Team fines are not taxable to fund administrator as long as they are properly categorized.
As practice starts, a teammate got stuck in traffic and shows up late that morning. After practice ends, they go to Venmo, pay a fine to a team fine account and goes on with their day. Although this practice has been going on for years, the usage of Venmo (and other payment applications), combined with recent headlines, might have the fund administrator wondering if their teammate just cost them additional income tax?
The recent law adjusting the threshold for issuing a 1099-K might have the team’s fund administrator concerned they will be paying tax on all the team fines they are collecting. With many professional athletes in the highest tax bracket, 37% in the United States, having to recognize the team fines as their own personal income could result in paying thousands of dollars in additional taxes. The good news is that understanding the law and taking the correct steps will allow the player to avoid having to recognize the money collected as additional income.
Change in Third Party Payment Processing Company Law
Although the changes will now be delayed until the 2023 income tax year, at the beginning of 2022, headlines were made regarding a change in the law that adjusted the threshold for issuing a tax document for third-party payment processing companies, such as Venmo, Paypal, Stripe.
Previously, there would need to be at least 200 separate transactions AND at least $20,000 paid to on individual or business to trigger the issuance of a 1099-K tax document, which obligated the individual to pay tax on the amount. The change states that anyone who received at least $600 through one of these electronic payment apps, regardless of the number of transactions, should be issued a 1099-K.
On the surface, it would seem the team’s fund administrator is going to receive the tax document and be obligated to report the team fines as their own personal income. However, the $600 threshold only applies to transactions done through a business/merchant account or labeled as goods and services. Since no goods are being exchanged or services performed when the fine is paid, it should not count as income for the administrator. Therefore, the administrator (and the player paying the fine) should ensure all fines are paid as friend and family, which will avoid the issuance of any tax documents.
Earning Interest on Team Fine Funds
Receiving team fines, so long as they properly labeled as family/friends transactions in payment apps, will not result in any additional taxable income for the fund administrator. However, if that money happens to earn interest, the owner of the fund would be responsible for recognizing and paying tax on that interest.
Most money transfer apps do not pay interest on balances held in the app, with Zelle being an exception. If the balances are transferred to a bank account or Zelle is the app used, there is a possibility the fund administrator will have to recognize interest income. Any bank account that accrues at least $10 in interest is required to issue a 1099INT tax form to the account owner and they would pay tax on that interest. The account owner is the individual whose social security number is associated with the account.
The headlines over the past year might have made the individuals who manage their team’s fine fund nervous about paying tax on the fines they collect. Because the fines are not compensation for neither goods nor services, they should be classified under family/friends transfers and not be considered taxable income. The only time the player managing the fund might be subject to tax as the fund administrator is if interest is earned in an account they own.