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How Your Signing Bonus Is Taxed

How Your Signing Bonus Is Taxed

For the majority of you, your signing bonus will be your first exposure to a significant amount of money. It will also be your introduction to paying a significant amount of tax.

Your signing bonus presents unique planning opportunities that are often missed in the first year of a player’s career. Unfortunately, for many players in the past, this resulted in losing out on thousands of dollars. 

Before the contract is signed, you should be working with your Sports Advisor, a CERTIFIED FINANCIAL PLANNER™ (CFP®) and a Certified Public Accountant (CPA®) in determining the most beneficial arrangement.

The first critical piece of information you must understand is how your signing bonus will be taxed.

What constitutes a true “signing” bonus has often been a matter of disagreement between taxpayers and taxing authorities.  Taxing authorities routinely challenge taxpayer “signing bonus” assertions, often prevailing under the ruling that the bonus relates to all provisions in the contract, not just the act of signing.  If not a “signing bonus,” the income is apportioned as part of regular wages. “Signing” bonuses are not subject to state apportionment if they meet all of the following conditions:

  • the bonus is not conditional on playing any games for the team;
  • is payable separately from any other compensation;
  • and is not refundable.

A true signing bonus is not apportioned as part of wages and is generally taxed to the athlete’s state of residence, which in many cases results in a more favorable outcome.

What Does the Contract Say

Unfortunately, during the recent 2012-2016 Collective Bargaining Agreement, the Abandonment Clause was added to the Standard Minor League Uniform Contract which changed the way your

signing bonus is taxed.

Abandonment Clause States:

“If player fails to report for, or abandons Club without permission and is absent from Club for a material portion, or for at least two weeks, of any playing season (which includes the championship season, any training required by Club in preparation for such championship season and any post-season that the team or affiliate to which Player is assigned participates) during the term of this Minor League Uniform Player Contract (“UPC”),

  1. Player shall relinquish and forfeit any right to, and Club shall not be obligated to pay, any portion of the amount not yet paid pursuant to the payment schedule set forth in this signing provision and
  1. Player shall immediately return and refund to the Club, and relinquish and forfeit any right to, that portion of the signing bonus already paid to Player by Club, regardless of the year of payment, that exceeds the amount of signing bonus already paid to Player by Club (i) multiplied by the number of champion-ship seasons Player reported to, and did not subsequently abandon without permission, Club and (ii) divided by the number of championship seasons covered by the team of this UPC.”

The addition of this language to the contract violates the following two conditions of a true “signing” bonus, resulting in the income being apportioned as part of regular wages:

  • the bonus is not conditional on playing any games for the team;
  • and is not refundable.

In summary, your signing bonus is taxed in the states you play NOT only your resident state.

As a simple illustration, take the following 2 scenarios:

Category: Taxes

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