Complicated U.S. Tax Code Hits Players During NFL Playoffs

Kurt Badenhausen, Forbes Staff writes: The only time NFL players are seen as equals, from kickers to quarterbacks, is during the playoffs…at least as far as compensation is concerned. Article 37 of the NFL’s Collective Bargaining Agreement establishes playoff shares for players competing in the postseason. Each player earns the same income as his teammates for as long as his team is alive.

This year, wild card players earned $20,000 for the first round of the playoffs, while division winners who participated in that round made $22,000. In the divisional round this past weekend, all players made $22,000. Next weekend, they will bring in $40,000. The Super Bowl winners will receive $88,000 while the losers will earn $44,000. As a tax accountant for athletes, I am often asked how this money is taxed at the state level, seeing as how most states have a jock tax. The answer is not as simple as it seems.

Conventional thought is that the state hosting each playoff game will tax the full value of the playoff share. This sounds logical, but it fails to consider practice days leading up to the playoff game, which are work days during which players earn part of that money. It also misses the fact that states determine taxable income based on W-2 income for the whole year. Most players will practice and play during 2013, the same year in which the playoff shares are paid.

To illustrate how players are taxed, let’s assume that retiring legend Ray Lewis will ride off into the sunset carrying the Lombardi Trophy. The Ravens’ first playoff game was at home. Lewis’ playoff share would have been fully taxable in Maryland had they lost. Since the playoffs occur in the new year, he could have chosen to maximize his 401(k) contribution, meaning that instead of $22,000 being taxed to Maryland, only $4,500 would have been taxable.

The Ravens won their first game and earned the right to play some road games, but that complicates the tax picture. Lewis earned another $22,000 inDenver this weekend and will make $40,000 in Foxborough next weekend when the Ravens take on the Patriots. If they win the Super Bowl, Lewis will receive $88,000 in New Orleans, along with a Super Bowl ring worth about $20,000 (the value of the ring is taxable). All told, Lewis could have $192,000 in taxable earnings in 34 days of services in 2013. This number reduces to $174,500 after his 401(k) deduction.

Each state is entitled to tax Lewis for the number of days he spent in its jurisdiction performing services for his team. Players typically arrive in town the day before road games for a walk-through and return home right after the game (two duty days). Thus, Massachusetts and Colorado will each tax Lewis on 2/34 of $174,500, or about $10,000 of income. Players will spend seven days in New Orleans for the Super Bowl, so Louisiana will tax 7/34 of his earnings, or about $36,000. Maryland taxes the remainder.

Since Lewis is retiring, his calculation is fairly simple. But consider Lewis’ teammate, Ray Rice, who will presumably remain with the Ravens next season. Rice will earn the same $174,500 during the playoffs as Lewis, but he is also slated to earn $1 million in base salary plus incentives of $1.75 million next season (ignoring any signing bonus due, which is usually only taxable in a player’s home state).

Assuming training camp begins July 19, Rice will perform 166 duty days during the 2013 season plus the 34 from the 2012-13 playoffs for a total of 200. Rice’s 2013 taxable income will be $2.925 million if he earns all of his incentives. This will be the baseline for taxing the playoff income he is currently earning. His Massachusetts and Colorado taxable income will be 2/200 of $2.925 million, or about $29,000; and his Louisiana income will be 7/200 of that amount, or about $102,000.

While this method of calculation seems wholly unfair to Rice as compared to Lewis, these are the rules as written in the states’ codes and regulations.  You can subscribe to Kurt Badenhausen on his Facebook profile.