Tax rule changes top-paid employee counts

Summary#

H.R. 10682 would amend the Internal Revenue Code of 1986, changing which employees can count as “covered employees” under a limit on employers’ deductions for certain compensation. Its stated goal is to provide parity in the taxation of professional sports franchises; that is a goal, not a guaranteed result. The bill is not law and has been referred to the House Ways and Means Committee.

  • For one category of covered employees, the bill would include an employee among the employer’s five highest-paid employees, while excluding people described in two other parts of the law and people who perform services in athletics for that employer.
  • It would make a wording change to the part of the definition dealing with employees who were covered employees in an earlier tax year.
  • The bill sets the change to apply to tax years beginning after December 31, 2026.
  • The text does not create a new program, office, fee, or penalty. It concerns employers’ tax deductions.

What it means for you#

  • Professional sports employers and other affected employers: The bill could change which employees count as covered employees for the deduction limit. The practical tax effect depends on how the amended definition interacts with the rest of the Code.
  • Athletes and other employees: The bill excludes people who perform services in athletics for the employer from the five-highest-paid-employee category it revises. It does not change their pay or personal income taxes.
  • Taxpayers: The bill could affect federal tax revenue through changes to employers’ deductions, but the amount is unknown.
  • Everyone else: It does not directly change public services, benefits, or individual tax rules.

The supplied material does not include the current text of the Internal Revenue Code provision being amended, so the change cannot be fully compared with current law.

Money#

No cost or revenue estimate is available in the supplied material.

  • The bill could affect employers’ deductions and federal tax revenue, but the size and direction of that effect are not stated.
  • It does not specify spending, staffing, fees, or fines.

What is unclear#

  • How the proposed five-highest-paid-employee test compares with the current definition; the current Code text was not supplied.
  • How the wording change to the prior-year covered-employee rule would affect its operation.
  • The bill refers to a tax regulation’s meaning of services “in the field of athletics,” but does not restate or define that term.
  • Which employers would see a change in their deductions, and by how much.
  • The bill has no start date for the law itself stated in the supplied text, beyond applying its amendments to tax years beginning after December 31, 2026. Its passage is uncertain.

Case for#

  • The bill appears intended to change how professional sports employers’ highest-paid employees are counted under the deduction limit.
  • Excluding athletic performers from this particular category could keep their pay from determining which other employees fall into it.
  • A possible argument for the bill is that a specific rule for athletic performers could make the tax treatment of sports franchises more consistent with the bill’s stated goal of parity.

Case against#

  • The bill does not explain what tax treatment it considers unequal or how this change would achieve parity.
  • Changing who counts as a covered employee could affect employers’ deductions, but the bill materials provide no estimate of the tax or revenue effect.
  • Without the current Code text, it is unclear whether the revised test would add or remove employees from the category in particular cases.
  • The bill does not explain how the athletics-services reference would apply to different roles.