Referee taxes are more complicated than traditional employment because you need to track all of your earnings and expenses — you don’t get a nice W-2 at the end of the year adding up everything for you. Instead, you’ll probably end up filing a Schedule C as a self-employed 1099 earner. Here’s what you need to do.
Are you an employee?
You’re only an employee if you provided a W-4, received a W-2, or otherwise entered into an employment agreement. Most sports officials are not employees. If you’re not sure, the easiest way to tell is if you received a pay stub with taxes withheld – if you did, you’re an employee.
If you’re an employee, stop reading. To file as an employee, simply add the wages from your W-2 to line 7 of your tax return. As of the 2018 tax year, employees may not deduct unreimbursed expenses as itemized deductions.
Are you a hobby?
The general rule is that if you lost money in 3 out of the last 5 years you’re a hobby not a business. In short, the IRS doesn’t want you manufacturing a loss every year to reduce your other taxes. The IRS may also go back and audit you if you filed as a business when it thinks you’re a hobby.
Why does it matter if you’re a hobby?
If you’re a hobby, you report your income on your 1040 as other income. You pay income tax but not Social Security and Medicare taxes. Beginning with tax year 2018, you may not deduct your expenses at all (the old rule was up to the amount of your hobby income).
The thing to keep in mind here is that the IRS wants you to pay Social Security and Medicare taxes if you’re actually making a profit.
Who gets in trouble with the hobby rule?
Referees in three categories frequently run afoul of the hobby rule. I.e., the IRS will disallow their deductions and send a CP2000 notice for extra tax.
- Those trying to make the professional level travelling around to poorly paid minor league games and tournaments on their own dime.
- Those with large travel expenses (especially the standard mileage deduction).
- Those who are “aggressive” with their deductions.
If one of these situations may apply to you and your expenses are more than your income, you should discuss your options with a tax professional so that you don’t lose legitimate loss deductions. The IRS will generally audit based on the 3 out of 5 years rule, so you really need to be prepared to document and defend your position if you’re not going to meet that rule.
If you’re sure you’re a hobby, stop reading. The remainder of this post only applies to independent contractors.
What’s your income?
Your income is any compensation you receive in any form. This includes cash, checks, direct deposit, gift cards, etc. It includes income that isn’t reported on a 1099. (Yes, the IRS can track cash payments without a 1099, and youth sports organizations have been under a lot of scrutiny lately.)
If your association withholds money for things like dues or assigning fees, your income for your Schedule C (line 1) is your gross income BEFORE those deductions. You’ll claim the expenses later on. Similarly, if you receive pay designated as for mileage, meals, or other expenses, you’ll usually report it in your gross income and claim a deduction separately.
What are your travel expenses?
Let’s start by correcting a common misconception: commuting from home is never deductible. It does not matter if Arbiter shows your miles. You can’t deduct commuting expenses. For transportation to be deductible, it needs to be either between business locations or travel outside of your metro area.
- Between business locations means from your day job to a game or between fields.
- Travel outside of your metro area means farther than a normal commute. This is a gray area. I take the position that it means either greater than 50 miles one way (based on the standard practice of leagues and tournaments to use this as the cutoff for travel reimbursements and hotels) or if an overnight stay away from home is required.
If you have a qualifying home office, trips from home could potentially be between business locations. However, a qualifying home office requires much more than just having space in your closet for your shirts. In most situations, referees who do not have another work-at-home job do not qualify.
So what can you deduct for transportation for trips between business locations or travel outside of your metro area?
- Miles at the standard IRS mileage rate. You could also track actual expenses (gas, depreciation, car maintenance) but this is a pain, and most people come out ahead with the standard rate.
- Bus, plane, and train tickets.
- Actual rental car expenses (you can’t use the standard mileage deduction for rental cars).
- Hotel nights you paid for.
Note: If you travel to games or a tournament as part of a longer vacation, your travel deductions may be reduced or eliminated based on how much of the trip was personal in nature versus how much was for business.
What are your meals expenses?
Meals are deductible when you’re traveling overnight such as to a distant game or tournament. Deducting other meals as entertainment expenses was highly questionable under the old tax law and almost certainly not allowed from 2018 on under the Tax Cuts and Jobs Act.
For overnight travel, you have two options.
- Keep your receipts and report your actual amounts.
- Use the GSA per diem rates as a standard meals allowance ($50-70 per day depending on zip code).
How to use the GSA per diem rates.
- Get the zip code for your hotel or wherever you’re staying.
- Use this link to search: https://www.gsa.gov/travel/plan-book/per-diem-rates
- For year, the GSA fiscal year does not match the tax year, but you must use the same rates for the entire tax year even if it’s after October. I recommend just selecting the fiscal year for the current tax year (e.g., fiscal year 2018 for all of 2018).
- Find the number under M&IE. This is your standard allowance per day.
- For the first and last days, you must multiply the standard allowance by 0.75.
- Example: 4 day trip, M&IE on GSA website = $54. Day 1 and Day 4 = $40.5 each ($54*.75). Day 2 and Day 3 = $54 each. Total standard allowance for that event = $189.
Whether you use the actual amount or standard method, the deduction is only one half of your expenses. So in the above example, your deduction is $94.50 not $189.
Filing tip: Pay close attention to whether the software is asking for your full meal expenses (and will divide by 2 later on) or for half of your expenses.
What else can you deduct?
The following items are generally allowed deductions.
- State and national association registration fees.
- Association dues.
- Background check fees.
- Assigning fees (if paid by referees rather than by the league or association).
- Uniforms, whistles, flags, and other equipment.
- Assessor fees (report your game fee as income and the assessor fee as an expense even if you’re paid in cash and hand the entire fee directly to the assessor).
- Liability insurance.
Gray Area: Shoes, Running Clothes, and Similar Equipment
Equipment deductions are only allowed for things that can only be used for your business. Your referee jerseys and whistles are pretty safe claims. Cleats and running shoes are not because you could use them to play in or go for a job. There is a gray area where it’s arguable if an item can be used for personal use or only in your business as a referee.
The bottom line: If you use it for something else, don’t try to deduct it.
Don’t Push Your Luck: Cell Phone/Internet Bills
“I use it to accept games, so I can deduct it” is not a valid reason for claiming your entire cell phone or internet bill as a business expense. Technically, you can deduct these bills in part if you’re able to prove how much you used them for business and how much you used them for personal reasons.
This is probably more trouble than it’s worth. Do you really want to sit there counting cell phone minutes or kilobytes of data and then keeping records of it?
Automatic: 20% of Your Profits
When you file a Schedule C as an independent contractor, you’re filing as a business. That gives you the right to claim the pass-through business deduction under Section 199A. Pass-through means that the profits show up on your own tax return instead of a separate business tax return.
Note: I’ve gotten many “jailhouse lawyer” emails saying this doesn’t apply because of the “the principal asset of such trade or business is the reputation or skill of one or more employees or owners” exception. Regulation 1.199A-5(b)(2)(xiv) defines this clause as a very narrow list of specific services, and referees aren’t on there. This is a good example of how key terms are usually further defined in regulations and/or case law, and trying to interpret them on your own will cost you money either now or in a future audit. (See also, attempts to claim mileage between home and local games.)
How the 20% Deduction Works
- You get an additional deduction equal to 20% of your business profits.
- You end up only paying income tax on 80% of the money you make as a referee after your other expenses.
- Your self-employment tax does not change.
- This is a separate calculation on your Form 1040. Don’t add this deduction to your Schedule C.
What’s the catch?
Congress added this deduction to level the playing field for other businesses when it cut corporate tax rates. If your total gross income (not just refereeing) is below $157,500 (single) or $315,000 (joint filer), you get the deduction.
If your income is higher, you lose part or all of the deduction for that year. You may be able to get it back by increasing your retirement contributions. Assignors, tournament directors, or those who own other businesses may also have additional tax planning options.
How much do referees pay in taxes?
To cover these taxes, you either need to increase your withholding at your day job or make estimated tax payments throughout the year. If you do not and your tax liability is greater than $1,000, you may be charged additional interest.
What if the referee is a minor?
Referees who are minors still need to file a Schedule C.
Parents should strongly consider having their own tax preparer file the minor’s return or, if using online software, doing the minor’s tax return with them. This is especially important if you are claiming the minor as a dependent, for head-of-household status, or for other credits.
What if the referee is a college student?
College students also file their own tax return. As with minors, college students and their parents should discuss how they will file their returns for the purposes of claiming dependents and other credits.
They should also be aware of the support tests that determine whether the college student is a dependent. Don’t forget to consider all sources of income including officiating, other employment, and student financial aid.
Do sports officials have to file state tax returns?
If you live in a state with income tax, you probably need to file a state tax return.
If you traveled to a state with income tax, check that state’s rules for the filing requirements (may be based on income or number of days in that state). The tax will be based on your portion of income that’s attributable to that state (sometimes based on complex rules that don’t reflect the actual cash you received)/
Can a referee open a retirement account to lower their tax bill?
Your game fees count as earned income. This allows you to contribute to a Traditional or Roth IRA even if you don’t have other income (e.g., students or retirees). As a Schedule C 1099 filer, you may also open a SEP IRA or Solo 401(k). These small business retirement plans allow you to contribute up to 20% of your profits on a tax-deductible basis.
SEP IRAs are usually the easiest to open and have the lowest (or no) fees. The advantage to a Solo 401(k) is being able to make up to $18,500 in employee contributions if you don’t have a 401(k) from a different job or if your main 401(k) has poor investment options.
Should you form an LLC for your officiating side gig?
If you’re only an official, forming an LLC probably won’t help you from a tax standpoint. You’ll also likely get little to no liability protection if you form an LLC.
Assignors, booking commissioners, tournament directors, event organizers, and others may gain a benefit from forming an LLC or corporation. That’s because instead of only your personal services and payments, you’re also potentially responsible for the actions of others working with or for you.
Sample Form Schedule C for Referees (Spreadsheet Download)
This is a spreadsheet version of IRS Form Schedule C customized for referees and sports officials. It is in Excel format and should convert to Google Sheets or Apple Numbers flawlessly. If you notice any problems, please let me know in email or chat so I can update it.
Keep in mind that your situation may vary, and you are responsible for making sure that your expenses are deductible under IRS regulations.