One bogus element of this claim I want to dispel right off the bat is the idea that if one athlete receives compensation, every athlete will pay taxes. This really makes no sense, but one element of the tax argument that McMillen and others make is that if a given athlete starts to receive wages from a school, not only will he or she will no longer fall into the special IRS ruling which says the scholarship is not taxed, but so will all college athletes. This is not true; rather, the tax exception for athletic scholarships is determined at the individual level based on the specific conditions of each scholarship, as the IRS explained in a letter to the Senate in 2014:

It has long been the position of the Internal Revenue Service that athletic scholarships can qualify for exclusion from income under section 117. Revenue Ruling 77-263, 1977-2 C.B. 47, addresses the tax treatment of athletic scholarships where the student athlete is expected to participate in the sport, and the scholarship is not cancelled in event the student cannot participate and the student is not required to engage in any other activities in lieu of participating in the sport. The ruling holds that the athletic scholarship awarded by the university is primarily to aid the recipients in pursuing their studies and, therefore, is excludable under section 117.


If, say, the SEC started paying its football players and the IRS decided that this law no longer applied to them, it simply doesn’t follow that anyone, even the IRS, would start taxing Division II athletes for the value of their 25% scholarships. Nor does it follow that women’s basketball players at Maryland would have to pay up if just the men’s football team gets paid. The only way Person A is going to pay more taxes than they do currently is if he or she receives more income. My taxes don’t go up because you earn more.

Leaving this canard aside, we can still explore the more plausible version of the argument, which is that if college athletes were to receive pay above the cost of attendance, those athletes who got paid might see their tax status change. So I sat down to play with the idea and see what it involves and what an athlete could expect to happen to his or her after-tax income if folks like McMillen and others who make this claim are correct.


First, some assumptions:

In the current world, athletes get a grant-in-aid, which, for the purposes of this exercise, we’ll assume has a list-price value of $50,000, of which $15,000 covers room and board and includes a monthly cost-of-attendance check, with the rest going to tuition, fees, and books. This distinction between tuition/fees/books and other elements is important because the two categories are treated differently under the tax law. Currently, at least in theory, the room and board and stipend is taxable as income under federal law, though in practice I understand that is rarely, if ever, enforced.


Let’s also assume that in a world with market compensation, an athlete will, on top of the current scholarship, receive some amount of pay. For the purposes of this hypothetical, we’ll put it at $100,000 on top of the existing scholarship, but it could really be any amount (as you’ll see).

Further, let’s assume in this world that the IRS, seeing that the athlete now has a salary, chooses to enforce the taxability of room, board, and cost of attendance, which it has until now tended to let slide. Thus, in addition to the tax payments on his or her income, the athlete will also pay taxes on the $15,000 of legally taxable benefits that currently skate by untaxed through a form of salutary neglect by the IRS.


Finally, a giant caveat: I am neither an attorney nor an expert in tax law, so I approach this as an economist with a general sense of how this works. I welcome constructive critique to improve this if I’ve missed anything.

Under these assumptions, is the athlete better off being paid or being “protected from taxes”?


Under federal law, anyone who has a qualified scholarship—not just an athletic one—is entitled to receive the following elements, tax-free:

(A)tuition and fees required for the enrollment or attendance of a student at an educational organization ...

(B) books, supplies, and equipment required for courses of instruction at such an educational organization.


There is, as best I can tell, no indication that being paid a salary in addition to those benefits would change this status. Even if it did, there is a separate provision in Section 117 that says that if the person is considered employee of a university or “any person treated as an employee,” he or she is still entitled to receive their tuition reductions tax-free:

(1)In general

Gross income shall not include any qualified tuition reduction.

(2)Qualified tuition reduction For purposes of this subsection, the term “qualified tuition reduction” means the amount of any reduction in tuition provided to an employee of an [educational institution] ...

(A)such employee, or

(B)any person treated as an employee (or whose use is treated as an employee use) ....


With this framework in place, we can do some math.

Under the “amateurism” rules, as posited, the athlete gets $50,000 in list-price value and pays zero in taxes (assuming continued non-enforcement of the tax laws with respect to room and board) for a net after-tax benefit of $50,000.


Under the market system, as posited, the athlete still gets $50,000 in list-price value and $100,000 in salary, with gross taxable income of $115,000—the cash plus the listed value of the room and board and cost-of-attendance payment. So what’s the tax impact?

First, the IRS comes looking for its slice. A single person with $115,000 in gross taxable income will be allowed to claim personal and standard deductions of $10,350, which means for the purposes of federal income tax, he or she will have incurred taxable income of $104,650.


Federal tax on a person earning $104,650 is “18,558.75 plus 28% of the amount over $91,150,” which comes out to $22,338.75.


But then there is FICA (i.e., Social Security and Medicare). At that income level, an athlete will pay 6.2% for SS and 1.45% for Medicare. This comes out to $8,797.50.

There might be state taxes, depending on where the person lives. A lot of big-time college sports are produced in states with low or no state income tax, so let’s be conservative and pick a high-tax state like California.


In California, as with the federal government, there is a level of earnings that you can deduct before you start paying taxes. Currently, that’s $4,129, so only $110,871 of the full income is taxable. California has a progressive tax bracket that looks like this:

This means the athlete would face a state tax payment of $7,787.51.

Adding up these three tax bills, the total taxes come to $38,923.76, leaving an after-tax take-home pay is $61,076.24


In total, then in a payment scenario, the athlete gets his scholarship as before, plus enough cash to cover all of his taxes (including additional taxes on room & board and COA) and then also makes around $61,000.

Which would you prefer?

Let’s play around with the $100,000. I can hear people saying, “But what if they make more than that, so the tax bracket is higher?” This is silly and reflects a lack of understanding of how tax brackets work. When you earn additional dollar under the current tax rates, your tax rate can only change on the margin. So as you cross from the 15% bracket to the 25% bracket, you don’t pay 25% on all of your earnings—just on the incremental part above the threshold. Given the maximum possible federal, state and FICA rates, each additional dollar the athlete earns over $100,000 will be taxed at less than 100%. (I am pretty high income and I keep about 45% of each marginal dollar earned.)


But where it gets interesting is if you assume the athlete earns less than $100,000, to the point where the the tax burden on their room and board actually overwhelms the after-tax pay they get. This could happen, but whether it’s a real concern or just a case of the faux-vapors depends on how large this break-even point is. The lower it is, the easier it is to brush aside as trolling.

To calculate the break-even point is a little complicated because of the way the standard deductions work, so to make it a bit easier to follow the math I’m going to simplify the assumptions just a bit by assuming that for all three taxes (state, federal, and FICA) there is no deduction allowed. In that case, then, we’re looking to find a level of take-home pay (after taxes) that remains positive (i.e., > 0), and the formula for when you prefer pay looks like this:

Your after-tax pay is equal to your pre-tax pay (“Pay”) minus your taxes (which are paid using a higher value that includes room and board and COA, multiplied times the three tax rates). (Note to the persnickity—going into this I didn’t know what the correct tax rates would be, but this reflects the result of a little work on the side to see what the correct marginal rates would be—you’ll note the California marginal rate is not the lowest possible.)


From here, the algebra goes like this:

So, in fact, even if there were no standard deduction, all an athlete would need to earn, before taking taxes into account, to be better off financially from getting a taxable pay check AND paying taxes on his/her room, board, and COA stipend, would be ... a little over $3,600.


But even this is an overestimate because we smoothed away the standard deduction and because the California marginal tax of 2% is higher than the average tax rate. The actual taxation of an athlete earning $3,400 (and also paying taxes on $15,000 of in-kind benefits) would actually be lower because of the deductions. You’d have

That would make for these taxes:

The total here is $2382.72, meaning even at $3,400, the athlete actually comes out ahead by a few hundred dollars. But having done it the easy way, let’s buckle down and get the exact break-even point. The algebra here is a little less clean—you have to calculate each tax stream separately and you have to adjust for California taxes having a lump sum plus a margin 2%—but it looks like this:

That is, for an athlete in a state with high state taxes and no itemized deductions or dependents, all he or she has to earn as a free-market wage above the current maximum scholarship to come out ahead is $2,137.08 per year, even if we assume a dramatic change in how the government enforces the taxability of room and board.


We can check if this is correct by calculating the tax on a paycheck of $2,137.08 + $15,000 in-kind:

Total: $2,137.08, which is exactly break-even. (It always feels so nice when it happens.)


“Okay,” you might say, “but what about the poor saps who will get less than that? They’ll be screwed!”

Fair enough. But I suspect if they were to tell their school “Please don’t pay me so I remain covered by the amateur approach to room and board taxation and don’t get screwed,” the school won’t say no. And go back to my original statement—if you aren’t paid, you won’t lose amateur tax treatment, no matter how much someone else is paid, because the IRS has made clear the question of whether a scholarship is taxable rests on the specific terms of each scholarship.


Which leaves us with the usual question that comes up whenever disingenuous reasons are offered to explain why college athletes, alone of all people, would suffer from being paid for their work: Is there perhaps something at work here other than concern for the well-being of athletes?

Update, Feb. 27:

I was asked by someone with some knowledge of the industry for a bit more information on why I think the tax treatment of the tuition piece of the athletic scholarship (GIA) would remain untaxed. As I explained to this industry insider (with a few minor changes made for clarity):

I think you missed one key point in what I wrote. I am not saying that if an athlete got paid a salary or salary-like payment, that the tuition part of the scholarship would remain tax-free because of the 1977 ruling re: athletic scholarships. Rather, I am saying that if athletes were paid by their university, then the tuition payment would be tax-free under a different clause of the tax code, 117(d):

(d)Qualified tuition reduction

(1)In general

Gross income shall not include any qualified tuition reduction.

(2)Qualified tuition reductionFor purposes of this subsection, the term “qualified tuition reduction” means the amount of any reduction in tuition provided to an employee of an organization described in section 170(b)(1)(A)(ii) for the education (below the graduate level) at such organization (or another organization described in section 170(b)(1)(A)(ii)) of—


such employee, or


any person treated as an employee (or whose use is treated as an employee use) under the rules of section 132(h).

(3)Reduction must not discriminate in favor of highly compensated, etc.

Paragraph (1) shall apply with respect to any qualified tuition reduction provided with respect to any highly compensated employee only if such reduction is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees (within the meaning of section 414(q)). For purposes of this paragraph, the term “highly compensated employee” has the meaning given such term by section 414(q).


The organizations described in section 170(b)(1)(A)(ii) are defined in the tax code as including “…institutions such as primary, secondary, preparatory, or high schools, and colleges and universities” as seen in 170(b)(1)(A)(a) and (c):

(a) The term section 170(b)(1)(A) organization as used in the regulations under section 170 means any organization described in paragraphs (b) through (j) of this section, effective with respect to taxable years beginning after December 31, 1969, except as otherwise provided. Section 1.170-2(b) shall continue to be applicable with respect to taxable years beginning prior to January 1, 1970. The term one or more organizations described in section 170(b)(1)(A) (other than clauses (vii) and (viii)) as used in sections 507 and 509 of the Internal Revenue Code (Code) and the regulations means one or more organizations described in paragraphs (b) through (f) of this section, except as modified by the regulations under part II of subchapter F of chapter 1 or under chapter 42.

[ … ]

(c)Educational organization and organizations for the benefit of certain State and municipal colleges and universities -

(1)Educational organization. An educational organization is described in section 170(b)(1)(A)(ii) if its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. The term includes institutions such as primary, secondary, preparatory, or high schools, and colleges and universities. It includes Federal, State, and other public-supported schools which otherwise come within the definition. It does not include organizations engaged in both educational and noneducational activities unless the latter are merely incidental to the educational activities. A recognized university which incidentally operates a museum or sponsors concerts is an educational organization within the meaning of section 170(b)(1)(A)(ii). However, the operation of a school by a museum does not necessarily qualify the museum as an educational organization within the meaning of this subparagraph.


So my point is that, given that tuition comprises the bulk of the value of a GIA (I used $35k vs. $15k in my article, happy to show you it with different numbers),and given that whether the athlete is amateur or paid, universities can provide tax free tuition benefits, all the payment needs to cover is the taxable impact (to a person in the lowest tax brackets) of $15K of value.

I did not include, but maybe could have, the value of any Earned Income Tax Credits for athletes receiving a low payment. I also did not include, but could have, the value of having paid into the Social Security system, which puts a person one year closer to full vesting for full retirement payments and to qualifying for disability payments if needed. And I’ve since been reminded that even if income tax would apply on the room and board portion, it’s highly unlikely FICA would, so my calculated break-even is likely an over-estimate.
And, of course, there is the benefit to the taxpayers of America—even if every athlete just broke even, the tax burden on everyone else would be lowered with all of these athletes paying their $2,000 or so into the common pool of money to build roads, bridges, and even walls.


Andy Schwarz is an antitrust economist and partner at OSKR, an economic consulting firm specializing in expert witness testimony. Follow him on Twitter @andyhre.