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How does the salary cap work?

The NFL salary cap is very confusing, and from browsing forums and comments, it seems that most people don’t understand it. I’ve seen comments like, "We need to free up some space by releasing Jay Ratliff and Miles Austin." They don’t realize that cutting them now will cost them more this year than it will cost to keep him.

Others have said, "Why are Tony Romo and Anthony Spencer taking so long to restructure? We’ve already missed out on the big name free agents." Even restructuring their deals won’t give us long term cap space to sign big name free agents, rather it just makes it worse for next year where even before restructuring Spencer, we will go into the offseason way over the cap. As Keg and Rena have explained, SJ can use his magic and get under the cap without too much difficulty, but adding more big salaries would make it much more challenging.

I haven’t been part of the btb community very long, but it does appear that you have a better understanding of the salary cap much better than in other places. People like Keg and Rena have done a great job explaining the Cowboys cap situation in the next couple of years. I haven’t seen a post, although maybe I just haven’t looked far enough back, that explains how the salary cap works in the NFL, so I will attempt to do that here.

So, how does the salary cap work? Each season, the league sets a salary cap number before free agency. Historically, the salary cap has risen every year, but since the new CBA was agreed to we have had a flat cap, and from what I’ve seen, it will stay relatively flat until around 2015.

Only the top 51 players on a roster count against the cap. So, technically speaking, even if the Cowboys have no cap room, they can still sign some minimum contracts. Let’s say the #51 player on the team currently costs $500,000 against the cap. If they sign a player to a 1 year, $600,000 deal, the team’s salary would only go up by $100,000.

To determine how a salary counts against the cap, you must know the signing bonus, salary, and years of the contract. If the contract is 5 years for $30 million with a $10 million signing bonus, everything that isn't signing bonus($20 million here) is divided up over the five years which is negotiated between the team and player. For example:

Year 1: $2 million

Year 2: $3 million

Year 3: $4 million

Year 4: $5 million

Year 5: $6 million

Normally, although not always, the salary in the first years is less than later on in the contract. A few reasons for this are because the player will actually receive $12 million his first season once you add in the $10 million signing bonus. Also, since the salary cap normally rises, they have more room to play with in future years. Since none of the salary is guaranteed(in most cases), they can also cut the player and not be responsible for any of his salary.

Now, his signing bonus is a different story. It is all guaranteed and paid up front. However, in order for the team to not have to count the entire signing bonus to the current year’s salary cap, they split it up between the 5 years, even though he receives it in year 1. For a $10 million signing bonus, it counts $2 million in cap room/year whether he is on the team or not. In the example above, his team cap hit would be:

Year 1: $2 million+$2million bonus=$4

Year 2: $3 million+$2million bonus=$5

Year 3: $4 million+$2million bonus=$6

Year 4: $5 million+$2million bonus=$7

Year 5: $6 million+$2million bonus=$8

Now, we hear people say that we need to cut people to free up cap space. So, what if our guy who just signed the above doesn’t live up to his contract, and is a waste to have on the roster? If you want to cut him after his first season, you don’t have to pay any of his salary, but his money paid in the signing bonus will still count against the cap.

It’s March of year 2, if he stays on the roster, he will count $5 million against the cap. $3 million in salary and $2 million in bonus(see above). If we cut him, he will count $8 million against the cap this year. Why? You have to add the bonus from years 2 through 5 which the team already paid him, and it all goes against the cap that season. The $2 million bonus from those 4 years is added up to give you $8 million. So, cutting him will count more against the cap than keeping him.

However, there is another option. That is designating him a June 1st cut. June 1st is the day that financially speaking in terms of player contracts, the year begins. If you cut a player on or after June 1st, for the current season, you are only responsible for the current year’s signing bonus, and the rest gets pushed ahead to the next season. So, if we decided to designate him a June 1st cut in year 2, his current salary cap hit would be $2 million, which would save us $3 million in cap space this year, but next season, year 3, he would count for $6 million(Seasons 3-5 signing bonus money, even though he wasn’t on the roster in year 2 or 3).

We've heard a lot lately of restructures. Teams like the Cowboys use restructures to create more cap room. Let’s say that we are in year 3 of the contract above. His cap hit is $6 million($4 million in salary+2 million in bonus). The team can lower his salary to the league minimum, and make the rest of his salary a bonus. For simplicity’s sake, we’ll lower his salary to $1 million. That is $3 million less. Since there are 3 years left on the contract, They spread the $3 million out over the 3 years. So, the team will save $2 million in cap space. The player likes this because it guarantees the money. The team likes it because it frees up space now, and pushes it to the future. The Cowboys have been doing this a lot lately. The new salary breakdown looks like this:

Year 3: $1 million+$3million bonus=$4

Year 4: $5 million+$3million bonus=$8

Year 5: $6 million+$3million bonus=$9

There are a few other technical rules, like a rule that I just learned recently with Will Allen’s contract, but in general, this is how to figure out the NFL salary cap. There are two sites that list the players’ salaries and team cap situation: www.overthecap.com and www.spotrac.com. These sites aren't 100% accurate, but are pretty good. www.overthecap.com still has Marcus Spears counting towards the cap next year, when he’s already labeled a June 1st cut. I have also seen Spotrac off at times. I hope this helps in understanding how the cap works. If something's not clear, please let me know.

Another user-created commentary provided by a BTB reader.

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