How much will Shohei Ohtani's contract cost the Dodgers?

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Thanks to the extreme deferrals in their stunning new contract, the Dodgers won’t be paying Shohei Ohtani his full $700 million over the next 10 years.

But the team won’t be on the hook for only $20 million in that span, either.

As more clarity has come in the wake of Monday’s news that Ohtani would defer a whopping $680 million of his contract until after its completion, the full financial ramifications for the Dodgers have also come into focus.

Yes, the team will pay Ohtani just $2 million in direct salary during each of the 10 seasons he plays for them.

And yes, Ohtani will receive $68 million payouts annually from 2034 to 2043.

But in between then, the Dodgers will have to front some money for those future payments, bringing their annual Ohtani-related financial commitments to about $48 million for most (but not all) of the next 10 years.

It doesn’t mean the contract isn’t a relative bargain. But the situation is also more complicated than, “the Dodgers are getting Ohtani for less money than Austin Barnes.”

Here is an explainer on exactly what it all means.

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How much will Ohtani earn each year?

This is the simple part.

As stated above, Ohtani will be paid $2 million by the Dodgers directly in each season from 2024 to 2033. That’s the number that counts toward the team’s actual payroll (but, importantly, not its luxury tax payroll). That was the trade-off Ohtani sought in hopes of helping the Dodgers add more talent around him.

A decade from now, Ohtani will then receive his annual payments of interest-free $68 million in deferred money for the 10 subsequent years.

So, over the next 20 years, a total of $700 million will eventually go from the Dodgers to Ohtani. That’s why it’s a $700 million contract. That’s why it was described as the biggest deal for a professional athlete of all time.

But, especially when factoring in the $50 million in endorsements Ohtani is reportedly expected to earn annually, he was OK with waiting to receive the full $700 million until 20 years down the road.

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But how much are the Dodgers spending?

The Dodgers' Clayton Kershaw shakes hands with Mark Walter during a pregame ceremony before a game on March 29, 2018.

Here, it gets more complicated.

Under MLB’s collective bargaining agreement, deferred money in player contracts “must be fully funded by the Club, in an amount equal to the present value of the total deferred compensation obligation, [within two years of when] the deferred compensation is earned.”

That means, while the Dodgers will pay Ohtani only $2 million directly each of the next 10 years, they will also have to set money aside in the near-term that will cover the deferred payments he is owed in the future.

Here’s how it works:

In 2024, Ohtani will “earn” $2 million in salary, and $68 million in deferred payments. By July 1, 2026, the Dodgers will also have to show the league how they plan to fund the $68 million that will come due in 2034.

The CBA requires only that the “present value” be funded within that two-year period. According to a person with knowledge of how the league calculates such contracts, the present value of that $68 million payment in 2034 is worth about $46 million in today’s money (since money in the present, because of inflation, is worth more than money in the future). Also, funding mechanisms can include cash or “readily marketable securities.”

So, in 2024 and 2025, the Dodgers’ only commitments will be to pay Ohtani his $2 million salary.

From 2026 until the end of the contract, the Dodgers will have to pay Ohtani his $2 million salary, plus show the league they have another $46 million set aside in, let’s say, an escrow account (or some other financial instrument) that will theoretically be worth the full $68 million deferral payment when it comes due.

For a financial giant like the Dodgers and their ownership group, that shouldn’t be much of a problem.

Dodgers chairman Mark Walter is the chief executive of Guggenheim Partners, a financial services company that manages more than $295 billion worth of assets. The Dodgers themselves boast an $8.35-billion television contract.

One more note: That $46 million total could grow over time, depending on larger economic factors.

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So this isn’t a total steal for the Dodgers?

Not quite.

It will be hugely beneficial that, for the next two years, the Dodgers are getting a two-time MVP for effectively just $4 million total. That alone makes the contract a bargain, and one that should enable the Dodgers to spend aggressively this winter and next.

Starting in 2026, the Dodgers’ will be on the hook for about $48 million in Ohtani-related costs (even if it’s not fully reflected on their actual payroll). That’s less of a steal. But it remains strong value for a player who, if his recovery from a second Tommy John surgery goes well, could be back to the peak of his two-way powers.

At that point, $48 million per year might still seem like a coup for the club.

And when factoring in the massive marketing revenue bump the team should receive by having Ohtani, the entire contract could end up effectively paying for most, if not all, of itself.

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What about the luxury tax?

Under CBA rules, calculations for the luxury tax payroll — the number used to determine whether a team exceeds the league’s luxury tax threshold, and thus incurs a tax penalty — consider the full present-day value of contracts with deferred money.

In this case, with its extreme deferrals, the true present-day value of Ohtani’s contract is worth about $460 million (since, again, money in the future is less valuable than money in the present). Divided over 10 years, the annual tax hit comes out to about $46 million.

The reason it isn’t “luxury tax evasion,” as some fans speculated, is because that’s the way it is written in the CBA.

For luxury tax purposes, it is best to think of Ohtani’s signing as a 10-year, $460 million deal — which, as MLB Trade Rumors noted, is more in line with what industry experts predicted entering the offseason.

Also of note: None of the deferred payments from 2034 to 2043 will impact the Dodgers’ luxury tax payroll in those years.

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So why did they do it this way?

That answer will become clearer after Ohtani’s introductory news conference. But already, there are a few key reasons.

First and foremost, this does free up the Dodgers to spend. Had Ohtani gone through a normal bidding process in free agency, his price might have been driven up to $500 million-plus, some rival agents speculated.

Maybe the Dodgers would have been willing to go that far. Maybe not. But now, they are effectively paying some $48 million on average over the next 10 years — and only $2 million in each of the next two seasons — on a deal that provides them financial flexibility and the acquisition of the sport’s biggest star.

For Ohtani and his agent at CAA Sports, Nez Balelo, adding in the deferrals came with a couple of smaller benefits: first and foremost, the ability to label it the biggest sports contract ever; and also, when Ohtani receives his deferred payments a decade from now, he might be able to take advantage of some tax benefits if he isn’t living in a high-tax state like California.

But mostly, Ohtani did this for one key reason: He wanted to win in his new location, and came to believe that deferring most of his money was the best way to make it happen.