Professional athletes are among our nation's highest-paid employees and, as such, a huge chunk of their income is plowed into the government via the IRS. In fact, federal taxes owed by professional baseball, football, and basketball players will exceed $3 billion in 2013, according to tax experts who specialize in representing athletes.
And, like every other U.S. taxpayer, their bill is due today.
That's $3 billion of the $2.5 trillion paid in federal taxes by all Americans, contributed by a select but paltry work force of about 3,000. On average, every MLB, NFL and NBA player pays $1 million in federal taxes.
According to data bases compiled by USA Today, players in these three major leagues alone earned nearly $9 billion in 2013. Most of that income is taxed at the highest rate of 39.6 percent, and for the first time a surcharge of .9 percent was added to the previous 1.45 percent Medicare tax employees pay on income that exceeds $250,000 to help pay for Obamacare.
Even though the overall federal tax burden of nearly 42 percent for these athletes is reduced by deductions, experts say most can only claim enough in agent fees, mortgage interest, dependents and charitable donations to whittle the bill down less than 10 percent. So assuming deductions reduce the overall tax burden to 33 percent, the amount paid in federal taxes on $9 billion of earnings is still $3 billion.
"You definitely look at the bottom-line [tax] figure and you go, 'Jeesh, that's a lot of money,' said Colorado Rockies outfielder Michael Cuddyer, who is in the last year of a three-year, $31.5 million contract. "Then you look at the net income and you go, 'Jeesh, that's a lot of money too.'''
State income tax varies greatly depending where an athlete lives. In addition, some states require athletes to pay tax on the income earned during the days they worked in that state, a levy known as a "jock tax." When it's all said and done, many athletes are paying as much as half their income in taxes.
"Wages for athletes can be huge but are earned over a relatively short period of time," said Mitchell S. Halpern, director of sports and entertainment accounting services at O'Connor & Drew in Braintree, Mass. "The battle with an athlete is, if he's making $10 million and taxes take half of that, he's taking home $5 million. Is that paid over a lifetime? No. And their rate of spending can be, well, it's amazing how much some guys can spend."
Unless they are getting sound financial planning and tax advice, athletes can find themselves owing a huge tax bill. Teams generally withhold only the mandatory minimum 25 percent of earnings unless instructed to withhold more. A savvy financial or tax advisor will ask the team to withhold as much as 40 percent for his clients.
"We send memorandums to teams requesting 30 to 40 percent withholding," said Ryan Losi, who represents about 75 NFL players as owner of the PIASCIK CPA firm in Glen Allen, Va. "Otherwise teams will withhold only 25 percent. Someone making a million dollars, say he's taxed at 35 percent after deductions but had only 25 percent withheld. He'd need to cut a check to the IRS for $100,000 on April 15. It can be a shock."
Halpern, who has represented athletes since 1985, is among a group of sports financial advisors creating an association to help increase what he calls "financial literacy" among players.
"We are in our infancy," he said. "It's a struggle getting traction with the leagues and players unions. We need to reach out in the financial advisor community to encourage best practices. Unions, the NCAA, high schools, they don't adequately educate players on this stuff. I had a player get his first paycheck and ask, 'Who is FICA and why is he getting some of my money?'"
Halpern explained the Federal Insurance Contributions Act to the player and its role in funding Social Security. Education on financial planning and taxation can be as important as learning a playbook for athletes. After all, when the federal government is counting on $3 billion a year in tax payments from MLB, NFL and NBA rosters, it behooves a player to grasp tax laws so he can hold onto as much of his income as possible. For Cuddyer, the ramifications struck him when he had to pay taxes on his $1.85 million signing bonus after the Minnesota Twins made him the ninth overall pick in the 1997 draft.
"The first check I ever had to write was like $300,000-plus in taxes," Cuddyer said. "I didn't even realize I had that much money, and now all of a sudden I'm writing a check for it. It was almost like it was Monopoly money. I was 18 and I didn't even realize I had that much. It's all fake. "Still to this day, when I get the pay stub it's kind of like, 'Jeesh, this is unbelievable.' Both the net pay and what you pay in taxes is all crazy, crazy."
So, while many of us live vicariously through our favorite players, April 15 may not be the best day to do so. Then again, who among us wouldn't want a paycheck so large we'd be forced to wrestle with their tax dilemma?
USA Today staff writers Jorge L. Ortiz and Steve Henson contributed to this story.
MLB: USA TODAY http://www.usatoday.com/sports/mlb/salaries/2013/player/all/