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We often encounter the question from professional athletes (and their families) if it’s okay to put family on the payroll. The answer is that “it all depends…” In some cases, there are valid reasons and circumstances where this practice is perfectly acceptable. However, in most cases, the practice borders on tax evasion and can get a professional athlete in a lot of trouble with the tax authorities and/or get him in the headlines for all the wrong reasons!

If a legitimate situation exists where the employee-relative relationship is sanctioned, then there can be some great benefits:

  • Income can be shifted from a high-taxed individual to a lower-taxed one, with real tax savings,
  • The professional athlete can have family members more closely involved with his career,
  • A business can be created that can provide an income stream after the playing career is over, and
  • The family can develop relationships in the sports and entertainment industry, possibly parlaying those relationships into further business opportunities, beyond the original client.

So, let’s explore how employing a family member can be acceptable. The Internal Revenue Service has ruled that family members can be put on a business’ payroll [IRS Revenue Ruling 1972-23]. However, certain conditions must be met, such as the following:

1. The salary must be reasonable,
2. Services must be rendered as a bona fide employee, and
3. The business must seek to produce income.

In the case of a professional athlete, the “business” would often entail income earned outside the scope of the athlete’s salary, such as endorsements. A family member could be tasked with obtaining, cultivating, and managing endorsement income opportunities, personal appearances, and marketing activities. If a professional athlete has hired an agent that is responsible for these activities, then the tax authorities would frown upon the athlete’s hiring of a family member (in a token capacity). Additionally, if a professional athlete does not have much potential for obtaining endorsements, then the profit motive would not exist, and paying someone would simply create a loss situation that could be denied under IRS scrutiny. Alternatively, a family member could be tasked with managing a legitimate outside business in which the athlete has invested, such as a restaurant, franchise, or condominium.

If the above conditions are met, and the professional athlete wants to pursue hiring a family member, then proper steps must be taken. ProSport CPA would be happy to evaluate the professional athlete’s personal situation, to run the numbers to see the tax savings potential, and to recommend a plan of action to ensure compliance with the necessary rules and regulations, including legal documentation, bookkeeping, and tax compliance activities.

Dr. John Karaffa is the President and Founder of ProSport CPA, a boutique firm that provides expert tax, accounting, and financial education services exclusively to professional athletes. For more information or to speak with a tax professional for professional athletes, please contact Dr. Karaffa at (804) 363-9684 or JKaraffa@ProSportCPA.com, or visit www.ProSportCPA.com.