How Do NBA Contracts and the Salary Cap Work?

The NBA offseason is marked by drama, excitement and Woj bombs, but it is also defined by a flurry of confusing terms such as “non-taxpayer mid-level exception” and “designated veteran player extension.” There’s also a lot of discussion of aprons, even though there is no cooking involved.

So, if you’re confused about why your favorite team can’t sign your favorite player or why certain players are earning more than others, we’ve got you covered. Here’s an explainer of how NBA contracts work.

What is the NBA salary cap?

The salary cap is a set amount of money designed to limit what teams can spend on player payroll. The number is determined for each season based on a percentage of projected basketball-related income for the upcoming year. In 2024-25, the salary cap will be $140.588 million.

Unlike the NHL, which has a “hard cap” that cannot be exceeded under any scenarios, the NBA has a “soft cap” (like a yarmulke). NBA teams are allowed to go over the salary cap by design using a variety of exceptions outlined in the collective bargaining agreement (CBA) that are explained below. In the 2023-24 season, 29 of the league’s 30 teams spent more than the cap on player salaries.

Owners are required to spend at least 90% of the salary cap in any given season to ensure that players receive their fair share of league revenues. Still, the cap ultimately serves to control owners’ costs. It also promotes parity by preventing large disparities in spending by different teams, which occurs in MLB, for instance.

What is the NBA luxury tax?

If a team’s payroll exceeds a certain threshold greater than the salary cap, then that team must pay a tax. This season, franchises start by paying $1.50 to the league for every dollar they go over the threshold, and the rate incrementally increases the further they go over. Additionally, the league imposes a repeat offender penalty (an additional dollar-for-dollar tax over the payroll threshold) for those who paid a tax in three of the previous four seasons.

Over the past decade, roughly a quarter of teams have paid the tax in any given season. In 2023-24, the Golden State Warriors paid a whopping $176.9 million in luxury tax, followed by the Los Angeles Clippers ($142.4 million), Phoenix Suns ($68.2 million) and five other franchises. Half of the money collected by the NBA from the taxpaying teams gets distributed to the other teams in equal shares.

What is the second apron?

The second apron is an additional level introduced in the 2023 CBA that is $17.5 million over the luxury tax threshold. Teams that finish a season with a payroll over the second apron are subject to a long list of roster-building restrictions (there is also a first apron with a smaller set of restrictions).

As outlined in the CBA, second apron teams can’t do a number of things in a trade: send out cash, aggregate contracts, or take back more incoming money than outgoing money, among other commonly-used techniques. They also cannot sign players whose contracts were bought out by their former teams. Furthermore, teams finishing 2024-25 over the second apron will have their 2032 first-round picks frozen (i.e. untradable).

Teams below the second apron that do any of the actions listed above will automatically be “hard-capped” at the second apron (i.e. prevented from making any moves that cause their payroll to exceed it).

What is the mid-level exception?

The mid-level exception (MLE) is a tool that can be used by each team once a year to sign one or more players despite its payroll exceeding the salary cap. In the upcoming season, taxpayers can offer first-year salaries of up to $5.2 million in deals lasting up to two years, while non-taxpayers can offer first-year salaries of up to $12.8 million in deals lasting up to four years. Those amounts change every year in concert with changes to the salary cap.

Teams that are above the second apron cannot use the MLE to sign free agents, and teams that use it are hard-capped at the second apron.

What is the bi-annual exception?

The bi-annual exception is a tool that can be used by each team in non-consecutive seasons to sign one or more players despite its payroll already exceeding the salary cap. In the upcoming season, teams can offer first-year salaries of up to $4.7 million in deals lasting up to two years.

Teams cannot use the bi-annual exception if they’ve already used the MLE, and teams that use the bi-annual exception are hard-capped at the first apron.

What are Bird rights?

Under the “Bird exception,” a team can exceed the salary cap to re-sign its own free agents at an amount up to the maximum salary. A qualifying player must play three seasons for the same team continuously to obtain “Bird rights,” which are named as such because the Boston Celtics were the first team allowed to exceed the salary cap to re-sign one of their own players.

There is also the “early Bird exception,” which enables a team to re-sign its own free agents if they played for the team for some or all of the previous two seasons. The team can offer up to the greater of 105% of the average player salary for the prior season or a 175% raise on the player’s previous salary.

Lastly, a team can still re-sign its own free agent who neither has Bird nor early Bird rights, albeit with more restrictions on the player’s salary.

How do NBA rookie contracts work?

Rookie contracts for NBA first-round draft picks are tied to the salary cap, and vary based on the players’ draft slots, with the value of the contracts dropping for lower picks in the first round. The first two years of such deals are guaranteed, and years three and four are team options, although the majority of picks in each draft class have those options picked up.

Zaccharie Risacher, the No. 1 pick in the 2024 NBA Draft, will earn a four-year contract worth roughly $57 million, while the No. 30 pick, Baylor Scheierman, can sign a deal for up to $12.8 million.

Teams must offer at least 80% of the “rookie scale contract” and no more than 120%. In practice, almost every deal is completed at the maximum 120%. The NBA allows teams to sign their draft choices to rookie scale contracts even if they are over the salary cap.

Second-round picks do not have any salary restrictions, but the players often sign deals for the league’s minimum salary.

What is a two-way contract in the NBA?

A two-way contract allows a player with fewer than four years of NBA experience to split time between an NBA team and a G League team. The player can play in a maximum of 50 NBA regular season games, is ineligible for the NBA postseason, and can practice with the team or play in the G League when not suiting up for NBA games.

Two-way players are paid half of the league’s minimum salary and can be cut at any point. Two-way contracts, however, can be converted to regular contracts during the season, after which the player will receive the league’s minimum salary, prorated for the remainder of the season. Teams can have up to three two-way players at a time, and their salaries do not count against the salary cap.

What is the maximum contract in the NBA?

Unlike MLB and the NFL, the NBA limits how much teams can pay individual players. The amount varies depending on several factors involving the player and is always based on percentages of the salary cap.

Players with less than seven years of service can be paid up to 25% of the cap following the completion of their rookie contract. The “Derrick Rose Rule,” however, states that a player can re-sign with his team for up to 30% of the cap after four years of service if they meet at least one of the following “higher max criteria:”

Players with at least seven years of service but less than 10 years can be paid up to 30% of the cap. The “Supermax” rule, or the “Designated Veteran Player Extension,” however, states that a player can re-sign with their team for up to 35% of the cap after their eighth or ninth season if they meet at least one of the aforementioned higher max criteria. Additionally, the team offering the extension must have originally drafted the player or acquired them in a trade while they were on their rookie contract.

Players with at least 10 years of service can be paid up to 35% of the cap.

Who has the highest contract in the NBA?

The highest base salary in the NBA for the 2024-25 season belongs to Stephen Curry at $55.8 million. The largest active contract by average annual value, however, is Jaylen Brown’s deal, which pays him an average of $57.1 million per year, with his salary increasing in each year of the contract. Jayson Tatum recently signed a deal that kicks in starting with the 2025-26 season and will pay him an average annual salary of $62.8 million.

How much is a 10-day contract in the NBA?

A team can sign a player to a 10-day contract to add bench depth or fill needs due to injuries. It lasts for 10 days or three games, whichever is greater. It is worth the player’s minimum salary, which varies depending on their years of experience in the NBA. In the 2023-24 season, 10-days were worth somewhere between $64,000 and $184,000 based on whether the player being signed had zero or 10-plus years of service, respectively.

What is included in an NBA contract?

An NBA contract is a legally binding document that determines how much money a player will earn and secures his employment with the team over a specified period of time. It also ensures that the team is protected in the event that the player violates the rules of the organization or takes reckless actions that compromise his ability to play basketball.

Contracts state exactly how much a player is compensated in each year of the agreement. They often also contain incentives or bonuses for hitting certain statistical milestones or winning awards. They may contain a variety of other stipulations, including guidelines regarding endorsement deals or activities in which a player may not partake during the offseason.

Are NBA contracts guaranteed?

For the most part, yes, NBA contracts are fully guaranteed. Once a deal is signed, the player will be compensated fully regardless of whether they get injured, play poorly or are not wanted by the team anymore.

Some contracts, however, include a “team option” for the last year or two, meaning that the team can decide whether it wants to retain the player for the salary originally outlined in the deal or let them become a free agent and potentially try to negotiate a new contract.

Lastly, any bonuses for performance or achievements are inherently not guaranteed.