Question: Are my athletic activities considered a hobby or a business?
Answer: That depends on your intent. Generally, if you engage in any activity with a profit motive, then the activity can be considered a business activity.
Question: If I show a loss on my tax return for my athletic activities for 3 consecutive years, is it true the IRS will deem my business a hobby?
Answer: No. The emphasis is on any business is intent. It is not uncommon for start-up businesses to operate at a loss for the first 5 years before turning over a profit. The only IRS requirement is that the business/activity is conducted with the intent of generating a profit. This requirement applies to professional athletes also (particularly to track and field athletes who may train for several years before earning a sponsorship contract, bonus and/or prize purse(s).
Question: Is income earned overseas subject to federal income tax?
Answer: Yes. All domestic and world-wide income is subject to federal income taxation and must be reported on your U.S. income tax return. This requirement holds true even if you do not receive a tax reporting form such as a W-2, 1099 or foreign equivalent. However, if you meet certain requirements, you may exclude certain foreign income.
Question: What happens if I do not report cash prizes earned overseas?
Answer: Under-reporting income can result in serious consequences such as fines, penalties, additional taxes and even imprisonment.
Question: What is the jock tax?
Answer: Jock tax is the tax levied on professional athletes in many states and some of the cities where they play or compete.
Question: If I earn a prize purse or appearance fee in states other than my resident state, is it subject to multi-state taxation?
Answer: Certainly. This is affectionally called the jock tax and is a tax nightmare for many CPAs and clients who are professional athletes in the NFL, MLB, NHL and track and field.
Question: What triggers a 1099-MISC filing?
Answer: If you earn $600 or more for services rendered (competition, appearance fees, modeling, sponsorship, etc) you will receive a 1099-MISC Income form to report income earned on your U.S. Income Tax Return. Likewise, if you pay anyone $600 or more for services rendered (coach, agent, trainer, pace-setter, etc), you must file a 1099-MISC form with the IRS and send a copy to the payee.
Question: Should I incorporate myself as a professional athlete?
Answer: While there are certainly advantages to incorporating yourself as an athlete, such as eliminating self-employment taxes (if corporation is structured properly), incorporating athletes must be determined on a case-by-case basis. Depending on income level, filing status, projected future income, and other factors, it may be advantageous to look into setting up a corporate structure to shave down your tax bill.
If you have additional questions, please contact us.