When Carlos Beltran landed his $119 million deal with the New York Mets, player agent Scott Boras wanted the contract done before Jan. 12 so that Beltran could beat the clock on an IRS ruling that would have taken $319,000 in Medicare taxes out of his $11 million signing bonus.
Beltran and the Mets would have paid $159,500 each.
Instead, Beltran and the club were able to keep the money, taking advantage of an exemption that has stood since 1958, when the IRS ruled that traditional signing bonuses paid to baseball players were not wages and, therefore, not subject to Federal Insurance Contributions Act taxes. The IRS reversed that long-standing ruling in December, giving players one month to get in under the old rules.
Sometimes, the news from Washington arrives without warning and, in this case, comes as the result of a decision made outside the circles of the industry’s D.C. insiders.
“It just came winging across the transom one morning,” said Steve Kidder, a Boston tax attorney who has worked as outside counsel to players unions in Major League Baseball, the NFL and NHL. “It absolutely was a surprise.”
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| Agent Scott Boras (right) saved Carlos Beltran $159,500 by beating the deadline. |
A surprise, perhaps, but not one that anyone is ready to call unfair.
The new IRS ruling simply requires employers to treat signing bonuses in the same way they treat wages, withholding Social Security and Medicare taxes from those checks. Social Security won’t be an issue for players, since income beyond $90,000 a year is not taxed. But the Medicare tax of 2.9 percent, split evenly by employer and employee, is applied to the entire bonus.
The original exemption was carved out after MLB owners argued that signing bonuses were not wages because they were paid regardless of whether the player’s name ever made it onto a lineup card. Because bonuses in other sports typically force players to pay back the bonus if they retire early, they didn’t meet the most basic test of the exemption.
But many baseball players continued to benefit from the exemption because their bonuses came with no strings attached. Dodging FICA saves a player and team $14,500 each on every $1 million paid.
“The change is going to cost clubs money and players money, but, when you think about it, the [IRS is] really right,” said Frank Coonelly, general counsel for MLB. “If we in baseball agree that $20 million of the guaranteed money that a player gets is a signing bonus, why is the government not entitled to tax that? Call it whatever you want, but you’re getting paid because you’re agreeing to perform services.”
Some saw it that way even when the exemption was in force. MLB surveyed clubs on the way they handled FICA three years ago, when then-Angels third baseman Troy Glaus filed a grievance on a related matter. It found no industry standard. About half the clubs took advantage of the exemption on any player who was signing with them for the first time, including both draftees and veteran free agents who came over from other teams, Coonelly said. Some took the most conservative approach, withholding FICA on all bonuses. A few didn’t withhold FICA on any bonuses.
A tax planner who specializes in pro athletes said he always was able to get clubs to report signing bonuses outside of standard wages so long as he got to them before checks were issued.
“As long as we were involved from the beginning, we could usually show them the revenue ruling and get them to see it our way,” said Allen Tharp, head of the sports division for Hamilton Accountancy Corp., a San Diego firm that represents about 110 pro athletes. “A lot of them were aware of the rule. It was a little bit of an education process with some others.”
Tharp said he always made sure clubs handled his clients’ bonuses in the most beneficial way allowed by law. Kidder said most financial planners who deal with athletes should have been aware of the loophole.
“The agent world was pretty attuned to the signing bonus issues and the rules of how to set up a pure signing bonus,” Kidder said.
But it’s clear that, if some clubs were taking the full 2.9 percent bite out of players’ signing bonuses, some players paid taxes they didn’t have to pay. So did the clubs.
“If that happened to players, good luck getting any of it back,” Kidder said. “By withholding FICA, the statement from the team is that these were wages. And the burden is on you to prove otherwise.”
