Indian tribal governments are exempt from tax under the Federal Unemployment Tax Act (FUTA), provided the tribes are fully compliant with the applicable State Unemployment Insurance. This exemption applies to any subdivision, subsidiary, or business enterprise wholly owned by the tribe.
IRC Section and Treas. Regulation
IRC Section 3301 – sets forth the rate of tax imposed on employers under the Federal Unemployment Tax Act (FUTA) based upon a percentage of the total wages paid to employees during the calendar year
IRC Section 3306 – sets forth definitions for purposes of FUTA
IRC Section 3306(c)(7) – provides an exception to the definition of employment set forth in Section 3306(c) for services performed in the employ of a State, or any political subdivision thereof, or in the employ of an Indian tribe, or any instrumentality of any one or more of the foregoing to the extent that the instrumentality is, with respect to such service, immune under the U.S. Constitution from tax imposed by Section 3301
IRC Section 3309(d) – the State law shall provide that an Indian tribe may make contributions for employment as if the employment is within the meaning of Section 3306 or make payments in lieu of such contributions under this Section, and shall provide that an Indian tribe may make separate elections for itself and each subdivision, subsidiary or business enterprise wholly owned by such Indian tribe. The exception provided under Section 3306(c)(7) will not apply if the tribe fails to make contributions, payments in lieu of contributions, or payments of penalties or interest assessed with respect to such failure, or if the tribe fails to post a required payment bond until such failure is corrected.
Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)
P.L. 106-554 – Community Renewal Tax Relief Act of 2000 – Section 166 of this law amended IRC Section 3306(c)(7) and added IRC Section 3309(d) to provide for the FUTA exceptions for Indian tribes as explained above.
Rev. Rul. 59-354 – Members of an Indian tribal council are not subject to federal income tax withholding, FICA taxes or FUTA taxes on wages paid to them for their services as tribal council members. Generally, tribal councils and other tribal enterprises are considered employers and are subject to federal employment taxes for payments made to other employees.
Indian tribes are considered employers for employment tax purposes. In general, services performed by employees of an employer constitute employment and their wages are subject to federal employment taxes. For purposes of FUTA taxes, “wages” means all payments received for employment unless an exception is provided.
As a result, Indian tribes are not automatically exempt from the FUTA provisions under Chapter 23 of the Internal Revenue Code (Sections 3301 – 3312) except to the extent that an exception applies.
In pertinent part, IRC Section 3306(c)(7) provides an exception to FUTA for Indian tribes and wholly owned instrumentalities of Indian tribes, subject to the requirements of IRC Section 3309(d).
IRC Section 3309(d) requires States to grant Indian tribes the option to contribute to the State unemployment fund or to make payments in lieu of contributions for benefits claimed by the tribe’s unemployed workers. An Indian tribe has the option to make separate elections for itself and each subdivision, subsidiary or business enterprise wholly owned by such Indian tribe.
Indian tribes that fail to make required contributions, payment in lieu of contributions or payment of applicable penalties or interest within 90 days of receiving notice of delinquency will not be considered exempt from FUTA. In other words, Indian tribes who are not compliant with State unemployment tax requirements will be required to pay FUTA taxes.
These FUTA requirements do not apply to wages paid to members of Indian tribal councils for their services as council members.
Issue Indicators or Audit Tips
During the pre-audit, verify whether a filing requirement for Form 940 is indicated.
Confirm whether the filing requirement code on INOLES is correct. If not, prepare and submit the update form to request the correction.
Look at previously filed returns to determine whether any 940 forms have been filed or any deposits posted to a 940 return.
Verify whether the tribe or tribal entity makes payment to the State’s unemployment tax program. Seek proof from the State when appropriate.
If FUTA tax returns have been erroneously filed resulting in an overpayment of tax, discuss expanding the scope of your audit with your manager to correct the error.
If non-compliance with the State program is confirmed, discuss expanding the scope of your audit with your manager. Remember to assess the full tax rate.