Pros and Cons Professional Athletes Need to Know About Earning International Income and Paying Taxes
Let’s face it, the life of a professional athlete is far from ordinary.
No matter the sport, professional athletes are accustomed to working at a very high level when it comes to not only physical fitness, but to mental toughness, and even business savvy as well.
Having a mind for business may not sound at first like something that helps an athlete to win races, but to be successful on a global scale requires endorsements and appearance fees, among other potential income. Because an athlete’s income is rarely steady, it takes certain mindfulness of finance as well as the discipline of personal habits to ensure that proper care has been taken.
Discipline is something that professional athletes have in spades, so that is certainly a plus!
Even for athletes who don’t have a head for business or have professional training in finance, as I do, it’s important to have a general understanding of what needs to happen to your money in order to be on the right side of the law come tax time.
Athletes who are lucky enough to be at the top of their game and are known worldwide are fortunate because that opens up a wealth of opportunities for competition as well as income streams.
Pros and cons of international competition
On one hand, increased demand for professional athletics on a global scale brings about additional sources of income – which is great. On the other hand, this income can sometimes create tax-related issues that many athletes are unprepared to deal with.
As a professional athlete, it’s difficult enough to gain a clear understanding of the ever-changing U.S. tax code – let alone comprehend the intricacies of each foreign jurisdiction in which you earn money.
Luckily, there are tax professionals available to help handle the paperwork and intricacies that go with it. The goal of this post is to share an understanding of how money is taxed abroad and what you can do to avoid any major pitfalls.
Paying taxes abroad
Even if you are an American citizen and reside permanently in the United States, if you earn money in a country other than the United States, you will need to report that income to the IRS and to the jurisdiction in which you earned the money.
You likely will not have to be taxed twice – once in the United States and once in the foreign country – because there is a tax credit available in the United States for any taxes paid abroad.
The important thing to remember is to keep all paperwork that verifies your employment and make sure it reaches the hands of your accountant.
In many cases when you compete abroad, the athlete or agent is provided with a form that details the taxes you paid in each respective country. Generally, you can collect these forms and provide them to your accountant.
Always know the source of your income
Although your accountant is capable of handling the majority of your tax-related issues, it is still important for you to be aware of exactly where your income is coming from — especially if you have a global sponsor. For example, some athletes are paid by Adidas USA while others might be paid by Adidas Germany. Adidas USA is governed by the same tax laws as any other American company. Along the same lines, Adidas Germany will follow the tax laws of Germany.
Make sure not to fall under the assumption that you are sponsored by Adidas without considering the country because you could set yourself up for a very expensive learning lesson come tax time.
There are no shortcuts
Sometimes, you might earn money in a foreign country, and they won’t provide you with any paperwork. Rest assured, you are still liable for paying taxes on that income. The IRS is very careful to look at international athletes come time for an audit. As long as you document everything properly on your end and pay the necessary taxes, you will be fine. Not receiving paperwork is not an excuse for not paying taxes on that money, and “but I didn’t know” is not an excuse that the IRS will accept.
Whether you are an athlete or work in a different profession, if you earn money in a foreign country, it’s critical that you report the income and pay the necessary taxes. Rest assured that if you don’t, the audit process will reveal the breach, and that could be a very expensive mistake.
If you are overwhelmed with uncertainty around managing your finances, remember that you don’t have to solve everything on your own. Seek the counsel of a Financial Planner who can help answer your questions and create a strategy to set you on the path for financial security long after your competing days have ended.
A financial planner can recommend a tax advisor and can help point you in the right direction with your paperwork so that you are ready to take full advantage of any international opportunities that may come your way to further your career.