January 18, 2018
Just like every typical taxpayer, professional athletes and entertainers must also pay taxes in the state where income was earned. Unfortunately, that can mean owing tax to every state in the country – and in some cases certain cities where they play or perform. Each state has their own set of rules for calculating income tax, which can make tax filings very complicated for those in the industry. There are a variety of issues that need to be considered and it often requires the assistance of a qualified professional to make sense of the laws and regulations. To help clients, prospects and others understand how state tax laws affect entertainers and athletes, Wilson Lewis has provided a summary of key considerations below.
Establishing Domicile
For many Americans, state tax is relatively simple because you generally pay tax in the state where you reside, which is where most earn their income. But for those who are frequently on the road and earning money in multiple states, it’s important to discuss and understand domicile and residency rules. Establishing “domicile” is the most vital factor for individuals in this situation. A domicile is where a person lives and plans on living in the future, and you can only have one domicile at a given time. Athletes can easily have two separate domiciles during the year if they are traded or sign a new contract, which requires filing part-year returns in two states and carefully allocating income and credits for taxes paid to the appropriate states.
Establishing domicile in a low- or no-tax state is a frequent practice for entertainers and athletes because they can save thousands of dollars by sheltering income in a lower tax jurisdiction. Doing so entails factors like acquiring a permanent residence, such as a 12-month apartment lease or buying a house, getting a driver’s license, registering to vote and doing other things that show a connection to that location. Beyond this, a sizable portion of the year must be spent where you are trying to establish domicile.
Residency Rules
Residency rules dictate that a certain number of days must be spent at the individual’s domicile home to establish residency. Many states consider a person a statutory resident if they spend 183 days – roughly half the year – in the state in a given year, regardless of where they have domicile, which means that the person must report all income on that state’s tax return. Because different states have various rules regarding residency, it’s important to understand the rules in states where you spend considerable time. For some states, like New York, spending even one minute of the day in the state counts as a full day, even if that minute is spent in an airport.
Different State Rules
There are also varying rules among states regarding the portion of income that can be taxed. While most states tax on the number of days worked in the state, there are exceptions. Different sports can even incur different tax treatment. For instance, Pennsylvania taxes baseball, basketball and hockey players on the ratio of games in the state compared to total games played, including pre- and post-season, but they tax football players based on days worked in the state versus total days worked. Michigan uses a similar method but excludes the preseason, while Arizona counts the number of days worked excluding those worked in the pre-season (keeping the MLB spring training home base intact).
Local Tax Considerations
Athletes and entertainers also have to be aware of hidden taxes in various local jurisdictions. For instance, Pittsburgh hits athletes for 3% of their wages for games played there. While the taxed amount is deductible on a federal tax return, it doesn’t often show up on the player’s W-2. Engaging an experienced tax professional can ensure these hidden taxes and other deductions, such as union dues, fines and charitable contributions, are found.
Reciprocity and Tax Credits
Reciprocity agreements between particular states can save an athlete or entertainer thousands of dollars. For instance, a Pennsylvania resident is exempt from paying taxes on money earned in New Jersey, West Virginia, Maryland, Virginia and Indiana – all of which have higher tax rates than Pennsylvania. Because they often perform and play all over the country, income may be reported and withheld in multiple states without regard to potential reciprocity agreements with the athlete’s or entertainer’s home state.
In addition, taxpayers generally receive credits on their home state return for taxes paid in other states. However, residents of California must take credits for taxes paid to Arizona, Indiana, Oregon and Virginia on those states’ returns. States rarely give credits for taxes paid to cities, but exceptions are possible. For instance, New Jersey gives people who earn income in Philadelphia and pay its nonresident wage tax a credit on their New Jersey return.
Contact Us
Athletes and entertainers often have very complicated tax situations because of the nature of their work. Seeking assistance from an advisor who is experienced in navigating all state tax laws can save significant tax liability and will ensure that you remain compliant with federal, state and local tax laws and regulations. If you have questions about multi-state tax issues, Wilson Lewis can help. For additional information, please call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.