Signing Bonus Evaluation

Signing bonuses are generally allocated to an athlete’s state of residency, rather than the states in which games and practices are held.  As many athletes reside in states with low income tax rates or no income tax rates, proper allocation to a state of residency can reduce overall taxes by hundreds of thousands or millions of dollars.  For example, an athlete residing in Florida (0 percent income tax rate) but playing for a New York team (8.82 percent income tax rate) would incur unnecessary income taxes of over $1.75 million if a $20 million signing bonus is incorrectly allocated to New York instead of Florida.

However, states have strict requirements as to whether a signing bonus will be classified as a pure signing bonus for income tax purposes or whether the signing bonus will be considered compensation for services and allocated to each of the states in which games, practices, workouts, and other appearances are held.  This determination has been the subject of substantial litigation in past years.

ETA works with professional athletes to identify how a signing bonus should be classified for income tax purposes.  This allows taxes to be dramatically reduced and reduces the risk of audit.  ETA can provide advice during the contract negotiation and drafting process to ensure that a signing bonus will be allocated to the athlete’s state of residency.