Ohtani’s histroric contract has fans, teams and agents buzzing over its size and unique structure that calls for 97% of the total to be deferred.Photo by Meg Oliphant/Getty Images

Shohei Ohtani’s free agency has been a closely followed parlor game among baseball fans and journalists, as they speculated on his destination and contract over the past two years. The Los Angeles Dodgers were the odds-on favorite and landed their man, but no one had a 10-year, $700 million contract with 97% of the money deferred on their bingo card.

“I can’t wait to join the Dodgers,” Ohtani said at his introductory press conference. The two-time MVP said when he met with Dodgers ownership that they considered the last 10 years a failure despite making playoffs each year because of only one World Series title. “When I heard that, I knew they were all about winning and that is exactly how I feel,” Ohtani said.

The historic contract impacts taxes, both the Dodgers’ and Ohtani’s, and its annual value varies depending if you break it down over 10 years ($70 million), for luxury tax purposes ($46 million), for the players union calculations ($43.8 million), over the 20 years it will be paid ($35 million) or its 2024 payout ($2 million).

Here is a breakdown of the contract details and its impact on the sport.

Baseball’s Biggest Contracts

Ohtani was bound to break the record for largest contract in baseball held by his former Los Angeles Angles teammate Mike Trout, who signed a 12-year, $426.5 million deal in 2019.

The deal also tops the NFL’s Patrick Mahomes’ $450 million deal over 10 years, which is the biggest contract in North American sports. If you ignore the deferral component of Ohtani’s deal, it is worth more than Lionel Messi’s four-year, $674 million deal with Barcelona FC, although that total included certain bonuses that were not earned by the Argentinian soccer star.

Deferred Salary

Ohtani’s contract calls for $2 million annual salaries and $68 million deferred each year without interest to be paid in $68 million installments between 2034 and 2043.

Salary deferrals in baseball are not new. Jerry Colangelo negotiated contract deferrals for many of the stars on the Arizona Diamondbacks 20-plus years ago that allowed him to retain the high-priced talent and win the 2001 World Series. Colangelo was ousted as managing partner three years after the World Series win, and new control owner Ken Kendrick was saddled with more than $250 million in contracts to pay off that he said impacted the team’s payrolls.

MLB codified its rules shortly after the Colangelo situation. The current collective bargaining agreement states: “Deferred compensation obligations incurred in a Contract executed on or after September 30, 2002, must be fully funded by the Club, in an amount equal to the present value of the total deferred compensation obligation, on or before the second July 1 following the championship season in which the deferred compensation is earned.” There are no limits on how much of a contract can be deferred, as long as players are receiving the MLB minimum salary, which is $740,000 in 2024.

The required funding is discounted by 5% each year of the deferred payment schedule. The funds must be put aside for the sole purpose of funding the deferred obligation, but owners have flexibility in how they can invest those funds. The CBA says the funds can be kept in cash or cash equivalents, but also that teams can invest in “registered and unrestricted readily marketable securities.” Another provision allows clubs to invest the funds in “alternative forms” with written permission from MLB. Clubs must certify quarterly to the commissioner’s office on the funding of deferred compensation obligations.

Until Ohtani, Bobby Bonilla was the most famous example of deferred compensation with every July 1 “celebrated” as Bobby Bonilla Day when the former big leaguer who retired in 2001 received his $1.2 million check that will continue to 2035. Other retired MLB stars still collecting deferred payments include Ken Griffey Jr., Manny Ramirez, Jon Lester and Chris Davis.

The Dodgers have big deferrals for current players Mookie Betts ($120 million) and Freddie Freeman ($57 million). Francisco Lindor, Nolan Arenado and Chris Sale are other players with deferrals in their current deals. Scherzer deferred 50% of his $210 million Washington Nationals contract in 2015 and is getting paid $15 million annually through 2028 from the club he left after the 2021 season.

Luxury Tax

The Dodgers first paid baseball’s luxury tax, or competitive balance tax (CBT), in 2013 and have been a payor ever since outside of 2018. (No clubs paid the tax for the 2020 60-game pandemic season.) The deferrals in Ohtani’s contract are important, because they drop the net present value of the deal for purposes of the CBT to $46 million annually and will allow the Dodgers to limit their CBT bill. The tax threshold is $237 million in 2024 with increased penalties at $257 million, $277 million and the so-called “Cohen tax” of $297 million for 2024. And there are repeater penalties for teams consistently above the tax lines.

Ohtani’s agent at CAA, Nez Baelo, says the deferrals were Ohtani’s idea to allow the Dodgers to sign other players to compete while he is on the roster. Ohtani echoed that sentiment at his press conference. “I figured if I can defer as much money as I can, and if that is going to help the CBT, and that is going to help the Dodgers be able to sign better players and make a better team, I felt like that was worth it.” he said.

Average Salary

Ohtani’s deal tops the current record for average annual MLB salary held by Max Scherzer and Justin Verlander, who have matching $43.33 million salaries. Those were both short-term deals at three years (Scherzer) and two years (Verlander). Aaron Judge is the closest comp on a long-term deal with his nine-year, $360 million contract signed last year.

Global soccer icons Cristiano Ronaldo, Karim Benzema, Kylian Mbappe and Neymar are all earning more than Ohtani, but Ohtani’s $70 million annual salary is tops in North American sports. Messi’s current deal with Inter Miami, which includes a stake in the team, is worth roughly $60 million a year. Nikola Jokic has the top current contract in the NBA at $55.2 million on average, although Jaylen Brown will make $57.7 million a year in his next deal that starts with the 2024-25 season, and Giannis Antetokounmpo will earn an estimated $62 million a year in his contract that kicks in the following season.

Joe Burrow ($55 million per year) and Justin Herbert ($52.5 million) received huge signing bonuses this year and are the highest-paid NFL players based on average salary.

Personal Taxes

The CBT outlays aren’t the only tax implications of the deal; Ohtani could skirt significant personal income taxes under the terms of his contract, particularly in California where the top marginal rate will increase to 14.4% on Jan. 1. Ohtani is on the hook for state taxes related to his endorsements as a player, but if he leaves California for a no-tax state or back to Japan after his Dodgers contract expires, his tax situation changes.

Title 4, Section 114 of the Internal Revenue Code says a state can’t impose an income tax on retirement income of a person who doesn’t reside in that state. This includes “nonqualified deferred compensation plans,” when certain conditions are met. The Public Affairs Office of the California Franchise Tax Board told Sportico that it can’t comment on Ohtani individually, but its policy position on deferred income suggests Ohtani and his CPA might be in for a showdown with the state.

“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 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.”

Tax expert Robert Raiola has a full breakdown for Sportico on the income tax consequences around the contract.

Endorsements

Ohtani is uniquely qualified to do a contract like this because of his unprecedented endorsement earnings. His salary was tied for only the 12th highest in baseball in 2023, but he was the top earner overall thanks to an estimated $40 million a year off the field from sponsors, memorabilia, licensing and appearances. That is nearly six times more than Bryce Harper makes as baseball’s No. 2 off the field, and four times what Derek Jeter made at his peak when he was the sport’s most marketable player.

Ohtani has roughly a dozen endorsement partners in the U.S. and Japan, including BOSS, Fanatics, Kowa and Seiko. In January, he signed a long-term footwear and apparel deal with New Balance after eight years with Asics, and the sportswear brand launched a limited-edition cleat ahead of the WBC. The deal is more akin to that of a top NBA or soccer star than MLB All-Star.

Ohtani’s endorsement earnings will get a boost with the Dodgers and likely regular postseason appearances.

Other Contract Provisions

Ohtani’s contract has a full no-trade clause. He does not have any traditional opt-out clauses that are sometimes part of long-term deals in cases like Manny Machado, Giancarlo Stanton and Alex Rodriguez, but he does have a “key man” provision in his deal that allows him to opt out of the deal based on changes in Dodgers personnel. Those personnel are president of baseball operations Andrew Friedman or controlling owner Mark Walter. “If one of them are gone … things might get a little out of control. I just wanted a safety net,” Ohtani said.

Some final perks: Ohtani gets a luxury suite at Dodgers Stadium, as well as an interpreter. He will also donate to a Dodgers charity an amount not to exceed 1% of the contract, according to The Athletic’s Ken Rosenthal.