College athletes navigating Name, Image, and Likeness compensation are being asked to untangle a tax system so complex that even seasoned experts struggle with it, according to a report released by the National Taxpayers Union Foundation. The report warns that 18-year-olds filing taxes for the first time face costly hassles because states offer no clear or consistent guidance on how to classify and source NIL income. While legislative proposals have focused on competitive impacts at the federal level or niche tax exemptions at the state level, the report says the tax treatment of NIL has been left behind entirely.
The core confusion centers on classification and sourcing rules that vary from state to state. NIL income is generally treated as self-employment income when it requires active services like appearing in an advertisement, and as royalties when earned passively, such as profiting from depictions in a video game. But this can vary by state, and some athletes earn pass-through income if they set up LLCs. When a contract requires different types of activities for one lump-sum payment, athletes or their advisors must use discretion and hope tax authorities agree. If a sponsorship deal requires services in multiple states, self-employment income is usually split evenly among those states unless the contract defines compensation for each service separately. Royalties are typically sourced to the athlete's state of residence, making classification critical. Many college athletes retain residence in the state they grew up in rather than where they attend school, meaning their home state can also claim a slice of the income.
The report identifies several policy pitfalls lawmakers should avoid. According to the authors, drafting laws that treat college athlete NIL differently from professional athletes, social media influencers, and other celebrities "will only muddy the waters further." The report warns that states may be tempted to extend "jock tax" laws, which impose income tax obligations on professional athletes who play games in a state, to college athletes. This would require changing existing statutes since jock taxes apply to wages of professional athletes, and college athletes neither earn wages nor are professionals. The authors also caution that such extensions would result in very little revenue for states. The report advises against creating special income tax exclusions for college athletes, arguing that this "privileges a certain class of NIL over others" and diverts resources from broader tax reductions.
The report's analysis traces the problem to the speed of NIL's evolution outpacing policymakers' ability to respond. Because NIL is not exclusive to college athletes, treating it as a special category creates inconsistencies across the broader landscape of image-based compensation. States that deviate even slightly from general sourcing and classification rules compound the confusion. The authors argue that if a state struggles to recruit athletes because of its income tax burden, businesses are likely facing similar challenges. Clear, uniform guidance would reduce compliance costs for young athletes and their families while avoiding the administrative burden of tracking and taxing small amounts of income across multiple jurisdictions.
The report concludes that this issue will "continue to fester" without legislative action to simplify the system. It calls for clear and consistent guidance on income classification and sourcing rather than piecemeal exemptions or extensions of professional athlete tax rules. The authors emphasize that the current approach asks teenagers with no tax experience to navigate a system that confounds experts, creating unnecessary costs and risks. The bottom line: lawmakers can help by reducing complexity, not by creating special carve-outs that make an already tangled system worse.