On Sunday, quarterback Peyton Manning led his uncharacteristically hapless Denver Broncos to the second-most-lopsided Super Bowl loss ever. Manning & Company just couldn't catch a break, from the safety they gave up on the game's first play, to Manning's two interceptions, to Percy Harvin's second-half kickoff return, to . . . you get the picture. So, Manning didn't walk away with that hoped-for second Super Bowl ring. But at least he walks away with the $46,000 bonus the NFL awards to losing players.
Or does he? Well, here's the deal. It turns on two things:
- New Jersey, like most states, tackles visiting athletes with a "jock tax." The state calculates Manning's taxable income by dividing the number of days he practices and plays in the state by the number of "duty days" he works for the whole year. Then they apply the regular tax rates, which range up to 8.97% on income over $500,000.
- Next month, Manning heads to the doctor to follow up on a series of surgeries to his neck and spine. If everything still looks good, he plans to return for the 2014 season. If not, he'll ride off into the sunset, go to work as a broadcaster, and wait for his induction into the Hall of Fame.
Now, here's where the play gets complicated. If Manning's neck forces him to retire, he'll finish 2014 with $111,000 in playoff bonuses. He'll owe New Jersey tax for the seven days he worked in the state, out of 33 days he played for the year. He'll hand off $982 in tax, and probably hope he can forget the day ever happened.
BUT — if Manning's neck checks out okay, and he goes on to play next season, he'll earn another $15 million in 2014 salary. Then he'll owe New Jersey tax for a smaller fraction of the season — seven days out of 200, rather than seven days out of 33. But he'll apply that fraction to a whopping $15,111,000 of income. That means he'll turn over $46,844 in tax — $844 more than he actually made for playing Sunday's game!
And this is all before we get to Uncle Sam, who picks off 39.6% for income tax and 3.8% for Medicare. Manning's total tax bill on his $46,000 Super Bowl bonus could hit $66,808, meaning it actually cost him 20 G's to play! Where's the fun in that?
At least Manning still leads the NFL in endorsements. He makes $12 million per year from sponsors including Reebok, Buick, Wheaties, DirecTV, and Papa John's pizza. He should be thankful New Jersey doesn't tax him on a share of that endorsement income. Some U.S. golfers, among other athletes, have had to weigh whether or not to play tournaments in European countries that tax visiting athletes on a share of their endorsement income as well as contest winnings.
So, here's the final score. When you try something new, like earning income from a new venture or in a new place, you can't just add up the numbers at the end of the year and hope for the best. You need a plan to penetrate the tax man's defense — one that anticipates blindside rushers like New Jersey's jock tax. So call us when you're ready foryour plan. And remember, we're here for your teammates, too!
Let's Talk! For a deeper conversation on our services, or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday for a no cost consultation, or drop me a note.
Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. As a trusted senior advisor and counselor working closely with Entrepreneurs, Professionals and Select Individuals, Mr. Hoffman provides counsel to his clients who are navigating through the complexity of today's business, tax, and accounting challenges.
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