If Mahomes fails to clear the last hurdle, Tom Brady and the Buccaneers, in his quest for a second consecutive Super Bowl, he would be facing a tax rate of 80% on his Super Bowl bonus!
Due to the pandemic, only 25,000 individuals will attend this year’s Super Bowl, however, the television viewership is expected to exceed 100 million people, amongst which will be tax authorities of the Missouri Department of Revenue as they have a substantial financial stake in this year’s game.
Jock Tax History
Although all income is subject to federal tax, where the bonuses from this year’s NFL playoffs and Super Bowl becomes interesting is at the state level. With this year’s Super Bowl in Tampa, Florida, a state that does not levy income tax, this does not mean that Patrick Mahomes and his teammates will not face state tax issues regarding this year’s bonus. Team members of the Super Bowl LV’s (55) winning team will each earn a bonus of $124,000, while members of the losing team receive $62,000. The additional tax each player pays will not only depend on the physical location of the game but the individual player’s salary, the number of days in the season (including the post season), and the player’s state of residence.
Game location
Raymond James Stadium in Tampa, Florida is one of seven National Football League (NFL) stadiums located in a state that does not impose a tax on income. Of the 22 states in which the 32 teams play, 18 states implement a tax on non-resident athletes, known as the ‘jock tax’. Florida, along with Texas, Tennessee and Washington are the four states that are home to NFL teams that do not tax income.
State of residency
Even though the Chiefs’ players will not face tax on their Super Bowl earnings in Florida, it does not mean that they will escape taxation at the state level. The additional income will be allocated to and taxed in each player’s state of residency (or home state). Therefore, players from the Chiefs who reside in Missouri will need to allocate their bonus for the Super Bowl back to these states.
Player’s salary and number of duty days
The net result of how much state tax a player will pay on their bonuses will be related to their total salary. Players are paid over the length of the season and their income is allocated into each state they perform services in. A percentage is computed by counting the number of days they are in each state in relation to the total number of days in the season. The formula, known as duty day allocation, takes into consideration all the days the athlete was required to participate in team activities, including the preseason and postseason. Therefore, for every day the season is extended the duty day allocation into each state is impacted.
Patrick Mahomes
Prior to beating the Buffalo Bills in the AFC Championship, including training camp (assuming it opens on July 15th) Patrick Mahomes was likely to be employed for 193 days in 2021. To that point, Patrick Mahomes had earned an additional $87,000 for the Chiefs two playoff wins that will need to be included to his salary. By playing in the Super Bowl, he is guaranteed at least a $62,000 payout just for participating in the game, and $124,000 if the Chiefs win. Additionally, he extended his total number of ‘duty days’ to 207.
Patrick Mahomes’ Salary and Tax Liabilities for 2021
With the number of duty days increased by their playoff run, Patrick Mahomes has lowered his non-resident state tax by over $10,000 win or lose. However, a closer look reveals that along with the decrease in non-resident tax, there is a significant corresponding decrease in non-resident credits (the state of Missouri will give tax credits to it residents for taxes paid as a non-resident in other states) and increase in resident state (MO) tax. Meaning, should the Chiefs win on Sunday, Missouri will collect $29,500 in additional revenue (minus credits) from Patrick Mahomes, if they lose, they will only receive $25,309.
When you take into consideration, Mahomes’ federal tax in addition to his state liability he is taxed at 63.1% should they win and an astronomical 80.2% should the Chiefs lose.
What About Tom Brady?
Tom Brady and his Buccaneer teammates have made history as they will become the first team in NFL history to play the Super Bowl on their home field. By extending their season, they too will increase their total ‘duty days’ and nonresident allocation to the other states on their 2021 schedule. Since there is no resident tax (and no resident credit) in Florida, the decrease in salary allocation to another state creates a dollar for dollar tax savings for Brady and his teammates! Just by playing in the game (win or lose) Brady saves over $16,000 in non-resident state tax ‘jock tax’.
Brady’s tax savings do not extend to the federal level, however, his savings at the state level does lower his overall tax burden for playing in the game. The end result is Brady will pay only 26.4% should the Buccaneers win and only 12.5% should they lose.
Summary
As the above analysis indicates, state tax issues for professional athletes can be confusing and in Mahomes’ case potentially costly. Although, this year’s Super Bowl is played in a state with no income tax, state tax consequences still exist. Along with their resident state tax liability, professional athletes also need to allocate their income into each state and city jurisdiction in which they play. Residency, duty days, and the salaries will impact the overall tax liability. With 20 of the 24 states in which professional athletes play implementing their own version of the ‘jock tax’ it is important to have professional guidance from an individual who specializes in understanding all the unique issues that face professional athletes.