NFL rookies have many reasons to be proud after signing their first deal. Not only have they proven that they have what it takes for an NFL team to invest in them, but they have also earned the chance to show the world that they deserve to play at the professional level.
There will be many firsts for rookies over the next year. In addition to adapting to life with a new team at the highest level of competition, they are most likely stepping out on their own for the first time. For example, receiving a signing bonus might mark their first paycheck, which is likely more than double the amount the average person in the United States earns in a year. Many players will even earn more on their signing bonus than what some people make in a lifetime.
Players need to realize that along with income comes responsibility. And, there is no greater (well, greater enforced at least) responsibility than paying taxes. When players receive their first check, they will probably see that, at a minimum, the check is worth at least 22% less than the number in the contract just signed.
Many players might be aware that employers like their NFL franchise are required by law to “withhold” income taxes from bonus checks. That’s right. Teams must follow the same tax rules as typical corporations. The standard withholding for federal taxes (there may be state taxes, too), is 22% of the bonus up to $1M and 37% of the bonus amount that exceeds $1M. So, you might ask, where does this go? The Internal Revenue Service (IRS) collects this amount from the employer (or team) and applies it towards the player’s total income tax due for the calendar year. That is why it’s critical for players to hire a tax preparer, such as a Certified Public Accountant (CPA), to help them determine what they will owe each year.
Players might be thinking, “OK, I paid them part of my bonus now, but I can go back and get a refund later, right?”Not always. In the United States, the top Federal Tax bracket of 37% takes effect once a person has $510,300 of annual income (if he or she is unmarried)*. Since the NFL Rookie Minimum Salary ($495,000) is just short of the top limit, the player’s salary alone just about pushes them into the top bracket. This means part of their bonus that may have already been taxed at 22% (anything under $1M) is now going to be taxed at 37%. They may owe the Federal Government another 15% on top of what the IRS has already taken out of their check.
So, what can NFL players do to better prepare for income taxes? Most importantly, they should consult with a qualified tax preparer to ensure they have a plan in place to make all their payments on time and without penalties. The CPA will also investigate the legal ways to lower their tax liability. For example, if a player gives money to charity or uses a mortgage to buy a house, he can potentially deduct those expenditures to lower his final tax liability for the year. Taking the time to work with a CPA professional can help NFL players tackle their taxes successfully.