Tennis superstar Caroline Wozniacki has a serious love affair. With tennis – not Rory McIlroy (that’s already over). So much so that she’s let it be known that she would play even if she didn’t get paid, saying, “For me, it’s about the tennis and the trophies. I’m not motivated by money.”
She almost found out how that might feel for real last month. After losing the U.S. Open to Serena Williams, Wozniacki picked up her trophy and went home – without her paycheck. Yes, the $1.45 million paycheck. A half an hour later, she returned to the Open, confessing, “I forgot to pick up my prize money.”
Wozniacki, who is ranked #7 on Forbes’ list of the World’s Highest-Paid Female Athletes 2014, may not need that check. She pulled in over $10 million last year with most of that coming in endorsements, putting her pretty comfortably in the top tax bracket.
But what if Wozniacki hadn’t gone back? What if she didn’t pick up her check after all? Would it still be considered her money?
I don’t know what the U.S. Open’s policy is on stars that don’t pick up their money but the IRS’ position is very clear: income is income when received, or when constructively received. That means that even if a taxpayer doesn’t have the money in hand, if the taxpayer could have had the money in hand, it is treated as though it has been received. In simple terms, income is taxed when it’s made available.
And while we don’t all have Wozniacki-sized checks to worry about, the rules are the same whether it’s $1.45 million or $145. You cannot avoid tax by not picking up your paycheck. Likewise, you can’t simply pop your paycheck in a drawer; toss it in a pile of papers; or hold off taking the paycheck to the bank in order to avoid paying tax or delay reporting income. You also can’t avoid taxes by giving your paycheck to another person (still taxable to you) or mailing it back to your employer (still yours). The technical term, for IRS purposes, is that an individual may not “turn his back on income” in order to avoid tax on the income.
Properly deferring income for tax purposes is tricky: the most popular methods tend to involve retirement plans, life insurance, or certain kinds of deferred compensation. What makes those different than simply hanging onto a paycheck? Well, for one: statutes. The tax consequences of those retirement plans, life insurance, and deferred compensation plans are defined under the Tax Code and spell out the criteria for deferral. The underlying theme, however, tends to be that you can properly defer tax on the income when taking the income earlier (as with a retirement plan) would otherwise result in a penalty. If in doubt, always ask your tax professional.
And remember that compensation is compensation. Just because something comes in another package doesn’t mean that the income and tax rules don’t apply. Whether it’s a huge paycheck or, say, chocolate, the result is the same. That’s good advice for Wozniacki: she hopes to add a new endorsement to her repertoire, telling the Wall Street Journal, “I will do a chocolate deal for product only. No need for money.”
(Psst, Caroline: for U.S. federal income purposes, it’s still taxable.)
