The tax landscape for professional athletes is challenging. Professional sports are expanding through international circuits and global endorsement deals, and even with domestic deals, individual state laws may require an athlete to file annual taxes in multiple jurisdictions. Add to this complexity the heightened audit risks associated with high-profile individuals, and the result is a perfect storm of disputes, oversights, and financial struggles.
The solution is to integrate tax planning strategies to manage and mitigate risk. Our team at Prager Metis focuses on the common challenges facing most athletes, from endorsement income to cross-border compliance. We walk athletes’ management teams through their state and local obligations and help them understand differing withholding regimes based on their residency.
Our goal with this piece is simple: We want to highlight the important tax issues facing professional athletes in the United States and overseas in the United Kingdom and Europe. As finance professionals, it’s our job to teach our clients and their relatives how to protect their income and manage their wealth.
Understanding the Athlete’s Tax Landscape
Tax planning has a foundation in residency. An athlete’s residency status dictates the percentage of global income a government can claim. The rules differ greatly between the US, the UK, and the EU.
The United States: Worldwide vs. Source-Based Taxation
In the United States, the Internal Revenue Service (IRS) classifies athletes into two categories: US resident and nonresident. For US athletes, the tax policy mandates worldwide taxation, creating a high risk of double taxation on foreign earnings. Non-residents typically pay on US-source income only, which is subject to a 30% federal withholding.
US athletes, regardless of residency status, must pay state-level taxes; this is usually more challenging for non-residents, as they’re often required to pay these taxes before leaving the country. To mitigate cash-flow problems for these athletes, non-residents can use a central withholding agreement (CWA), a contract between a non-resident athlete, a designated withholding agent, and the IRS to reduce standard federal withholding rates.
Prager Metis takes a pre-emptive approach to tax planning for residents and non-residents, identifying tax credits (foreign and domestic) and treaties to mitigate risks. We provide detailed guidance on the complexities and obligations of residency rules to help athletes reduce over-taxation.
The United Kingdom and EU: Specialist Oversight
Like the US, the UK taxes resident athletes on their worldwide income and gains, including their team salary, global sponsorships, personal dividends, and rental income from property abroad. Again, the risk is double taxation. For example, if an athlete lives in London but plays a tournament in France, they may owe taxes in both countries. Double taxation treaties can subvert this risk by crediting any taxes paid in France against an athlete’s UK tax bill.
The UK only taxes performance income for non-resident athletes, meaning athletes only receive a tax bill for income sourced in the UK. While that may sound like a win, non-resident athletes must pay attention to the definition of earned or sourced income. His Majesty’s Revenue and Customs (HMRC) often aggressively pursues portions of global endorsement income as performance income, regardless of where an athlete signed the endorsement deal.
HMRC uses a specialised department, the Foreign Entertainers Unit (FEU), to monitor non-resident athletes and entertainers. This strict statutory regime ensures that any person or entity making a payment to a non-resident athlete for appearances or performance withholds tax at 20% from the total income (i.e. before deduction of expenses). Withholding from the total income may cause cash-flow problems.
Our experts focus on pre-emptive tax planning, filing net-basis arrangements (reduced withholding arrangements) in advance. Filing this paperwork early allows an athlete to show projected expenses, such as flights, hotels, and coaching, to argue for a 20% withholding on profits rather than total income. This would alleviate any cash-flow problems.
Domestic Tax Planning and Withholding Mechanisms
The tax landscape is only part of an effective tax plan. To ensure compliance, athletes’ financial managers must understand how income is captured the moment the athlete signs a contract or plays a game.
The Logistics of Multi-State Taxation in the US
The administrative burden begins with the “duty day” calculation. This is the primary mechanism for allocating income across US states. Since athletes must pay a patchwork of taxes (jock tax) across jurisdictions, they use a duty-day ratio. A duty day is equivalent to one day spent performing services, which may include appearances, games, or tournaments. The ratio is the calculation of how many or what percentage of duty days account for an athlete’s professional season in each jurisdiction.
While helpful, duty days are more nuanced in tax planning because of the way different locations define the term. For example, some jurisdictions may include travel days or off days as duty days, triggering tax liability. Prager Metis focuses on calendar management to ensure an athlete’s income is accurately apportioned, preventing road states from over-claiming taxable income.
Federal Withholding Rules for International Athletes in the US
The most immediate hurdle for a global player is the withholding tax for non-resident athletes. As in the UK, the US tax system adopts a defensive posture toward international athletes. The 30% federal withholding rule on gross income for these athletes is a catch-all designed to ensure the IRS receives its fair share before an athlete departs. Because this 30% is taken off the top (an athlete’s gross income), it ignores the reality of these professionals’ expenses, including routine expenses, such as coaching, training, legal fees, and travel. Prager Metis uses tax planning tools like CWAs to account for these expenses and argue for a lower withholding rate, helping athletes preserve liquid assets for their ongoing season or tour.
A UK athlete who plays a sport in the US may subsequently file a Form 1040NR, which would allow the athlete to be taxed on a net rather than gross basis and claim a partial refund of the 30% tax paid on the gross amount of the earnings.
It should be noted that Article 16 (Entertainers and Sportsmen) of the UK/US income tax treaty also provides some limited relief for athletes.
UK Withholding and Third-Party Complexity
The UK’s approach to non-resident athletes is more stringent than the US system. Instead of focusing on the athlete’s obligation, the UK uses the FEU to target payments before they reach the athlete, requiring payers to withhold 20% from payments to non-resident athletes.
This rule gets a little murky when payments occur through third-party “loan-out” companies or agents instead of athletes directly. The added step creates further complexity, which can lead to oversights and potential penalties for the athlete. Promoters and tournament organisers can help athletes avoid such problems if they’re aware of a player’s FEU status before payment.
Managing International Tax Exposure: Key Tools
Understanding the 20% and 30% withholding rates is foundational to tax planning, but it’s the pre-emptive application process that offers real value to non-resident athletes. Proactive management of international tax exposure, rather than the reactive filing, leads to a beneficial contractual relationship with tax authorities.
US Central Withholding Agreement (CWA)
It’s not enough to view a CWA as a tax reduction. It’s a budget-driven contract with the IRS, and as with any contract, it has obligations. For the athlete, these obligations include:
- Submitting the CWA application (Form 13930) at least 45 days before the first event of a US tour or season
- Detailing ordinary and necessary business expenses, such as airfare, lodging, equipment, commissions paid to agents and managers, and more
- Filing an annual tax return (Form 1040-NR) to reconcile final figures
By adhering to these rules, athletes can reduce their tax withholding.
UK Foreign Entertainers Unit (FEU)
The proactive tax planning approach is also effective in the UK, but the FEU has its own set of administrative hurdles. For example, like the United States’ CWA, non-residents can apply for an FEU clearance to reduce the 20% withholding on gross payments. The process requires similar steps to the CWA, including providing a detailed breakdown of expenses related to UK performances.
A significant risk to international athletes is the UK’s treatment of payments made through loan-out companies. These companies manage an athlete’s appearances; they’re often owned by athletes. HMRC treats these entities as look-throughs, meaning it ignores the corporate structure and looks through to the owner. This means that instead of a promoter paying the company and the company paying corporate tax, HMRC charges the athlete a 20% withholding on the payment.
While for US-based structures, pass-through or look-through entities offer value, such as the Qualified Business Income (QBI) deduction, they require precise management. Prager Metis ensures that athletes file for withholding reductions early and transparently, reducing the risk of oversights in payment structures.
Tax Treaties
Tax treaties are the ultimate tool against double taxation in an athlete’s tax planning strategy. Most of these international treaties include an artists and athletes section, which clarifies which country has the right to tax performance income. Prager Metis uses these treaties to ensure that tax paid to a foreign government is accurately accounted for and credited against an athlete’s home-country liability.
Structuring Endorsements and Commercial Income
Government entities, such as the IRS and FEU, determine the tax on athlete endorsement income based on where the promotional services occur. For international athletes, these entities often try to source a percentage of global sponsorship deals to their respective territories, basing the percentage on the number of days an athlete spent competing there.
Prager Metis assists athletes in accurately allocating this income to prevent over-taxation. By using proactive tax planning strategies, documenting where promotional duties occur, and using image rights structures where appropriate, we protect an athlete’s commercial earnings from aggressive, blanket withholding.
The Critical Role of Specialized Advisors
The tax landscape for professional athletes is a perfect storm of high visibility and complexity. Managing multi-state filings, CWA applications, FEU clearances, and tax treaties requires a synchronized effort between agents, business managers, and tax professionals. Our team of experts, including Arvinder Matharu, Partner, UK Global Services Co-Leader, and Hillary Green, Senior Manager, US International Tax Department at Prager Metis, will work with the athlete’s team to address domestic and international compliance hurdles.
