Shohei Ohtani’s record-breaking $700 million, 10-year contract with the Dodgers may not be as large as it seems. Specifically, his stunning decision to reportedly defer $68 million a year of his Dodgers salary—without interest—would cost the two-way baseball star a lot of money: more than the average MLB team’s payroll in 2023.
According to various reports, Ohtani will take just $2 million a year in salary and defer the rest for 10 years, and then receive the remainder after his contract ends in annual installments from 2034 through 2043. This means over the next 10 years, the Dodgers would pay Ohtani $20 million, not $700 million as headlines from his signing intimated.
It would also mean the superstar is surrendering $18.55 million a year in interest, assuming a 5% annual interest rate, which is the percentage cited in MLB’s collective bargaining agreement as a benchmark rate for some payroll calculations. Over 10 years that total is $185.5 million. That’s more than the average MLB payroll of $165.7 million, according to Spotrac, and ahead of most MLB clubs, including the Boston Red Sox, who had the 13th highest payroll this year.
While some fans might believe the Dodgers and Ohtani are attempting to pull a fast one, and that MLB commissioner Rob Manfred should intervene to block the signing as undermining the best interests of the game, MLB’s collective bargaining agreement with MLBPA says otherwise. It allows for deferred compensation and explicitly places no cap on how much money can be deferred.
“There shall be no limitations,” Article XVI of the CBA states, “on either the amount of deferred compensation or the percentage of total compensation attributable to deferred compensation for which a Uniform Player’s Contract may provide.”
The tax implications of the deferred arrangement are considerable, particularly if Ohtani relocates from California to a state without an income tax following the 10-year period.
Ohtani will pay the highest federal income tax rate (37%) on the portion of his income that exceeds certain thresholds, depending on whether Ohtani files as a single filer or married filing jointly (Ohtani is reportedly not married at this time). In 2024, Ohtani will pay 37% on income exceeding $609,499 ($731,200 if married).
This federal rate is projected to climb to 39% in 2026. Provisions of the Tax Cuts and Jobs Act of 2017, more colloquially referred to as the Trump tax cuts, are scheduled to expire at the end of 2025.
Ohtani must also contend with California’s income taxes. The Golden State has the highest income tax of any state, with residents paying a 13.3% tax on income that exceeds more than $1 million a year. The tax rate will climb as of Jan. 1, 2024, too, when California’s top marginal rate rises to 14.4%.
In addition to his earnings from the Dodgers, Ohtani will earn considerable income from endorsements. According to a Sportico analysis in March, the two-time AL MVP earns about $40 million a year in endorsements.
Assuming (1) Ohtani resides in California for the 10 years of his contract; (2) is not traded to a team in a different state, (3) neither U.S. and California income tax rates change during that stretch; and (4) he earns $40 million a year in endorsements, we project he’ll pay $16.632 million in federal income taxes and $288,000 in California taxes each year during the 2024 to 2034 period. He also projects to pay about $48,000 a year in federal payroll taxes that are used to fund Medicare and Social Security. In addition, Ohtani will pay jock taxes, which some jurisdictions impose on players from visiting teams, while he plays for the Dodgers. However, assuming he is a California resident, he will receive a credit in California for taxes paid to other states.
After Ohtani, currently 29 years old, finishes his 10-year deal in 2034, he will collect his deferred payments over the next decade. If he resides in California, he’ll have to pay California taxes on those deferred payments.
But as has been reported, many high-income residents in California have been leaving the state. If Ohtani moves to one of the nine states without an income tax, his tax situation would change.
Under Title 4, Section 114 of the Internal Revenue Code, a state can’t impose an income tax on retirement income of a person who doesn’t reside in that state. The code defines retirement income as inclusive of plans contemplated in another section, 3121(v)(2)(C), which includes “nonqualified deferred compensation plans,” when certain conditions are met. Those conditions include payments that are not less frequently than annually, occur during a period of not less than 10 years and are “substantially equal.”
What this means is that if Ohtani resides in a state without an income tax, he and his CPA could argue he is not subject to any state income tax—including from California—on grounds his deferred payments ought to count as retirement income. He would still have to pay federal income taxes. We assume for purposes of this illustration that he continues to earn $40 million a year in endorsements, as he will likely remain marketable after his career ends.
But whether the State of California would agree with Ohtani and his agent is another story. The Public Affairs Office of the California Franchise Tax Board told Sportico that while it can’t comment on Ohtanii, its policy position on deferred income suggests it might argue it can tax him.
“Generally,” the agency wrote in a statement, “nonresidents are taxable on California source income. Like other states, California has the power to tax individuals on California source income earned when they are nonresidents. One type of California source income includes wages paid to a nonresident who performed services in California. The way to calculate the portion of income that is California sourced is to multiply the total amount of income for the year by a ratio of the total number of days performing services in California over the total number of days performing services worldwide.”
“The timing of the payments and timing of generating taxable California source income is a fact specific finding that would depend upon the unique facts and circumstances of a taxpayer as well as the terms of any compensation agreement. The timing and finding of California source income in contracts involving payments for residuals is likewise a fact-specific determination.”
This analysis would change if Ohtani returned to Japan during his deferred compensation years. Japan has a graduated tax system where the top tax rate is 45%. In addition, if Ohtani were a resident of Japan, he would pay a 10% resident tax. He would also need to comply with U.S. tax laws.
(This story has been updated with a statement from the California Franchise Tax Board.)
