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CIBC’s podcast series, Financial Toolbox, understands that financial wellness is not innate, it’s learned. Many people go their whole lives without access to networks, or education on financial literacy. Whether you’re a member of the next generation wanting to start your financial journey out strong or you’re more seasoned and would like to improve your understanding moving forward, our team of experts are here to equip you with the information you need to make your financial literacy journey a reality.
Introduction:
Welcome to Financial Toolbox, a podcast series sponsored by CIBC Bank USA that understands that financial wellness is not innate, it's learned. Whether you're a member of the next generation wanting to start your financial journey out strong or you're a lifelong learner looking to improve your financial standing moving forward, our team of experts are here to equip you with the information you need to help make your financial ambitions a reality. And now for our next episode.
Josh Davis:
So hello and welcome to Financial Toolbox. My name is Josh Davis and I spearhead the sports entertainment division here at CIPC Private Wealth, and I'm pleased to be your host today. For this episode, we'll discuss NIL taxes and the money no one talks about. Joining me today to discuss further is Andrea Stepka. She's a CPA down in Roanoke, Virginia.
Andrea Stepka:
Yes, I am a CPA. I'm also a partner at a firm in Roanoke, Virginia called Foti, Flynn, Lowen & Company.
Josh Davis:
Great. Awesome. And before we get started, if you want to tell a little bit about yourself, Andrea.
Andrea Stepka:
Yes, I am, like I said, a partner in a CPA firm. I have been here since 1995, so I just completed my 31st tax season, oddly enough. I specialize like you do in sports and entertainment. I work with quite a few, amass quite a few NIL athletes as clients, and then also work in the NFL, NBA range as well.
Josh Davis:
Amazing. Amazing. If you've got a college athlete in your family or you are one, you've probably heard a lot about NIL deals, but what you haven't heard enough about is what happens after you sign. Today, I'm sitting down with Andrea, a CPA who works exclusively in the athlete space to have the honest conversation most families aren't having until it's too late. I'm Josh Davis with CIC Private Wealth, and this is what financial education for athletes actually looks like. Andrea and I have been in the trenches together. She was actually on a call I hosted with some Penn State parents talking through exactly these issues. Andrea brings that tax expertise. I bring the wealth planning side, and together we cover the full picture. Andrea, welcome and thanks for spending some time with me today.
Andrea Stepka:
Thank you, thank you.
Josh Davis:
I think a good question to start with would be once NIL money lands in a college athlete's bank account, what's the very first thing they get wrong?
Andrea Stepka:
So one of the first things I think they get wrong is that some of them are not even aware that that money is taxed, that they have to pay tax on it. So that's a big misconception, I think not as big as it used to be, now that NIL's becoming more prominent. One of the big things I think that is not understood as well is that they get 100% of that money upfront. So they have to be responsible to turn around and set aside the money for the income taxes. And in addition to that, because they are paid the way they are, which is called through Form 1099, they are considered self-employed. And because they're self-employed, they also are responsible for the self-employment taxes on that income.
Josh Davis:
Right, right. And I think that's a good part where I come in and help with the planning. You need to set a certain amount aside for not only taxes, but you got living expenses. You have a car, you might be renting an apartment, you might be sending money home, you might be helping some other people with their expenses. So I think getting your team together, just like you're on a football team, basketball team, golf team, getting your financial team, which includes myself, you, and others, is really important as well. I was just thinking, what's the number that surprises most athletes when they see that first tax bill? What do you think is a good number that they get surprised at?
Andrea Stepka:
Well, the fact that it's 30% of their income in general. But I mean, these guys nowadays are making six, seven figures. And so when you take that number, if you take a million dollars and you take 30% and multiply it, and that's 300,000, and that's really actually probably low because their tax bracket is higher at that level of income. $300,000 going back out of their pockets just to pay the taxes is outrageous to them. And then to your point, they are running a business now the way they're paid. They are self-employed. So because they're running a business, you are imperative because you need to help them set aside the certain amount of money to help pay the taxes. I'm imperative because we also want to take those expenses that you're talking about and hopefully reduce that income by some of those expenses because we have deductible types of categories of expenses they can take as a business owner.
So if they're not aware of all of this and they come in and they get this income form and they A, don't know anything about it, don't know they need to file taxes, they don't file their taxes for two years, they get a notice from the IRS because they will find them. They will absolutely find them because those forms get sent directly to the IRS from the institution that pays them. They will eventually find them. And not only will they owe the $300,000 of taxes, they probably will owe close to a million because of the penalties and interests that incur. So that is why, like you're saying, it is imperative that they're at least knowledgeable about tax in general and that they have a good team that can help surround them to do all this.
Josh Davis:
Agreed. Agreed. Totally. Definitely. How is NIL income actually taxed? I mean, we were just touching on it a little bit. You said some self-employment or federal, state, but why do you think that catches so many families off guard? Why are they so surprised?
Andrea Stepka:
Yeah, because of the rate, because of the amount. So I'm saying 30% because that's a good average. That's a good average after we take into consideration what we're here for to help out. If they don't plan, why it is such a shock is because self-employment taxes are 15.3% of your income. If you're making $100,000, that's $15,300 right there off the bat. If you're paying income at that level, you have another, let's say 25% is probably where it's going to land. So another 25,000 is gone. And then your state of Virginia, if you play in Virginia, for example, the state rate is about five and a half percent on average. So 5% more, so another five grand is gone. So if you are not planning for this and you're not aware, you are paying more than 50% of your money back to the government. So what catches them off guard is if they don't have somebody like you or I that's making them aware.
They go to fill in the TurboTax online, the free H&R Block income tax software online. They go to put the number in. They put in 100 grand as self-employment income and they're paying more than 50% in taxes. That truly will catch somebody off guard. So what do they do? They say, "Ah, we're not going to worry about it. We'll just put it off until somebody catches this." So again, why we're important is because we would take that hundred grand, we would reduce that number by travel, by telephone, by advertising, by meals, by vehicle expenses. And so it could get that number down as low as let's say 70,000. And so we reduce that tax just by doing that. Something else that we can hit on later is by forming this business, by running a business, there's also other tactics that we'll hit on that you can also do to help reduce the income tax.
Josh Davis:
Right. So it sounds like you're talking about setting up some entities like LLCs and tax them like an S Corp. Can you talk about that a little bit? Why is setting up an LLC important? And does that even lower your taxes?
Andrea Stepka:
Yeah, good question. So these athletes are going to come to us now more so than they did before, and they're going to know what they're going to have heard LLC. So most of these guys are in the locker room talking, "Oh yeah, I've got this LLC that I've formed with Ms. Up. Go, Ms. Andrea." These LLCs are being formed for mainly one big reason, and it's because an LLC limits your liability. It does not in and of itself reduce the taxes. It doesn't really change the tax because if you own the LLC all by yourself, you're basically filing the same information on the same tax return. You're truly just limiting your liability, making it look more professional from an IRS standpoint and look more like it's running a business. So that's what the LLC does itself.
Josh Davis:
Right. Because whether they like it or not, these kids are now, your son or your daughter, if they're getting NIL money, they're now running a business whether they like it or not. And that's how the IRS looks at it. And that's how, as a professional athlete now, because you're getting paid, you should be looking at it as well. I love that. And what income level does setting up an LLC or S Corp actually make sense? At what point? Because I'm coming in, I have two young kids, I'm not going to set them up as it would for an LLC, but at what level have you seen in your experience is a good watermark for setting up one of those entities? In
Andrea Stepka:
My profession, the answer is always it depends. I'm never black and white, so I always have to start with that. It always is, it depends. So if they are a freshman coming in, or let's say they're a senior in high school and they're coming in and they're some big wig that we know is going to be called, and this first year they're going to sit the bench and they're, I don't know, an O-line player. So they're going to eventually probably be making in the next two to three years six digits easily. But this first year they're a freshman and they're going to probably make 25 grand. In that situation, I'd say let's go ahead and get that sucker set up and let's go ahead and start now because in the next five years, the likelihood of you making great money and needing this LLC set up today is a must.
If we have a safety that is a third string that's going to maybe make 25 grand for the next four years, probably not as big of a deal. So it really depends on A, the longevity of the career. A lot of times I get, I actually have one of my players that plays for a team in Cincinnati that has sent me all of his buddies because he speaks very highly. And so now all his buddies have started coming to me, well, they're all seniors, so I get them for one year of NIL, and then they might go in the real world, they might not. In that situation, unless they're making a good chunk of change as one year making NIO money, is it going to be worth it? Maybe, maybe not. So I'd say probably just to give you a threshold, 75 to 100 on an annual basis is definitely a good idea depending on the longevity.
Josh Davis:
That's good to know. Just thinking back, you were talking about self-employment tax. Can you talk about filing a 1099 versus being a W-2 employee? Because myself, I work at CIBC, I get a W-2 form, so my taxes are already taken out. But a 1099, can you talk about that a little bit and what that means for someone that's getting NIL and has to file a 1099?
Andrea Stepka:
Sure. Yeah. So a W-2 is a form that gets issued to an employee of an employer. So in my job, I'm an employer and an employee, but an employee gets a wage that's reported to them. And before they get that money put into their bank account, the payroll department has taken out money to cover their federal taxes, their income taxes. They've taken out money to cover their state income taxes, and they've also already taken out money to cover their portion of the self-employment taxes. So being an employee, you're not bypassing having to pay tax. You just don't see it because it comes out of your check before you get the money. As an employee though, the big difference is an employee has to only pay half of the self-employment taxes. So whereas somebody getting a 1099 pays 15.3% self-employment, an employee only pays 7.65%. So that's the savings there.
But a 1099 person gets 100% of their money upfront. They have to pay into income tax on a quarterly basis. They have to pay in for the state and IRS. They have to pay in the payroll taxes on their own throughout the payroll or the FICA taxes on a quarterly basis as well. But they get to reduce that total income with deductions because they're running a business. So that's the big difference. 1099 is self-employed business owner in a sense. A W-2 works for somebody else. A W-2 employee cannot deduct any expenses anymore. Nothing. But 1099 form self-employed contractor can. So there's the big differences.
Josh Davis:
So again, they're running their own business. They need to know this because myself, there's people being paid to do that in the back of the house. But someone that's in high school or college, they don't have the back of house people doing this for them. They need a team put in place on their own to do that for them. That's really interesting. Absolutely. Also, you're talking about that just to build off of that. If an athlete plays a game in three different states, are they filing in all three or do they just file? Because if they're going to Virginia Tech or if they're going in Penn State or if they're going to Florida State, are they filing just in their home state or do they have to file in all three?
Andrea Stepka:
So these are good questions. So as an NIL, so you're asking me about college kids playing NIL, getting NIL money. They are not currently as it stands today, so this could change on a whim, but currently they're not being paid to play. So because they're not being paid to play, they're not being paid to play when they're traveling to Florida or traveling to Tennessee or traveling to North Carolina or whatever they are. They are being paid for promoting their name and their image and their likeness. So where that service is provided is where they are being taxed. And for the majority for that, it's going to be in their home state, wherever they're living at the time. They're typically doing events or signings or appearances in the state that they're living in. So for the most part, they are being taxed in the state that they are earning the NIL.
So for example, my Hokies are paying Virginia taxes. The Penn State kids are for the most part paying Pennsylvania taxes.
Then as the NFL athlete, they are now converting from being, which they still have some NFL athletes that are doing well are still getting NIL income as well. They're still getting sponsorships from Nike and Adidas or whatever. So that's selling their name and image. They will still be taxed where they live for that. The NFL playing time, now they're being paid to play. So an NFL player, once they get to that point, could be taxed in 13, 15 states, depending on how many states they play in. So yes, there's a big difference.
Josh Davis:
That's really interesting. That's good to know. What does smart NIL financial planning look like to you? Just beyond, "Don't spend it at all." One of the things I do is I go on social media and look at a player and their family and see, because I feel like that's a good tell-all about what they're spending their money on, what they're spending their time on. But someone like you, what does a smart NIL financial plan look like?
Andrea Stepka:
Well, I have a little bit of a different ability because I get to see all of their spending.
I get to see not just what I see on social media, but I get to see details. And we have to see details because we have to categorize it to figure out what's deductible. So what I say to a lot of my athletes when I first get with them is A, kind of what we're talking about today. You need a financial team just like you need your teammates on the field. You need a financial team behind you in order to conserve this money that you're going to probably only be getting for a short period of time. So to get started with it, obviously having a financial advisor, somebody that can help you budget, set aside money is a must, and I'm always big on pushing for that first. The other thing obviously is creating this professional LLC business setup from the start, depending on, like I said, the income levels, just to go ahead and get that in place and start that from the beginning.
The other part is to really, and honestly, there's a lot of little tips and tricks from there, but one of the big ones is they're getting scholarship money for the most part, most of these kids. And I always preach to them and tell them that I was living off of a very small allowance of money from my parents a month and didn't need it because all you wanted to do was really buy meals and pay your utilities and rent. And so they should be able to ideally live off of a very small chunk of the NIL money and invest it either in taxable funds or a big push that I have for them is if they're making this amount for four to five years on average, and they invest this in a pre-tax retirement type of plan, and they put that money aside for themselves that they can't touch for now and they watch it grow, they basically could potentially have generational wealth in the future.
So those kind of things, obviously, we try to lay the groundwork for from the start. Something we hit on, that I tell them all the time is to delete their cash apps because of these little tips like this
Josh Davis:
That was really interesting.
Andrea Stepka:
Yeah, because I see it. I see it. When you look at the amount of transactions that are Cash App driven and amounts that are given to people, not to places, it's pretty crazy how generous everybody expects them to become. And what they don't understand there is they're still paying tax on that money that they've just now given to somebody else. So not only are you giving somebody $1,000, you're giving them actually a thousand dollars plus another $300. So it's things like that, I guess from the beginning. And then of course we are very involved with this, probably more so than most individual clients in that we are like you are, budgeting, helping make sure that they're tracking things properly.
Josh Davis:
Yeah, no, I couldn't agree more. For me, it's investing early, understanding what compounding is, the difference between income and wealth. Because I feel like a lot of people, a lot of families I talk to, their son gets, like you said, a million dollar check. They're millionaires. They think they're millionaires. They don't understand that that's actually income, and that's not the wealth. The wealth is how do you use it, how you save it, what it looks like in two, three, five, 10 years. And you talked about taxable accounts versus tax-deferred accounts. Financial literacy, the reason why you and I are talking and sharing all this is financial literacy is very important to us at CIBC. We create something called the wealth warmup where it describes what a Roth IRA is, what a traditional IRA is, what's a 401k? Because many, many of these players are going to have a career after this.
They're going to be working at a company that has a 401k option. It's going to have maybe even a pension plan. And you need to know what those are. You need to know what these stocks are. You need to know what index investing is. What's that ETF? A lot of the guys I have, they call me and say, "I just heard about this new drink. I just heard about this new shoe coming out, company. I want to be an investor." So it's always about having the conversation, but having the conversation from an educated standpoint, which I think is very important. And that also ties into the parents. So for the parents in the room, what's their role? And what mistakes do you see well-meaning parents make? Every parent, you and I are both parents. We want our kids to succeed and go beyond the wildest dreams, but really, but can you just talk about a little bit what their role should be and what it shouldn't be?
Andrea Stepka:
Yes, that's great. Yeah, I mean, I kind of tell the parents this too. That's funny you say that. I tell the parents to let me be the bad guy because these kids are at that age where, I mean, I get it. I have a 19 and a 21-year-old, so I get it. They don't want to listen to their parents telling them not to spend this money on their drip or what they want to buy for themselves. So I tell them that to let me be the bad guy. Where I think our parents are misinformed is a lot of parents will come in and ask me if they should be owners, co-owners in the business in the LLC with the athlete. And my recommendation there would be no. Let the athlete, for ease of just a lot of reasons, ease of the way that the operating agreement can be handled for the business, the ease of tax filings, the ease of it all, have them be sole owner of that business.
And if the parents are truly involved, and if the parents want to be involved and the athlete wants the parents to be involved, I think it's great because the parents care more about that athlete than most people or than anyone. So as an agent, as a manager, as somebody that wants to make sure that their wellbeing is met, as somebody who wants to set up meetings with you and I, as somebody that wants to make sure their son is being involved in financial literacy, those things are great. And there's a lot of parents that are doing that. Where I see parents maybe not screwing up, but maybe just misinformed as A, saying, "Well, I put my son through all this, and so I would like to be an owner in his LLC." So what that does is that forces him to give that percentage ownership to the parent.
So if a parent owns 10% of the business, he gets a million dollars, the parent has to get $100,000 of that money. So there's things like that that if the parent is involved, they can become an employee of the son. There's other ways around it. So that's one big one that I think the parents sometimes want to get too involved. And again, when that happens, I also see the kids running from all, from us, from you, from everyone, because they don't want to answer some of the questions of the parents.
So I think if the parents would let us be the bad guys and let us be the ones helping them, advise them financially, they stay out of that side and manage the athlete's career and life elsewhere, I think the better.
Josh Davis:
Just be their parents. Be the parents. Yeah, that's really interesting. I couldn't agree more. Let your son be the athlete and you be the parent. You keep doing what you've done. So why would it change? It's working obviously because we're having the conversation, so if it's not broke, don't fix it kind of mentality. But also I get the other side. You're very protective. You don't want anyone to take advantage of them. There are bad actors out there. Myself, CIBC, we're a fiduciary, so whatever suggestions I'm making for investing or introducing people, it's for your best interest. It's not for mine. And I think that's really important because there are companies out there that are not fiduciaries that don't have to put your needs above their own. Agents are the same. An agent that is registered with the NFL, PA, NBA, NHL, they have to go through background checks and test, have to have a law degree or a master's, but to be an NIL agent, you don't.
And I think a lot of parents don't understand that when they get a call from an agent, the agent just has all this euphoria to it like, "Oh my God, an agent's calling me for my son to talk to my son." That person literally could be 14 years old sitting in a basement somewhere. They can literally be anybody at any point. So I think it's really trusting the process and trusting the people that have gotten you there, your parents, your coaches. And if they're coming to you to be trying to be compensated, that's when you have the team in place to A, talk to, B, run the ideas through, and then also, like you said, be the bad guy or the good guy. And I think that gives them a lot of strength and power. But also, what's the conversation you think you wish parents had with their athlete before the first deal was signed?
Andrea Stepka:
Yeah, and I think there it's just communication, communication, communication. So these kids, and they've got to understand it too. And I mean, you're probably seeing this as well. Some of these kids are coming from families that this money is more than they've ever seen in their lifetime either. So, we're having to not only educate the child, we're having to educate the parents a lot. And so I think the best thing that I think colleges could do for these kids as an organization or an institution, and that what we're trying to do as a whole is educate them from the start, just like what we're doing, giving them the tools and the information. Obviously we can't force them to do it, but if you give them that information upfront, let them know upfront 30% of this money is not going to be yours. It's just not. Let them know upfront, you really can live off of so much less. You're in college. You really don't need all this money. Here's how you budget. All those things. But again, I think communication, communication and upfront education is key. I mean, you do so much work on going to visiting schools. You visit all these D1 schools or you're in D2, D3. You're spending a lot of time investigating the coaches and the colleges. If it feels right, why not do the same with your money? Why not do the same with the NIL money? Why not do the same for your future why you can't? If a high school junior is getting recruited right now, which is wild to say out loud, I was actually - It's happening. I know. I gave a talk to a bunch of middle school eighth graders ranging from 13 to 16, but that's the world we live in. But if a high school junior's getting recruited right now, what should their family be doing financially today? Not in the future or should have done, but what would you say to them that they should set up right now?
Andrea Stepka:
Well, I think definitely if they know that their future is going to be successful, going ahead and setting up the business LLC is ideal. A, it's cheap. It's $100 in the state of Virginia to do it. I'm not sure about other states, but for the most part, it's maybe a couple hundred dollars to set up an LLC. You get the registration done, you get the business account set up. You have to have what's called a tax identification number set up. We help with that. I don't know if your firm does, but you could do it online if you really wanted to. But to do that is a must because then once you start getting that first paycheck from the college or from the collective agency, you have the tax ID number, the bank account set up, and you can get that first deposit put into the business.
Does that happen often? No. Because most kids are meeting with you and I after they're recruited in college or after they've come to college and gotten their first contract signed. So is it a must that first paycheck go into a business account? No. Is it cleaner from the IRS's viewpoint? Absolutely. So the earlier that we can get this set up, and that's what we try to do immediately when we get our clients, is to get this stuff set up and going so those paychecks can go in from the start.
Josh Davis:
I think that's perfect. Early tax identity setup for myself, we don't do any of the tax ID numbers. We rely on specialists like you. But the way I understand it, it is very easy, very simple, very quick. But for us, it's more relationship building and really the planning timeline before the early money arrives. Let's make sure we have all those, like you said, the business checking, the LLC, the people in place, who to talk to and when. Start getting to know what the family situation's like. Are they living in Florida? Are they living in Texas? Are they living in Michigan? Because all that's different. Not only the way it's taxed, but the way the cost of living is different on a travel team, where they're going. Just trying to get to know them more so when those bigger checks start coming in, you already have those building blocks put in place.
You already have these habits of, "All right, I know I need to put 30% here. I know I need to put 20% there. I know what my phone bill is. I know what My car bill's going to be. I know I have to allocate more money because I don't have to start paying rent. My parents aren't going to be there to do my laundry. So it's like all these little things that start adding up quickly that you and I have learned over decades now, but someone that's junior, even sophomore in high school coming to it on their own. But I will also say, do you think there's such a thing as starting this conversation too early? Because for me, having a conversation with an eighth grader 10 years ago, it was unfathomable. But now what point do you think they should start having a conversation?
Andrea Stepka:
I will say this because I say this information on repeat to a bunch of 18 to 24-year-olds. Their eyes will glaze over if you inundate them with information. What I would think would be good is to start them, if they're prospects or if they're even hopeful to make NIL money one day, to start them at a young age like middle school, at least explain to them, "Do you know what income taxes are?" I think starting there, "Do you know that you have to pay income taxes? Do you know if you invest your money in something besides a checking account, your money can sit there and grow on its own?" Basic things like that, I think that's fine. I think in high school, introducing the little bit more details I think is fine too. I think inundating them with too much information at a young age, again, because I say it every day on repeat, their eyes will start glazing over at some point.
What I try to do with them even still at the college age is piecemeal information to them. So I say this, "We're starting here. So we're going to get the LSC set up and we're going to maybe do an S election, which I don't know if we hit on that at all yet, but let's start there. And then next step, let's get your business account set up. The next step, let's get your financial advisor to set up a retirement account. Next step." So again, I don't think it's ever too early to start telling them about it, but I think you want to start small.
Josh Davis:
Yeah, I know. I couldn't agree more. Especially with, like I was talking about earlier, social media, everybody's on it now, Instagram, Twitter, and did you see all these people coming on there and saying, "Get rich quick," or, "This is how you should be spending your money," or, "You should be investing in this." So I think the earlier the conversation happens is the better. And it's one of those things that this is the world we live in, and having these conversations, not sitting them down and giving them a lecture for an hour, but like you said, drips and drabs here. Hey, let's talk about an LLC now, or in a couple of weeks, let's talk about what an S Corp is or what investing's like, or what's a stock versus a bond? What's a 401k? And just start introducing that slowly. And by the time they get to being a junior in high school, they're already savvy enough to understand what's a good investment versus a bad investment and they won't get suckered.
But I feel like this hall been really good. Thank you all for listening. And as we discuss NIL taxes and the money no one talks about, if you have any additional questions, please reach out to myself or to Andrea. You can also check us out on cibc.com/us or across several social media platforms by searching @CIBC_US. Thanks for listening, and we look forward to catching up again soon.
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