Duty Day Allocation / State Nexus

Professional athletes are subject to tax in each state in which games, practices, exhibitions, training camps, and other mandatory appearances are held.  In addition, the cities and counties in which they play or practice may also impose income taxes.  For example, New York, Baltimore, Detroit, St. Louis, Cleveland, Cincinnati, Pittsburgh, and Philadelphia all impose an income tax.  Unfortunately, this means that by year end a professional athlete may be subject to income tax in more than 20 jurisdictions and be required to file tax returns in each jurisdiction.  This is commonly referred to as the “jock tax”.

In most states, income is allocated to the state via a methodology called the “duty days method”.  Under this method, the amount of income subject to tax in each state is the athlete’s total income multiplied by the number of duty days in that state divided by the total number of duty days in that year.   A minority of states use a different methodology called the “games played” method.  To make this more complicated, each state may apply the particular method in a slightly different manner than another state.  For example, although Michigan and Pennsylvania use the games played method, Michigan does not count exhibition games whereas Pennsylvania does include exhibition games.

Professional teams are required to withhold income taxes in each jurisdictions from every paycheck, but the tax withholdings are often performed incorrectly by the teams.  This can lead to an overpayment of taxes to some states and an underpayment to other states (which could lead to audit and penalties).  ETA’s tax attorneys and CPAs have extensive knowledge of the critical definitions and rules of each state and the interplay between the methodologies.  This knowledge allows ETA to review each athlete’s duty days and games played to ensure that taxes are minimized.