This article is a reminder to all pro athletes why they don’t want to make California their home, and why they don’t want to play for a California team. Indeed, from a tax standpoint, they’d be wise not to play in a western conference — given that many of the games will be with California teams. Cam Newton is learning this lesson the hard way — and doubtless is thanking his lucky stars he plays in an east coast NFL conference.
Remember when Peyton Manning paid New Jersey nearly $47,000 in taxes two years ago on his Super Bowl earnings of $46,000? Manning has nothing on the state taxes facing Carolina Panthers quarterback Cam Newton for Super Bowl 50 in Santa Clara, Calif. Newton is looking at a tax bill more than twice as much, which will swallow up his entire Super Bowl paycheck, win or lose, thanks to California’s tops in the nation tax rate of 13.3%.
Before we get into the numbers, let’s do a quick review of the jock tax rules applied to professional athletes (similar tax rules apply to anyone doing business across state lines, but they are rarely enforced). States tax a player based on their calendar year income. They apply a duty day calculation which takes the ratio of duty days within the state over total duty days for the year. That ratio is then multiplied by the player’s salary to arrive at a state’s allocatable income.
In 2014, Manning would have paid New Jersey a 51% rate on his $92,000 earned had the Denver Broncos won Super Bowl 48. Unfortunately for them and Manning’s legacy, they were blown out by a Seattle Seahawks team that knew the right plays to call all night. So Manning paid a whopping 102% tax to New Jersey on his $46,000 consolation prize.
Skip ahead two years and now Manning is back in the Super Bowl against the highly talented and highly compensated Cam Newton, who signed a five year, $103.8 million contract extension in June. Newton has already earned $58,800 so far this year for week 17 of the 2015 season and $71,000 in playoff bonuses. Newton is due a $10 million signing bonus and $13 million in base salary for the 2016 season, which he will receive the full amount during the regular season.
Luckily, week 17 next season will occur on New Year’s Day 2017, thus shielding about $765,000 from California’s grasp. If the Panthers win the Super Bowl, Newton will earn another $102,000 in playoff bonuses, but if they lose he will only net another $51,000.
The Panthers will have about 206 total duty days during 2016, including the playoffs, preseason, regular season and organized team activities (OTAs), which Newton must attend or lose $500,000. Seven of those duty days will be in California for the Super Bowl and another four will be in the Golden State for road games against St. Louis Los Angeles and Oakland next season.
Win on Sunday, and Newton will pay California a total of $159,560 in taxes in 2016. Lose, and he will pay $159,200, based on an income reduction of $51,000.
To determine what Newton will pay California on his Super Bowl winnings alone, we will ignore the four 2016 season duty days and pretend they are being played elsewhere. In looking at the seven days Newton will spend in California this week for Super Bowl 50, he will pay the state $101,600 on $102,000 of income should the Panthers be victorious or $101,360 on $51,000 should they lose.
The result: Newton will pay California 99.6% of his Super Bowl earnings if the Panthers win.
Losing means his effective tax rate will be a whopping 198.8%. Oh yeah, he will also pay the IRS 40.5% on his earnings.
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This is a guest post from K. Sean Packard, CPA, who is Director of Tax at OFS. He specializes in tax planning and preparation of tax returns for pro athletes. He can be reached at firstname.lastname@example.org and on Twitter at @AthleteTax.