What is Jock Tax and How is it Calculated?

In the previous articles, we have already seen that the owners of sporting franchises are able to evade taxes even though they earn billions of dollars from the sporting league. However, this is not the case when it comes to athletes.

Since athletes make large sums of money which are known to the media and the general public, there is a lot of pressure on the tax authorities to tax them. As a result, tax authorities are vigilant when it comes to taxing them.

Jock tax is one of the ways in which tax authorities collect money from professional athletes. There are several critics who believe that the jock tax is unfair because in practice it almost exclusively applies to professional athletes. In this article, we will have a closer look at what a jock tax is and what are its pros and cons.

What is a Jock Tax?

A jock tax is a form of income tax which is levied on non-resident visitors on the income that they make while they spend time in the state. It is important to note that the tax is not calculated only for the day that the income is made i.e. the game is played. Instead, the tax is levied on the entire time that is spent in the state. This is because the tax authorities believe that the press conferences, visits, and other activities that precede the game are also part of the actual income generation activity i.e. the game.

Also, the tax is not only levied on professional athletes. It is levied on the entire squad i.e. coaches, physiotherapists, scouts, trainers, and any other staff member who has visited the state.

In theory, the jock tax is applicable to everyone i.e., even if a person working in California spends some time in Texas and sends some work-related emails over the weekend. However, in practice, it is difficult for tax authorities to keep track of how much time a person spends in which state. This is not the case for professional athletes.

Example:

The Jock tax can be better understood with the help of an example. Let’s say that the team from New Jersey and Washington State reached the finals of an interstate tournament. The finals are scheduled to be held in Florida.

Now, athletes from New Jersey as well as Washington will be required to visit Florida to play the match. However, they may not visit the state only on match day. Instead, they may be required to visit Florida at least one week in advance. This could be because they are expected to perform certain important economic activities such as marketing and promotion for the team as well as training for the event.

In this case, the state of Florida will gain more than publicity from hosting the finals. They will prorate the wages received by the athletes in that one week and consider it taxable income. The state will then lay the relevant income tax rates in order to calculate the final liability.

Why is there a Pressure for Jock Tax?

The rates for jock taxes are often different from regular income tax rates. There are many states which do not levy income tax on their ordinary residents. However, they too are compelled to levy jock taxes. This is because oftentimes the political pressure to levy such taxes is very high. It is important to understand that the vast majority of people believe that sportspeople are able to make a lot of money from these leagues.

Most of the money collected in the form of ticket sales gets paid to the athletes. These athletes are just visitors and hence do not spend much money in the state. Since they spend most of the money out of the state, the state is not able to generate much in the form of income taxes. Hence, there is an economic loss which the state is expected to bear.

In order to minimize these losses and help the state recoup some money, the decision to levy jock taxes is taken. Since the high salaries and flamboyant lifestyles of athletes are well known, the state is under pressure to tax the money that they receive as compensation which has ultimately been taken from lower middle-class citizens.

How is the Jock Tax Calculated?

The jock tax is calculated in a prorated manner. This means that first, the state tries to determine the number of days that the athlete has been actively working in any given season. This number generally lies between 170 and 180. The next step is to find out the number of working days which were spent in the state. The number of working days in the state is then divided by the total working days in order to find out the multiplication factor which will be used to derive taxable income.

Let’s say that the athlete has worked for 9 days in the state out of a total of 180 days. In such a case, the athlete has worked in the state for 5% of their total time. Hence, 5% of their total income is assumed to be generated in the state and this is the amount that is used for income tax calculations.

Sometimes there are bonuses as well as other payments which are made to such players on account of winning a particular game. The income tax rules related to bonuses are quite different as compared to regular wages. A larger percentage of the income earned may have to be paid as a tax in case of a bonus.

The bottom line is that the jock tax is an income tax which is theoretically imposed on everyone. However, in practice, it is paid up exclusively by sports athletes. Almost every state which has a team and hence hosts other teams when they visit has created a system for collecting jock taxes.