Bonuses and taxation
You may notice from the handy M’s contract chart that the team paid a ton of money to Beltre and Sexson this year that more or less with their 2005 salaries equals what they’re paid in other years. Why do this, you ask? The answer conveniently is clearly explained in an ESPN article today:
For the rest of the American public, signing bonuses count as wages earned, with both the employer and employee having to pay taxes under FICA (the Federal Insurance Contribution Act). But in 1958, baseball players — the exclusion for other athletes later became understood — were exempt from FICA taxes on their signing bonuses because it was determined that no service was technically rendered for the player’s bonus.
But in November, the U.S. Treasury Department modified the loophole so that FICA taxes had to be paid on signing bonuses signed after Jan. 11.
The article’s about how different taxation schemes affect the actual value of contracts. It’s wrong in one important respect: players in all states pay income taxes when they play in states with income taxes, and in many states, they pay double tax from their state of residence. Sammy Sosa attempted to sue Illinois over this, but Illinois cowardly weaseled out of the suit (which was entirely reasonable: Sosa said “how come you’re taxing me on income I made in another state and was taxed for there?” and Illinois’ response was “Uhhhhhhhh… you’ll have to take that up with that other state.”)
So there’s kind of a… an automatic tax burden for every player that can be made substantially worse if they live in the wrong state, or if they play for a team in a state with particularly aggressive residency requirements (81 days a year? taxable!).
This is one oft-overlooked advantage that Washington (and Texas, and others), with our regressive sales taxes, have in attracting free agents: there’s no additional tax burden on free agents.