NIL and Taxes
Taxes are a necessary part of life in many countries, and they serve as the main source of revenue for governments to fund public services such as infrastructure, education, and healthcare. In the United States, there are several types of taxes that individuals and businesses must pay, including federal income taxes (FIT), FICA taxes, and SECA taxes. In this blog post, we will explore the differences between these three types of taxes. While your specific situation may vary commonly student athletes who receive compensation from NIL deals are considered self-employed and will be subject to FIT and SECA taxes.
Federal Income Taxes
Federal income taxes are taxes levied by the federal government on an individual’s income. These taxes are progressive, meaning that individuals who earn more money are subject to a higher tax rate. The federal income tax is based on a system of tax brackets, with each bracket having a different tax rate. For example, in 2022, the tax rate for the first $10,275 of taxable income for a single filer is 10%, while the tax rate for taxable income over $539,900 is 37%. Taxpayers must file a tax return with the Internal Revenue Service (IRS) each year to determine their tax liability and pay any taxes owed.
Single/Unmarried Individuals
| Taxable Income | Tax Rate |
|---|---|
| $0 – $10,275 | 10% |
| $10,276 – $41,775 | $1,027.50 + 12% of the amount over $10,275 |
| $41,776 – $89,075 | $4,807.50 + 22% of the amount over $41,775 |
| $89,076 – $170,050 | $15,213.50 + 24% of the amount over $89,075 |
| $170,051 – $215,950 | $34,647.50 + 32% of the amount over $170,050 |
| $215,951 – $539,900 | $49,335.50 + 35% of the amount over $215,950 |
| $539,901 or more | $162,718 + 37% of the amount over $539,900 |
FICA Taxes
FICA taxes are taxes levied to fund Social Security and Medicare programs. These taxes are split evenly between employees and employers, with each party responsible for paying 6.2% for Social Security and 1.45% for Medicare. Self-employed individuals are responsible for paying both the employer and employee portions of FICA taxes, which is known as the self-employment tax. In 2022, the Social Security tax applies to the first $147,000 of an individual’s income, while the Medicare tax applies to all income.
Read more about FICA taxes here- https://smartasset.com/taxes/all-about-the-fica-tax
SECA Taxes
SECA taxes are similar to FICA taxes in that they fund Social Security and Medicare programs. However, SECA taxes are paid by self-employed individuals rather than split between employees and employers. Self-employed individuals must pay both the employer and employee portions of the FICA taxes, which is 12.4% for Social Security and 2.9% for Medicare. In 2022, the Social Security tax applies to the first $147,000 of an individual’s income, while the Medicare tax applies to all income.
Details on SECA can be found here- https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes
In summary, federal income taxes are levied on an individual’s income by the federal government, while FICA taxes and SECA taxes are used to fund Social Security and Medicare programs. FICA taxes are split evenly between employees and employers, while self-employed individuals must pay both the employer and employee portions of SECA taxes. Understanding the differences between these three types of taxes can help individuals and businesses better manage their tax liabilities and plan for the future.
Disclaimer- Everyone’s tax situation is different and you should consult with a CPA or tax advisor about your specific scenario. The information contained in this blog is not written or intended as financial, tax, or legal advice. The information provided herein may not be relied on for purposes of avoiding any federal tax penalties. You are encouraged to seek financial, tax and legal advice from your professional advisors.
