How estimated tax payments work for NIL income

Most people never think about estimated taxes because their employer withholds tax from every paycheck. NIL income often works differently. When a brand or collective pays you as an independent contractor, there is typically no tax withheld, so the responsibility for paying during the year shifts to you.

What estimated tax payments are

The IRS expects tax to be paid as income is earned, either through withholding or through estimated tax payments. Estimated tax payments are the payments you make yourself, during the year, to cover tax on income that had no withholding. For self-employed income they cover both income tax and self-employment tax, which is Social Security and Medicare tax for people who work for themselves.

Think of it as doing your own withholding. Instead of an employer holding back part of each paycheck, you set money aside and send it to the IRS on a schedule.

Who generally needs to make them

According to the IRS, individuals generally have to make estimated tax payments if they expect to owe $1,000 or more when their return is filed, after subtracting withholding and credits.

There is an exception. You do not have to pay estimated tax for the current year if all three of these are true:

• You had no tax liability for the prior year.
• You were a U.S. citizen or resident alien for the whole year.
• Your prior tax year covered a 12-month period.

That exception matters for many athletes in their first year of NIL income, but it depends on the prior year’s return, and it does not reduce the tax you will owe when you file. It only affects whether penalties can apply for not paying during the year. Planning to pay the full amount in April still requires having the money available in April.

When payments are due

For estimated tax purposes, the IRS divides the year into four payment periods:

Income earned	Payment due
January 1 to March 31	April 15
April 1 to May 31	June 15
June 1 to August 31	September 15
September 1 to December 31	January 15 of the following year

If a due date falls on a Saturday, Sunday, or legal holiday, the payment is on time if it is made the next business day. Notice that the periods are not equal. The second period is only two months long, which surprises many people.

States that have an income tax usually have their own estimated payment requirements and deadlines, which may or may not match the federal schedule.

How the amount is figured

The IRS explains that to figure estimated tax, you estimate your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. Form 1040-ES includes a worksheet for this. If your income changes during the year, you refigure the estimate for the next payment.

For an NIL athlete, a useful estimate usually considers:

• Income received so far and deals you reasonably expect for the rest of the year
• Whether each payment is self-employment income, royalty income, or wages with withholding
• Products and services received, not just cash
• Business expenses you can support with records
• Other income, such as a summer job
• Whether a parent claims you as a dependent
• State income tax where you live and possibly where you perform work

This is why a single “set aside this percentage” rule does not work well for everyone. Two athletes with the same NIL income can owe very different amounts.

Avoiding the underpayment penalty

If you do not pay enough during the year, you may owe a penalty for underpayment of estimated tax, even if you end up receiving a refund when you file. The IRS says most taxpayers avoid the penalty if they owe less than $1,000 after withholding and credits, or if they paid at least 90 percent of the tax for the current year or 100 percent of the tax shown on the prior year’s return, whichever is smaller. Different rules apply to certain higher income taxpayers, so check Publication 505 or ask a professional if your income is significant.

When income arrives unevenly

NIL income is rarely steady. A large deal may land in one quarter and very little in the next. The IRS notes that if income is received unevenly, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments, using Form 2210. This method works, but it depends on knowing when income was actually received. Good records make it possible.

How to pay

The IRS accepts estimated payments online, through your IRS online account, by phone, through the IRS app, or by mail with Form 1040-ES. You can also pay more often, such as monthly, as long as enough has been paid by the end of each period. Some athletes find that sending a payment each time NIL money arrives is easier than saving up for a quarterly deadline.

What this looks like in an ongoing relationship

For the athletes we work with, estimated taxes are not a once-a-year calculation. We recalculate as deals come in, prepare federal and state payment amounts before each deadline, and explain what changed and why. The goal is simple: no surprise bill when the return is filed, and a clear picture of what money is actually available to spend.

When to get individual advice

Talk with a CPA if your income changes significantly during the year, you receive a large payment late in the year, you have income in more than one state, you were paid in products or services, or a parent claims you as a dependent. Those situations make a generic estimate much less reliable.