The U.S. Federal Tax Consequences of Athletic Scholarships: Is the Recipient an Employee?—Effect on Gross Income and Dependency Status

Abstract

The purpose of this paper is to discuss the current tax treatment of athletic scholarships for U.S. federal income tax purposes from the perspectives of the scholarship-recipient, the college or university, and the parents/guardians. The paper also prescribes an approach that could effectively eliminate tax liability to the scholarship recipient and the institution. In general, only the portion of the “qualified” scholarship that covers the value of room and board is included in the gross income (earned income) of the scholarship recipient. The portion pertaining to qualified tuition, fees, books, supplies and equipment is entirely excludable (IRC §117). Strong evidence exists suggesting that the scholarship-recipient has entered into a valid “pay to remain eligible” employment contract with the scholarship-granting institution. If the scholarship requires the student athlete to live on campus and use the university meal plan, the value of the room and board would then be excludable from gross income under § 119 – Meals and Lodging for the Convenience of the Employer. This interpretation has significant tax implications to the student-athlete and the institution since an exclusion from gross income under § 119 also excludes the item from FICA tax, resulting in considerable tax savings.