April 30, 2014

The sports world has been abuzz with the news that the National Labor Relations Board ruled in favor of football players at Northwestern University, giving the players the right to form a union. Most of the chatter is about the effects such a move could have on college sports.

The tax world is also talking about the questions raised by this development. For example, if unionized athletes are considered employees of the university, would the value of their scholarships still be exempt from tax?

The Internal Revenue Code provides that “gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization” as long as that money goes toward educational expenses. In 1986, the IRS ruled that athletic scholarships are no different from academic scholarships when it comes to applying the tax code.

But if the players are defined as employees, another aspect of this tax law could come into play. The scholarship exclusion “shall not apply to that portion of any amounts received which represents payment for . . . services by the student required as a condition for receiving the qualified scholarship.” As a result, students who receive compensation for lab work or teaching duties, for example, are subject to tax on their earnings.

In the case of the Northwestern football players, the federal income tax on their $61,000-per-year “scholarship” could cost them about $15,000. And that does not consider the value of training facilities, travel and other perks the players receive as athletes.

These additional benefits might have to be tested to see whether they qualify as tax-free “employee fringe benefits” or whether they might represent additional taxable compensation.

“Going to college offered me the chance to play football for four more years.” – Ronald Reagan

This article was originally posted on April 30, 2014 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at marketing@grfcpa.com.