NIL Income for Student-Athletes: Tax Implications and Emerging Pitfalls for Practitioners

By Aaron Klein, CPA-East Texas, and Andy Barg, CPA-Fort Worth

The rapid expansion of Name, Image and Likeness (NIL) opportunities has created a new class of earners: student-athletes with complex tax footprints but little financial literacy. For CPAs and tax professionals, the challenge is not simply reporting NIL income; it is navigating an environment where IRS assumptions, outdated frameworks and inconsistent guidance create traps for both taxpayers and advisors. A recent TXCPA committee meeting with the IRS Taxpayer Liaison office indicated an increased focus by the IRS on these transactions. This post highlights some important tax implications and key fallacies currently embedded in the IRS’s approach to NIL compliance.

1. NIL Income is Not “Scholarship Adjacent” — It is Business Income

A common misconception is that NIL income is similar to scholarships or tied to educational status. In fact, NIL payments are typically self-employment (SE) income under IRC  Section 1402, as student-athletes operate as independent businesses through endorsements, social media, autographs, appearances and licensing. While the IRS has sometimes described NIL as “compensation for participation in athletics,” it is more accurate to view it as entrepreneurial income – not wages, scholarships or fringe benefits.

2. Collectives Create a False Impression of “Passive” Income

Many student-athletes assume that payments from NIL collectives are “stipends” or “grants,” with some collectives encouraging this belief by using terminology like financial aid instead of wages. In truth, collective payments are taxable. These payments typically do not qualify as gifts under Section 102, are not considered scholarships under Section 117, and are generally not exempt from SE tax. Additionally, the IRS notes there is limited Form 1099 reporting, which increases confusion among student-athletes. The IRS issued guidance in 2023 (Memo AM 2023-004) clarifying that most NIL collectives do not qualify as charitable organizations.

3. Barter and Non-Cash NIL Compensation is Routinely Overlooked

The IRS emphasizes cash payments in its public messaging, but NIL deals frequently include free apparel, travel, meals, cars, housing, training services and equipment. These are taxable at fair market value, yet many athletes – and even some advisors – fail to capture them.

4. Multi-State Tax Exposure is Real — and the IRS Underplays It

NIL deals often involve appearances, events or promotional activities across multiple states. The IRS has not meaningfully addressed the state-sourcing complexity inherent in NIL income. Key considerations include sourcing income to the state where the NIL activity occurs, social-media-based NIL deals creating nexus in multiple states, nonresident filing obligations, and varying state conformity rules. The IRS’s silence on multi-state sourcing creates a false sense of simplicity.

5. The IRS Overestimates Recordkeeping Sophistication

The IRS’s public posture assumes student-athletes maintain adequate books and records. In practice, most do not. Common issues include no tracking of business expenses, commingled personal and NIL funds, no mileage logs for appearances, no documentation for promotional activities, and no understanding of deductible versus nondeductible costs. The IRS’s expectation of “ordinary and necessary” substantiation is technically correct but practically unrealistic for 18- to 22-year-olds with no training. The recordkeeping requirements for travel and entertainment expenses are particularly problematic for preparers.

6. The IRS Assumes Athletes Understand Entity Choice — They Don’t

Some athletes form LLCs or S-corps at the suggestion of agents or collectives. The IRS’s guidance assumes these structures are used correctly. In reality, many athletes form entities without understanding tax consequences, make S-corp elections without reasonable compensation analysis or use entities to pay personal expenses.

7. The IRS Overlooks the Compliance Burden on First-Time Filers

Most student-athletes have never filed a tax return before receiving NIL income. The IRS’s messaging assumes a baseline level of tax literacy that simply does not exist. Common issues include no estimated tax payments, no understanding of SE tax, no awareness of filing thresholds, and no familiarity with 1099s or W-9s.

8. Audit Risk is Higher Than the IRS Implies

While the IRS considers NIL income as ordinary income, it is seen internally as high-risk due to inexperienced taxpayers, significant unreported earnings, non-cash compensation, multi-state issues, insufficient business deduction documentation and lack of 1099 reporting. The IRS's growing focus suggests rising concern over unreported NIL income.

9. Class Action Litigation Expected to Provide More Structure

The House v. NCAA settlement, finalized in June 2025, provides up to $2.8 billion in backpay for athletes from 2016-2025 and introduces a 10-year revenue sharing plan, allowing schools to pay up to $20.5 million annually to athletes starting in the 2025-2026 athletic year. It also requires NIL deals valued at $600 or more to be reported and vetted for fair market value. The settlement is expected to transition student-athlete compensation to a more professional model of direct compensation by schools.

Conclusion

NIL remains a specialized sector; however, it is experiencing rapid growth among small-business taxpayers who face distinct risks and have access to limited guidance. Practitioners who are familiar with areas where the IRS may lack clarity will be well equipped to safeguard their clients and foster enduring advisory relationships. The IRS has announced plans for further guidance and potentially even a CPE webinar this summer, so professionals engaged in this area are encouraged to closely monitor updates from the IRS.

See Name, image and likeness income | Internal Revenue Service