In this episode of the Main Street Business Podcast, host Mark J Kohler welcomes Main Street influencer, Max Merritt, to unpack how student athletes can manage NIL income by forming an LLC. Together, they break down the key strategies and tax advantages available for NIL athletes into four easy sections.
Here's what you can look forward to:
Mark and Max highlight the importance of structuring yourself as a business entity, such as an LLC, for tax planning purposes.
They emphasize the need for professional advice when setting up the business entity to ensure proper tax strategies are in place.
Mark and Max discuss the two types of income NIL athletes may receive.
The significance of understanding state tax implications and strategizing residency for tax purposes.
How to utilize an LLC as a powerful tool for tax planning and incorporating family members for additional write-offs.
Reporting income to the IRS using Schedule C or E and the importance of maximizing write-offs
How to be patient yet proactive in setting up the business correctly and continuing education on entrepreneurship.
Are you ready to get certified in EVERY strategy I teach? Start your journey with a FREE 15-minute demo.
You don't want to miss this! Secure your tickets for the most significant tax & legal event of the year: Tax and Legal 360
In this episode of the Main Street Business Podcast, host Mark J Kohler welcomes Main Street influencer, Max Merritt, to unpack how student athletes can manage NIL income by forming an LLC. Together, they break down the key strategies and tax advantages available for NIL athletes into four easy sections.
Here's what you can look forward to:
Mark and Max highlight the importance of structuring yourself as a business entity, such as an LLC, for tax planning purposes.
They emphasize the need for professional advice when setting up the business entity to ensure proper tax strategies are in place.
Mark and Max discuss the two types of income NIL athletes may receive.
The significance of understanding state tax implications and strategizing residency for tax purposes.
How to utilize an LLC as a powerful tool for tax planning and incorporating family members for additional write-offs.
Reporting income to the IRS using Schedule C or E and the importance of maximizing write-offs
How to be patient yet proactive in setting up the business correctly and continuing education on entrepreneurship.
Are you ready to get certified in EVERY strategy I teach? Start your journey with a FREE 15-minute demo.
You don't want to miss this! Secure your tickets for the most significant tax & legal event of the year: Tax and Legal 360
If any of you are a student athlete anticipating or being offered nil income, your first thing to do is go form that LLC.
Max Merritt:
Schedule e income is not subject to the self employment tax.
Mark J Kohler:
Setting up your LLC allows you to open a bank account and treat yourself like a business. That LLC doesn't save you tax. The LLC saves you tax. When you layer it with this s.
Max Merritt:
Election and we can add family members to board of advisors, different things and start generating the ability to make your life a tax write off in a lot of ways.
Mark J Kohler:
Business owner set ups the entity where they freaking live and do business. That's the general rule. Be careful of signing up with someone that wants a percentage of you. Welcome, everybody, to a Main Street Business podcast interview with a Main street influencer. This is Max Merritt, one of our tax lawyers at KQS. Lawyers, my name is Mark Kohler. I'm also a tax lawyer, a senior partner here, and we've got Max here, the leader of our nil business group, helping clients around the country. Thanks for being with me.
Max Merritt:
Oh, thanks so much for having me. I'm super excited to be here. This is a topic that's becoming bigger and bigger in the news and the media. With March Madness happening right now, it's.
Mark J Kohler:
Critical and we want to get right to it. We want to make this very effective and informational for any of you watching. We want to cover four things for the nil athlete, and we've got other videos for you. Four part series. This is the first part, and that is understanding the tax ramifications of being an nil athlete. And we want to talk about you as a business, how to structure yourself and what type of income might be coming in, what to do with federal taxes and what to do with state taxes. So we're going to hit four topics. We're going to dive into it. We hope to be there for you for many years to come with additional articles and podcast videos, YouTube videos. If you're finding this for the first time, you may go to ask yourself, wow, these guys have some content. We got lots of content out there. Main Street America needs good tax planning advice. So I'm going to ask you, Max, first, as we kind of beat this up and peel away the onion. Is a student athlete a business?
Max Merritt:
Absolutely. Absolutely. And sometimes student athletes don't realize this as they go to college. They just think, I'm a young, dumb kid here to play basketball or football.
Mark J Kohler:
Well, that was offensive. Young dumb kid.
Max Merritt:
Come on. Offensive, right. I was a young dumb kid. I didn't go to play basketball, obviously. But the one thing they don't realize all of a sudden is all of a sudden they've got deals coming in and they're like, what do I do with this income? You're a business. You are absolutely a business. Your image, your name, your likeness is a business, and you've got to take care of that.
Mark J Kohler:
Yeah. And your name, image and likeness is going to live on if things go well after college, and that's one of our other videos, is, what do I do with this after I graduate? And we're seeing nil athletes capitalize on that and make money after college. So we'll come to that. But the first and foremost, you need to realize you are a business. You're like a Tom Cruise actor or actress. You're Greg Norman playing golf after the fact. I mean, just cause you're in college doesn't mean it detracts from the fact that you as an individual are a business. So me, Mark Kohler, as a tax lawyer, I have incorporated myself, my name, image and likeness as a tax lawyer helping small business owners around America. That's very valuable to me. That's very important. And so, before we even get into the details of how you're going to report, I think the first recommendation is you need to incorporate yourself as a name, and that could be as easy as an LLC. And we might do a special tax election we're going to talk about here in a moment. But I think every student should create their own LLC, right?
Max Merritt:
Yeah, absolutely. And the nice thing about creating an LLC, and we'll talk about the tax strategy with it, is once you get this up and going now, we start having a legitimate business in our hands, and we've got tax planning that we can take care of. We've got expenses we can start looking at. But it also gives us the opportunity for what you just kind of gave a little tidbit of, which is that s election to really get the tax savings happening.
Mark J Kohler:
Now, just going online and clicking a button and setting up an LLC is oftentimes not just an LLC. You need to have a bank packet with a tax id number. We have the new Fincen Boi business owner information report that has to be filed within 90 days to the Treasury Department. I want you to have a corporate book and articles. What state do you incorporate in or set up your LLC? Those are all questions. And if you start clicking around on legalzoom thinking you're going to nail it, watch out. We literally have an entire service in our little boutique law firm. Helping clients around the country called fixmylegalzoomentity.com dot. And it's not that legalzoom's bad, it's just a lot of people think, oh, I can do this. I watched law and order last night. No, you can't. Please, with this first entity, get a little bit of advice. And our law firm, for example, start to finish with a real lawyer on the phone with you. 1200 bucks. So be careful. And we have another video talking about agents and how they're a lot more expensive than that. But setting up your LLC allows you to open a bank account and treat yourself like a business. Gosh. I want to add to that a little bit your thoughts just before we move on again, being a business. Yeah.
Max Merritt:
The biggest thing I would point out is there's a lot of money being paid to these athletes. When we talk to small business owners all the time I'm talking to small business owners that are starting businesses where they're netting 30, 40 grand in a year. And they need a business. They need to legitimize this. These student athletes are making a ton of money. I read an article just recently where the first year of nil, $917 million was paid to student athletes. These guys, you need a business to create around yourself and to really shelf yourself and help you.
Mark J Kohler:
And it's not for asset protection. This is for audit protection with the IR's because they could very well audit you. But it's also to capture all the tax benefits that come with this. Because from now on, you as a business owner, and you're the business, we're going to be able to deduct travel, your cell phone, home, office, laptops, electronics, anything at Best Buy, anything at the Apple store, marketing expenses, maybe some clothing or workout material, workout equipment. There's a lot of things that could relate to it, and it's going to vary depending on the athlete. So don't take that as carte blanche to write off everything. We're gonna talk about our tax advisor network that we set up over two years ago, helping train over 600 accountants around the country. Cause your accountant may not know these rules or strategies. And they're like, I don't know. And you got a $500,000 1099. Your accountant might just. Their brain might explode. You need to have resources that are not terribly expensive. So we've got a network we'll share with you as well.
Max Merritt:
Agreed? Totally agree. And I think as you get going, you're going to realize how awesome your own business can be. We'll get down into the nitty gritty with having things like board of advisors, having your family on there, getting the input there, but creating different write offs and expenses there. It's going to be awesome.
Mark J Kohler:
All right, so that's point number one. You are a business. Own it and it'll live with you for many years to come. You may write a book. You might start a business after college. You might partner with someone that wants your name, image, and likeness in their car dealership or who knows what. So you want protect it and own it and be. And be involved in it. And that's going to be having a business credit card, a business debit card, a business bank account, taking write offs when you get paid, it goes into the business. This is a whole new level, and it's exciting and it's okay. So that's point number one. Now, point number two, you're going to get two types of income. Now, when you google this, it is all over the map. Now, we are a legitimate tax law firm that's been around for 25 years. We've helped thousands of business owners, from dentists, doctors, to restaurant owners, to landscapers, realtors, to nil, athletes, actors, actresses, all the above. And throughout that experience, and I've done 10,000 consultations with small business owners around the country. We know this. So I want you to feel confident in this. But there's two types of income. Max, why don't you explain these two types? There's kind of a earned income and a royalty income that you might see.
Max Merritt:
Okay, so there's two types of income we're going to work with. The first one is going to be ordinary income. This is going to stem from when you're offering a service. Maybe you're going somewhere. You're going and signing autographs, you're going to a car dealership and speaking to their employees, and they're maybe creating a t shirt with their car on it for you or whatever, but you've gone there and done something, some activity. The other type of income may be a little bit more unique, but we're seeing more of it, which is what may be referred to as royalty income. You're not really going and doing anything, but they're putting your image on, say, a t shirt or any other sort of product. Any sort of product might be there, but you're not going and physically doing anything for them. There's no service oriented.
Mark J Kohler:
And what this is going to look like when you get these reports in the mail next January is a 1099 NEC non employee compensation so if you get a 1099 NEC, whoever gave you that money is going to see what you did as a service. They paid you for an endorsement, some sort of physical thing you did. Then the other type of 1099 would be a 1099. Miss Mis C. Miscellaneous. Box two is going to be where royalty income is stated. So you very well might get 210 99s. Those are going to go in two different spots, and they're taxed very differently. So let me repeat as an nil athlete, two types of income, active, passive, ordinary royalty. And it's okay. Don't freak out by it on that. And once you have those two types of income identified, you want to go at it and try to get both of those. Now you're going to get hit up with a lot offers and opportunities to get paid for one of those. And we have another video on what to do about an agent. Do you really need an agent? What do you do when these offers come in the mail? We're going to talk about the legal or negotiation, legal aspect or negotiation that needs to occur. But these two types of income are going to be reported differently. Now, once we have the. That's point number two types of income. Now let's talk about how you would report the ordinary income. Where does this is where the LLC comes into play. Right.
Max Merritt:
So once you've set up your LLC and once you have your name, image and likeness out there, you need this entity in place when you start getting income. An LLC is just a pass through entity for you. So this income from ordinary income. Excuse me. Where we're offering a service, we're going and doing something, it's going to show up on your schedule C as in Charlie, that's subject to self employment tax.
Mark J Kohler:
Not good. Not good.
Max Merritt:
And that's where we're looking to save taxes. Right. And so that income, that's going to be on your schedule C, that's where we look at being able to do an S corporation and make that s selection on that entity to get the tax savings.
Mark J Kohler:
I like it. And before we go to royalty, that LLC doesn't save you tax. The LLC saved you tax. When you layer it with this s election. Now, the s as in small corporation, we can make that election anytime in 2024. Don't let your accountant say, oh, my gosh, you missed the deadline, March 15. No, we can retroactively make an S election for all of 2024. But I'll say this, if you don't set up an LLC, you can't backdate into an S corp, you gotta have that LLC set up. So one of our first recommendations is if any of you are a student athlete anticipating or being offered nil income, your first thing to do is go form that LLC. And when you meet with one of our lawyers, and you can get on a Zoom call with your parents or family or your advisor, and you may have an agent already involved. Remember, they may be great at negotiating, but they may not be great at taxes. You need to stand up for yourself and go, I want to consult with this tax law boutique. I want to work with them on this. Well, we've got you covered. Again. Watch our other video on agents. They're going to try to hold you captive. So get that LLC set up. Our tax lawyers can meet with you. You get that set up very affordably. You've got your llc. All of the questions you or your parents might want to ask are going to be answered, and we're going to make that s election and become an s corporation when the time is right. Now, I've got Max and I've got videos and podcasts. I've got books written on this. You're going to learn about the s corporation in due time. But that is the step to take with the ordinary income. Now, the royalty income, different story. What would be, you said the example of your name, image, or likeness or picture might be on a Wheaties box or a product or a shirt. This royalty income, where do you report that?
Max Merritt:
Yeah. So the royalty income is going to be reported on your schedule e, as in Edward. This is where that 1099 miscellaneous income is going to show up. This is critical that you understand the difference. Big reason is that schedule E income is not subject to the self employment tax.
Mark J Kohler:
But you still get to take write offs.
Max Merritt:
Absolutely get to take the write offs. You get a write off against it. But there's some tax savings. So it's critical that you have a tax advisor that understands the difference between these two, because there's tax savings, large tax savings, by getting this on your schedule e, if it's justified and legal.
Mark J Kohler:
Now, in this process, if you had to choose one or the other, you'd want schedule e. That's a good thing because you don't have to run it through this S corp strategy and payroll and all that. But you're also allowed to set up a solo 401K fund, a Roth IRA. There's all sorts of tax strategies we want to layer on top of your s corp. Now, let's take a breath. You've got two types of income. We're on topic number three, reporting to the feds, you're going to have a schedule c or an s corporation or a schedule e, as in Edward. Now you start to think of, okay, what are all these write offs? And this is where we've had podcast after podcast. I've got my 30 ultimate tax guide, 30 strategy tax guide that you can download on my website. Start learning what some of these write offs could be. Dining, electronics, travel, auto, home, office, all these goodies. You're gonna start learning that, and you're gonna be filing your own tax return. So when you file that 1040, you may or may not be claimed as a dependent on your parents tax return. So you're gonna have to have a conversation with your parents. I am now independent. I'm now a 1040. Heck, you may be making more money than your parents. So your tax planning is now going to be separated from your parents.
Max Merritt:
Right. And it's critical to understand and get ahead of this because, one, we want to capture all the write offs and deductions that you can take. Meals, travel, all the ones that were just mentioned. But a lot of these student athletes want to go home for Christmas. They want to go do things. And we can add family members to board of advisors, different things, and start generating the ability to make your life attacks write off in a lot of ways. Yeah.
Mark J Kohler:
And this LLC that you set up, you should be the manager of it. It should not be member managed. That's a way people screw up their LLC filing. And we can also create this board of advisors or board of directors and put your family on it. So when you meet with them or travel, you're getting a tax write off for any expenses you pay for there. So this LLC gets to be really powerful as a planning tool. Now you've got your LLC, you've got your bank account, you're tracking your expenses. You know, okay, where am I going to write this off? The tax pro network that you can get to@markjcoler.com. Is down in the description. If your accountant is not savvy enough for this, you want to be aligning yourself with an accountant. At the same time, you're aligning yourself with a lawyer and or maybe an agent. So you've got all these new people on your team, and you got to be careful because some of them are not going to have your interest, your best interest in mind. They're going to want a piece of you. And there's so many good movies out there you need to start watching on this topic. So you're reporting your income, you're off to the races. Where do you set up your LLC? Now this can be really tricky because we're going to come to state taxation as well. I think you set up your LLC in your home state where you are still a resident. Let's give an example. Maybe you're a California resident, but you're going to school in Colorado under coach prime and you're playing football. Okay. Do I set up a Colorado LLC or a California LLC? One of the questions we're going to ask in the consult, and this is again why you're not clicking on Google for answer in the middle of the night, is where do you plan to be a resident during those four years in Colorado? Are you going to be a resident of Colorado? You probably save taxes to do that. And if you're going to claim residency in the state where you're going to school, that's where we're going to set up the entity. But it can vary.
Max Merritt:
Right. Can I make one service announcement too, where I had a client today that just made this mistake. Do not go set up your corporation in Delaware. Don't just go set up this Nevada or Wyoming corporation because that's what you saw online. It's a huge mistake because a lot of your tax savings won't or missed. But then we're gonna have to go in and we have a cleanup service. These mistakes happen, but we can avoid it. Call us first and let us help you get it set up because we want it set up in the right state. That's critical to these entities.
Mark J Kohler:
And if your freaking agent or some advisor, that's not a certified tax advisor lawyer is saying, oh, set up in Delaware. Why? Well, that's because where everybody goes, or Nevada or Wyoming, ask them why. Well, that's because what big companies do, yeah, they're going public and selling stock and they're going on a stock exchange, or they're a syndication, they're a hedge fund or a small business owner set ups the entity where they freaking live and do business. That's the general rule. Now, if you're going to our example, University of Colorado, that's where you're doing business. We're going to set up in Colorado. All right. Doing it in Delaware does not save you. It costs you. So be careful of who's giving this flamboyant, sexy, cool advice to go to one of these states when they don't have any good reason why you're doing it and it can cost you. So be careful. There now we get to state tax reporting, which can, again, depend on the state of residency you've chosen. Also, what your plans are on after college, I don't know. There's so much here. What do you like to say or unpack here?
Max Merritt:
Yeah. As far as state tax goes, I think you have to be really careful in how you do this because the state reporting, both states can want a piece of you, right? You're a resident of California. You're going to school in Colorado. California, they want to claim some of that. And so you want to be strategic in how you do this. And that's why meeting with us and talking with us about, okay, should we move our residency? Should we not? What are we doing? Is going to be critical to this because both states, you may file income tax reports in both states because Colorado, they want to claim you, too. Your name, image and likeness is where it's at because of where you're playing college football.
Mark J Kohler:
And by the way, this is not an infomercial that you've got to use our law firm or our network of accounts. Go where you want, but go somewhere that understands these rules and you trust and they can work together because what's going to happen, you're going to go talk to your accountant. They're going to go, I don't know, talk to your lawyer. And the lawyer's going to go, I don't know, talk to your accountant. All of a sudden, you're the mediator here, trying to interpret complex laws and make decisions and flipping around on Google in the middle of the night trying to find answer. So get a second or third opinion if you need to. Don't use us. Use someone you trust and make it affordable. Be careful of signing up with someone that wants a percentage of you. We don't do that. We're hourly. That's cool. Ala Carters, when you need us, call us. Cool. That's how it should be. These people that want to take a percentage of your revenue through college and even after that, holy crap. Be careful. So the state issue comes down to a conversation with your tax advisor and really figuring out kind of what you're doing now, where you want to go, where you're making the revenue where you're not. Another good example might be, let's say, a Texas student going to play in California. USC. All right, cool. Texas, they don't have state tax. They don't care. But you go to California and you're playing at USC and you got an nil deal. I think California is going to want a piece of that. Now if it's schedule e they're still going to get a piece of it. Or schedule C or a s corporation, they're going to get a piece of it. See, the federal plays out before the state and you have to understand those two tiers and your accountant should understand that as well. Our network is trained on this issue. They can walk you through it. But the state tax planning is a tricky one.
Max Merritt:
It is tricky and it goes back to the critical environment of create a team around you. Having an attorney and your CPA and an agent all in the same room is not a bad thing. That's a good thing. They're all there to advocate for you and they all have their own expertise to create a really good picture for you.
Mark J Kohler:
By the way, I know a lawyer like we could be four, five, $600 an hour. We need to save you ten times that when you call us. For example, I've done 10,000 consultations plus in my 25 year career. If I'm dollar 600 an hour, are you really paying me for an hour? No, you're paying me for the 9999 consultations I had before you. And so if I've met with 9000 clients, do you think something I learned from the mistakes they've made and the successes they've had is going to help you? That's what you're paying for. And that's the same thing with an accountant, a financial advisor, an agent. You're paying for their experience. So don't get hung up on an hourly rate when you're like, holy crap, I've never paid someone dollar 500 an hour. Yeah, but they should be saving you ten times that. And especially someone trying to take a percentage of you. Be really careful. It's okay to spend a nickel to make a dollar and so many people step over the dollar to pick up a nickel. Like I can't pay that. Oh my gosh, you're in a whole new level now. You're going to make 100 grand on an nil deal. You can spend a grand to get it done right wherever you go.
Max Merritt:
Absolutely, I agree.
Mark J Kohler:
So, well, we've got more videos on this nil topic and we are so excited for you. An athlete worked so hard practicing, training, training, training, sacrificing food and social events and working mornings and nights. This is an exciting time for you. Don't have a lot of anxiety over this. Don't stress out, take careful suggestions and advice and be careful when anybody says you got to move. Now what advice would you say here, too.
Max Merritt:
Yeah. Be patient, but be proactive. Right?
Mark J Kohler:
Go.
Max Merritt:
If you start getting deals, we're seeing this with a new college athlete who all of a sudden has big deals. We're talking big companies, reaching out to them, wanting to use them. His name, image and likeness or hers. Be proactive. Go meet with us. Come meet with us, and let's get this set up correctly.
Mark J Kohler:
Well, continue your education on this topic. Welcome to the world of entrepreneurship. You are an entrepreneur now as a student athlete. How exciting. We're not going anywhere. We have a weekly podcast, the Main street business podcast, with now almost 500 episodes. We're not new to this world. This is very common for us. My YouTube channel has tons and tons of video on this, books on Amazon. Please do your research. Continue to learn about being a business owner. It's an exciting time. We've got a workshop in Salt Lake in June, in Phoenix in December. We get on the east coast, the west coast. We help clients around the country find an advisor that you believe in. Max and I, we're going to be back, and we've got more videos to share with you. The nil athlete, and good luck. Wish you the best.