Key Takeaways:
- Know the real value of your contract by focusing on the net amount after taxes, fees, and deductions — not just the headline number.
- Explore negotiation options beyond salary, including bonus structure and tax-friendly terms, to maximize your take-home pay.
- Plan for hefty taxes on signing bonuses, and consider strategies like residency choices, deferral options, and smart investments to protect your earnings.
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Making the leap from amateur to professional athlete is an exciting milestone, but signing your first contract comes with financial complexities you may not have faced before. Whether you’ve been preparing for this moment for years or it’s arrived sooner than expected, understanding how your contract, salary, and signing bonus will impact your finances is essential.
Let’s break down what you need to know before you put pen to paper.
How Much Are You Willing to Sign For — and What Will You Take Home?
Your first pro contract might be worth more money than you’ve ever seen before, but don’t let the big numbers fool you. Taxes, fees, and other deductions will greatly impact what you take home.
Before agreeing to a deal, it’s important to consider the “net” amount — the money you will have after taxes and deductions. A contract worth $1 million does not mean you’ll see $1 million in your bank account. Federal and state taxes, agent fees, and other obligations can take a major cut. The key is to focus on what you will actually keep, not just the headline number.
Do You Have Room to Negotiate?
In most major pro sports leagues, draft position determines much of a contract’s structure — including how much room you have to negotiate. First-round picks typically receive more leverage when negotiating signing bonuses and guaranteed money, while later-round picks often have fewer options.
That said, negotiating terms beyond just salary — such as how bonuses are structured, incentives, and tax-friendly options — can make a dramatic difference in what you take home. Having a knowledgeable advisor by your side is critical to making sure you don’t leave money on the table.
How Are Signing Bonuses Taxed?
Signing bonuses are one of the biggest financial perks of going pro. Unlike salaries that are paid throughout the year, signing bonuses are often paid upfront or in structured installments. But before you start making big purchases, you need to understand how they are taxed.
Are Bonuses Taxed at a Higher Rate?
Yes. The IRS treats signing bonuses as supplemental income, which means they can be subject to a higher withholding rate. The standard federal withholding rate for bonuses is typically 22% up to $1 million and 37% for amounts over $1 million.
What About State Taxes?
State taxes also play a major role. If your team is based in a high-tax state (like California or New York), you could owe state income tax on your signing bonus. The California bonus rate is 10.23% and New York is 11.7%. However, in some cases, teams can structure contracts in ways that minimize state tax burdens — so it’s worth reviewing all options. The key is residency of the athlete at the time of signing the contract unless the language indicates that the bonus is earned based upon duty days or games played. This is addressed in more detail below.
Understanding the “Net Signing Bonus”
What does “net signing bonus” mean? Simply put, this is the amount you’ll actually receive after taxes and deductions. A $2 million signing bonus may only leave you with around $1.0–$1.3 million after federal tax (income and employment), state tax, and agent fees are deducted.
Because bonuses are taxed immediately upon payment, many athletes are surprised at how much is taken out before they even see the money. That’s why it’s critical to plan ahead and look at strategies to manage your tax burden.
Ways to Manage Taxes on Your Signing Bonus
There are several strategies to reduce or manage the taxes on your signing bonus. Depending on your situation, these may include:
- Establish residency in a tax-friendly state: If possible, signing with a team in a state with no income tax (like Florida, Texas, or Tennessee) can help you keep more of your earnings.
- Defer income when possible: Some contracts allow you to defer portions of your bonus to future years, spreading out your tax liability over time.
- Invest wisely: Using tax-efficient investment strategies can help grow your wealth while minimizing tax burdens.
- Work with a financial professional: An experienced CPA or financial advisor who works with pro athletes can help navigate tax strategies tailored to your situation.
Planning for the Long Term
Your first contract is the beginning of your financial journey as a professional athlete. Many athletes earn most of their lifetime income in a short playing window, so planning wisely from day one is essential.
If you’re preparing to sign your first pro contract, don’t go through it alone. With the right guidance, you can make smart financial decisions that set you up for success — both on and off the field.
How MGO Can Help
Our Entertainment, Sports, and Media team has worked with professional athletes for over three decades, helping them navigate contracts, taxes, and long-term financial planning. Whether it’s structuring your signing bonus efficiently, managing multi-state tax obligations, or setting up investments for long-term security, we can help you make the most of your earnings. Contact us today.