Understanding the Jock Tax: What athletes and remote workers need to know
This article is for informational purposes only and does not constitute legal or tax advice.
Always consult with a tax professional for your specific circumstances.
Professional athletes, entertainers, and even some remote workers often find themselves facing a peculiar tax known as the "jock tax."
This tax applies to income earned outside their home state or city, adding an extra layer of complexity to their financial planning.
Let’s break down what the jock tax is, who it affects, and how you can manage it effectively.
What is the Jock Tax?
The jock tax is an income tax levied on individuals who earn money outside of their home state or municipality.
While the name suggests it's primarily for athletes, it applies to anyone who travels for work and earns income in different states. This includes entertainers, musicians, and even remote workers who might respond to work emails from another state.
The concept of the jock tax gained significant traction in the 1990s. Following the 1991 NBA Finals, where Michael Jordan and the Chicago Bulls played in Los Angeles, California imposed state income taxes on their earnings.
Illinois responded with "Michael Jordan’s Revenge," taxing athletes from states that taxed Illinois-based athletes. This sparked widespread adoption of the jock tax across many states and municipalities.
How the Jock Tax works
Calculating the Jock Tax
The jock tax calculation can be quite complex, typically based on the "duty day" method.
Here's how it generally works:
- Duty days: These are the days an athlete or entertainer is on duty, including practice days, game days, and other official duties.
- Income allocation: The income subject to tax is calculated by dividing the number of duty days in the taxing state by the total number of duty days in the year.
- Tax rate application: This allocated income is then multiplied by the state's income tax rate.
Example calculation
Let's take an MLB player with a $10 million annual salary and 200 duty days.
If the player has 10 duty days in State A, which has a 5% tax rate, the calculation would be:
- Duty days in state A: 10
- Total duty days: 200
- Income subject to state A tax: $10 million * (10/200) = $500,000
- Tax owed to state A: $500,000 * 5% = $25,000
Who pays the Jock Tax?
The jock tax doesn't just affect athletes. Coaches, trainers, doctors, and other support staff who travel with the team are also subject to this tax.
Moreover, it extends to entertainers such as musicians, actors, and even authors on book tours.
Essentially, anyone earning income in multiple states needs to be aware of their potential jock tax liabilities.
Legal challenges and variations
The jock tax has faced legal scrutiny over the years.
For instance, Ohio's Supreme Court struck down Cleveland's "games played" formula as unconstitutional. Similarly, Tennessee's flat tax on visiting NHL and NBA players, which often exceeded their daily earnings, was repealed in 2014.
Different states may have unique methods for calculating the jock tax.
For example, Missouri uses both the duty day method and a withholding method, where the venue withholds 2% of the compensation paid to entertainers if it exceeds $300.
This can result in significantly different tax liabilities.
Also read – 9 US States With No Income Tax
Impact on remote workers
With the rise of remote work, the jock tax's implications have broadened. Remote workers who perform tasks in multiple states might also be subject to this tax.
While states have historically targeted high-income earners, there's potential for broader application as remote work becomes more common.
Tips for managing Jock Tax liability
1. Consult a financial advisor
Working with a tax professional can help navigate the complexities of the jock tax. They can assist with understanding state-specific rules and maximizing available deductions.
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2. Keep detailed records
Accurate records of duty days and income earned in each state are crucial. This documentation can support your tax filings and ensure compliance with various state laws.
3. Understand state laws
Knowing the specific tax laws and calculation methods of each state you work in can prevent unexpected tax bills and ensure proper filing.
4. Plan your schedule strategically
Athletes and entertainers can minimize their jock tax liabilities by planning their travel and work schedules to spend less time in high-tax states.
Bottom line
The jock tax adds a layer of complexity to the financial lives of athletes, entertainers, and remote workers. Understanding how this tax works, who it affects, and how to manage it is essential for effective tax planning.
By consulting with financial advisors, keeping detailed records, and staying informed about state-specific rules, you can navigate the jock tax landscape more efficiently.
Remember, taxes might be inevitable, but with the right strategies, you can tackle them like a pro and keep more of your hard-earned money in your pocket.