Man, New Jersey apparently must hate Peyton Manning. It’s threatening to tax his Super Bowl earnings at a rate of 51.08% if he wins. Or 101.83% if he loses. Seriously, 101.83%. And that’s just his New Jersey taxes; he’ll also owe federal income tax.
Or so says K. Sean Packard over at Forbes. In a widely circulated blog post,[fn1] Packard explains the tax trap that Manning will fall into by virtue of being the quarterback of one of the two teams playing in the Super Bowl this year.
There are suggestions in the post, though, that this conclusion is too good (or, rather, bad) to be true. Chief among them: if Manning plays in the 2014-2015[fn2] season, he’ll jump into the top New Jersey tax bracket of 8.97%. But if the top tax bracket is 8.97%, how could Manning be taxable on an amount greater than his Super Bowl winnings?
Simple. His Super Bowl winnings aren’t his only New Jersey income, and he’s not just being taxed on them.
Under New Jersey tax law, nonresidents are taxable on their New Jersey-source income. Essentially, that means money they earn from real and tangible property located in New Jersey, money they earn for services performed in New Jersey, and money they earn from unincorporated businesses located in New Jersey.
This is easy enough to illustrate. Imagine, for example, a guy who works as a recording engineer. He lives in New York and generally works in New York, and is paid $100 an hour for his services. Bruce Springsteen hears his work and likes him, so Bruce invites him to his New Jersey studio for a session. The recording engineer works in New Jersey for 10 hours with Bruce, and is paid $1,000 for his services. New Jersey would tax him on that $1,000, because he earned it performing services in New Jersey.
Peyton Manning, though, is not paid an hourly wage; instead, he’s a salaried employee. It’s not completely clear what he earns in any single location, so New Jersey’s so-called “Jock Tax” instead uses a formula to determine what portion of his salary he derives from services performed in New Jersey.
The formula is based on “duty days,” which New Jersey defines as the number of days starting on the first day of official preseason training until the last day an athlete is required to play. To determine his New Jersey taxable income, Manning takes the number of duty days he works in New Jersey and divides that by the total number of duty days for the year. That fraction determines his New Jersey taxable income.
At this point, I’m going to use the numbers from Packard’s post. He claims 200 duty days in a season, and that Manning has an annual salary of $15 million. If those numbers are right, Manning earns $75,000 for each duty day.
Assuming the Denver Broncos spend the week before the Super Bowl practicing in New Jersey, that’s seven duty days in New Jersey, meaning that in 2014, he earned $375,000 from services performed in New Jersey (plus his bonus for winning or losing the Super Bowl). It’s not as intuitive as the hourly wage-earner. But if you believe that Manning’s salary is related to the services he performs (i.e., playing football), some portion of that salary must be derived from the time he spends in New Jersey. New Jersey’s formulary apportionment is a sensible—and accurate—way of figuring out how much.
So, win or lose, don’t weep too hard for Peyton Manning. Not only is he doing all right,[fn3] but New Jersey doesn’t have it in for him.
[fn1] As of this writing, it’s been liked on Facebook 9,100 times, tweeted 1,200 times, and +1’d on Google Plus . . . 83 times. (Also, it’s undoubtedly been emailed hundreds, if not thousands, of times.)
[fn2] Technically, it’s probably just the 2014 season, but the postseason carries over to 2015; for purposes of our tax analysis, it’s important to keep in mind the shift in years.
[fn3] (financially, at least)