Wealth Strategy Insights

Guarding the Million Dollar NBA Paycheck

07 July 2016

“If I earn a million dollars, how much do I keep?” This is a common question asked by many young athletes. Most working adults—who know the reality of deductions—can provide a fairly accurate answer. For young athletes, though, for whom professional sports is their first job, the answer is not as clear.

As a financial advisor, my “short answer” to the young athlete is, “Think of $1 million as $400,000 to $450,000. After taxes and agent fees, you’ll keep only 40% to 45% of your salary.”

The longer version of the answer begins with, “It depends!” In reality, the sport, the league, the team, and where athletes reside all play a factor in how much of their paychecks they will keep.

One of the most dramatic examples is an athlete entering the NBA. In both of the examples below, we haven’t factored in daily living expenses such as rent and utilities.

A Texas-based NBA athlete playing for the San Antonio Spurs, Houston Rockets or Dallas Mavericks will see $1 million reduced to $465,000.

39.5% - Federal Income Tax
10% - NBA Escrow
4% - Maximum Agent Fee*
53.5% - Total in Taxes and Fees

A player drafted to California to play for the Los Angeles Lakers or the Golden State Warriors will see $1 million reduced even more dramatically to $332,000.

39.5% - Federal Income Tax
13.3% - CA State Income Tax
10% - NBA Escrow
4% - Maximum Agent Fee
66.8% - Total in Taxes and Fees

The largest variable in reductions after federal income tax tends to be state income taxes (California being the highest). However, a constant reality for all players is the 10% NBA Escrow.

This escrow represents a program enacted as part of the NBA’s Collective Bargaining Agreement (CBA) in 2011. It was established to ensure players do not receive more than their contractual financial agreement with the team and requires that a percentage of player salaries is withheld and placed into an escrow account. The funds may or may not be returned to players.

Specifically, the NBA withholds 10% of the players’ salaries from their paychecks and deposits the funds into an escrow account. In addition to salary, NBA players are also eligible for a portion of the proceeds from various revenue-generating ventures sanctioned by the NBA, known as Basketball Related Income (BRI).

 

At the end of each season, the NBA will evaluate the combined income of the players’ guaranteed share of BRI, paid salaries and benefits. If the players earned more than they were guaranteed as part of the CBA, then the amount of the overage is returned to the teams—not the players—from the escrow account. If the amount is less than the guaranteed maximum, the players receive any escrow money that remains up to their maximum allowed.

Escrow money not distributed to teams is used for “League Purposes”, which is any purpose the league decides.

The escrow system is the mechanism used to ensure that salaries and benefits do not exceed the players’ guaranteed cut of BRI. Based on the 2011 CBA, the agreed upon share of BRI is between 49% and 51%. In the event BRI exceeds or falls short of 49%, adjustments are made as stipulated in the CBA.

Below are the actual results for four seasons ending 2014-2015.

In the three consecutive seasons ending with 2013-2014, the salaries and benefits exceeded the designated share. The escrow system lowered salaries back down to the designated share and the players kept what was left over.

In the 2014-2015 season, the salaries and benefits were less than the designated share, so the players got to keep all of the escrow dollars in addition to receiving a supplemental payment to meet their guaranteed share.

The NBA Escrow Account program is a negotiated measure to ensure that players share in the profits of all NBA revenue streams without exceeding the bargained ceiling. Also, important to note, under the 2011 CBA, the owners are not paying more than 51% of revenue to players (2005 CBA BRI revenue share was 57.5%), guaranteeing the owners’ share remains proportionate to revenue.



*Based on NBA Collective Bargaining Agreement of 2011- 2021

Sources: NBA Collective Bargaining Agreement of 2011; Coon, Larry (2012); “NBA Salary Cap/Collective Bargaining Agreement FAQ”; http://www.cbafaq.com; http://deadspin.com/the-nbas-next-labor-war-is-here-1703832294; https://en.wikipedia.org/wiki/NBA_collective_bargaining_agreement; http://www.NBA.com