-line [tax] figure and you go, ‘Jeesh, that’s a lot of money,’ said Colorado Rockies outfielder Michael Cuddyer, who is in the last year of a three-year, $31.5 million contract. “Then you look at the net income and you go, ‘Jeesh, that’s a lot of money too.’’’

State income tax varies greatly depending where an athlete lives. In addition, some states require athletes to pay tax on the income earned during the days they worked in that state, a levy known as a “jock tax.” When it’s all said and done, many athletes are paying as much as half their income in taxes.

“Wages for athletes can be huge but are earned over a relatively short period of time,” said Mitchell S. Halpern, director­ of sports and entertainment accounting services at O’Connor & Drew in Braintree, Mass. “The battle with an athlete is, if he’s making $10 million and taxes take half of that, he’s taking home $5 million. Is that paid over a lifetime? No. And their rate of spending can be, well, it’s amazing how much some guys can spend.”

Unless they are getting sound financial planning and tax advice, athletes can find themselves owing a huge tax bill. Teams generally withhold only the mandatory minimum 25 percent of earnings unless instructed to withhold more. A savvy financial or tax advisor will ask the team to withhold as much as 40 percent for his clients.

“We send memorandums to teams requesting 30 to 40 percent withholding,” said Ryan Losi, who represents about 75 NFL players as owner of the PIASCIK CPA firm in Glen Allen, Va. “Otherwise teams will withhold only 25 percent. Someone making a million dollars, say he’s taxed at 35 percent after deductions but had only 25 percent withheld. He’d need to cut a check to the IRS for $100,000 on April 15. It can be a shock.”

Halpern, who has represented athletes since 1985, is among a group of sports financial advisors creating an association to help increase what he calls “financial literacy” among players.

“We are in our infancy,” he said. “It’s a struggle getting traction with the leagues and players unions. We need to reach out in the financial advisor community to encourage best practices. Unions, the NCAA, high schools, they don’t adequately educate players on this stuff. I had a player get his first paycheck and ask, ‘Who is FICA and why is he getting some of my money?’”

Halpern explained the Federal Insurance Contributions Act to the player and its role in funding Social Security. Education on financial planning and taxation can be as important as learning a playbook for athletes. After all, when the federal government is counting on $3 billion a year in tax payments from MLB, NFL and NBA rosters, it behooves a player to grasp tax laws so he can hold onto as much of his income as possible. For Cuddyer, the ramifications struck him when he had to pay taxes on his $1.85 million signing bonus after the Minnesota Twins made him the ninth overall pick in the 1997 draft.

“The first check I ever had to write was like $300,000-plus in taxes,” Cuddyer said. “I didn’t even realize I had that much money, and now all of a sudden I’m writing a check for it. It was almost like it was Monopoly money. I was 18 and I didn’t even realize I had that much. It’s all fake. “Still to this day, when I get the pay stub it’s kind of like, ‘Jeesh, this is unbelievable.’ Both the net pay and what you pay in taxes is all crazy, crazy.”

So, while many of us live vicariously through our favorite players, April 15 may not be the best day to do so. Then again, who among us wouldn’t want a paycheck so large we’d be forced to wrestle with their tax dilemma?

USA Today staff writers Jorge L. Ortiz and Steve Henson contributed to this story.

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David Carter is the executive director of the USC Sports Business Institute and is an associate professor of sports business at USC’s Marshall School of Business. Bio

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The Next Big Step for the SEC

If you don’t live in, say, Birmingham, Alabama or Knoxville, Tennessee, you may not be keenly aware that this Saturday, tens of thousands of college football fans will file into their favorite team’s stadium to take in a mere intersquad scrimmage. The “Spring Game” for college football programs across the country — many of which are held this Saturday — marks the climax of spring practice, while offering the first taste of football for fans in 2014 and teaser of what’s to come in the fall. Much like college football in general, each Spring Game tends to mean a little more in SEC Country.

However as spring practice ends, on top of mind for SEC administrators — Conference executives, University presidents, and athletic directors alike — will be the launch of the SEC Network, the conference’s new television network in partnership with ESPN.

When you consider that the Big Ten launched its network in 2007, it’s surprising that the powers that be in the SEC have sat on the sidelines for this long. Over the last seven years, they’ve watched the Big Ten Network grow from a meager distribution base largely within its conference footprint, to now being delivered to approximately 52 million homes in North America. That seven-year head start in not only distribution, but carriage fees, has resulted in fully vested Big Ten schools (Nebraska receives a partial payment at this point in time) believed to each currently receive 25.7M/yr, $7.6M of which reportedly comes directly from the Big Ten Network. This is even before Jim Delany and Big Ten executives land a considerably higher television contract when it expires in 2016, now armed with Rutgers, Maryland and most importantly the 15 million households in-market they collectively deliver. The SEC distributed $20.7M to each member institution last year even without revenues generated from having its own conference network.

Nevertheless, the SEC is ready and launches its network at a very opportune time, with a tremendous thirst for televised sports content in the marketplace, of which the Conference undoubtedly provides the best product.

The SEC Network will launch on August 14th in 20 million households — with Dish Network and AT&T U-Verse — as of now, which represents a broader distribution figure than either the Big Ten Network or Pac 12 Network had at launch. It’s fruitless to compare that figure with the Big Ten Network, as that network is now fully established, however, looking at the slow growth of the Pac 12 Network as it continues its seemingly neverending distribution battles, I imagine SEC executives appreciate their advantageous starting position.

What we’ll be watching for during this college football offseason will be the cable and satellite distributor dominoes beginning to fall one by one as the SEC Network gets picked up. While it’s unrealistic to expect it to reach a level of distribution that’s taken the Big Ten Network years to build, it’s not out of the question that the SEC Network surpasses the Pac 12 Network in relatively short time. ESPN President John Skipper has gone on record expecting the SEC Network to reach 75 million subscribers (not coincidentally the same number of subscribers as ESPNU, which appears to be the model).

Seeing that ESPN’s partnership in the venture has already lead to Dish Network (and its 15M subscribers) picking up the SEC Network as a part of a larger deal between ESPN and the Satellite provider, it’s easy to see how Skipper’s figure might be quickly attainable. Additionally, the August 28th game between Texas A&M and South Carolina is scheduled to air on the SEC Network, a marquee matchup of national interest that will provide a necessary nudge to distributors during this negotiation. And if that doesn’t work, there’s always Tebow!

So, as spring football comes to a close, the distribution battles prior to the August launch of the SEC Network are something we’ll have an eye on. What the total distribution figure ends up being, and what carriage fee the conference is able to negotiate, will determine how soon the SEC and its member institutions can eclipse the Big Ten financially.

Large market, highly branded college teams win over time

(James Snook/USA TODAY Sports)
(James Snook/USA TODAY Sports)

The last couple of weeks have featured the customary upsets on the college basketball court, as well as the ongoing and heated debate off it regarding the commercialization of college athletics.  But all this hand-wringing about the state of college athletics and, more to the point, the commercialization surrounding it, is misguided.

The debate, which has historically centered on the differences between the so-called collegiate and professional models, has recently shifted to how best blend the two. The collegiate model has striven to balance academics and athletics, while optimizing the right amount of commercialization.  At its core, the professional model is about generating revenue and, over time, sports franchise value. On the surface it would appear that these are on a collision course; but the collision happened long ago, and the fundamental elements that increase franchise value in professional sports are already deeply engrained throughout college athletics, and drive collegiate franchise values. Look no further than the issue of competitive balance for evidence of this.

True competitive balance is not desirable if a primary goal is to increase franchise value. Consider how players are optimally distributed in pro sports. Over time, every team in a league, including small-market teams, is better off if the large market or highly branded teams sign the best players and perform well. Accomplishing this increases media and corporate revenue at both local and national levels; revenue that finds its way back to every team in the league, albeit at different amounts.

Essentially, the key to long-term asset appreciation is to allow small-market teams to win just enough to maintain fan interest, whether these fans are face painters or linked to corporate America.  This must be accomplished in a manner that softly guarantees that the large market or highly branded teams win over time.  When this happens, all those hoping to make money from sports benefit, ranging from athletes, agents and sports marketers, to the respective league, its franchise owners and their business partners, most notably the media and sponsors.

Consider how revenue is distributed in college sports. The vast majority of the NCAA’s budget comes from its 14-year, $10.8 billion agreement with CBS and Turner Sports to televise the men’s basketball tournament. Estimates suggest that this enables, on average, about $740 million annually to be distributed to conferences and schools. But how is this revenue allocated?  The core determinants by the NCAA are how well a conference performs over a rolling six-year period in the tournament; the number of scholarships the school offered the previous year; and the number of sports/teams the school fields.

Although these factors were rooted in helping stabilize the athletic department budgeting process and removing the immediate fiscal impacts associated with a specific loss in the tournament by broadening distribution criteria, additional consequences have proven even more impactful.

The rolling six-year average mitigates against too many “Cinderella’s” from small conferences and modest media markets upsetting the revenue apple cart over time, as this would suppress revenue generation. With regard to scholarships and the number of sports/teams offered, big market and well-branded athletics programs are far better positioned to excel because of their media market size, access and attractiveness to corporate America and athletic heritage, which routinely drives boosterism and scholarship funding. Each increases revenue while simultaneously positioning these individual schools to receive the lion’s share of NCAA distributions.

These distribution criteria all but guarantee that the top programs from the big conferences maintain their status as revenue generators and, by extension, increase their franchise value over time.  To this end, and as is the case in pro sports, college athletics is structured and fundamentally incented to ensure that its large market or highly branded teams win over time.

So, why all the misguided hand-wringing over the perceived over-commercialization of college athletics? After all, not only has this structure firmly taken hold over the last decade, but it’s also in the best interests of anyone that hopes to profit from sports.

Just something to think about as we prepare to watch a Final Four consisting of Florida, UConn, Kentucky, and Wisconsin – four ‘big market’ and/or well-branded teams.

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David Carter is the Executive Director of the USC Sports Business Institute and is an associate professor of sports business at USC’s Marshall School of Business. Bio