This issue snapshot addresses questions concerning whether an Indian tribe's decision to enter into a 218A agreement and elect social security coverage for its tribal council members, or not enter such an agreement, affects the classification of those workers for other purposes of the Internal Revenue Code (IRC) such as income tax and retirement plan participation.
IRC Section and Treas. Regulation
IRC 3121 – Defines wages, employment, employee, and other terms for purposes of the Federal insurance Contributions Act (FICA)
Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)
Revenue Ruling 59-354 – discusses the applicability of employment taxes for remuneration paid to Indian tribal council members
CCA 201926011 – provides guidance concerning the worker status of Indian tribal council members who participate in 218A agreements
Public Law 115-243 – the Tribal Social Security Fairness Act added Section 218A to the Social Security Act (42 USC 418(a)).
The Tribal Social Security Fairness Act of 2018 (the Act) (Pub. L. 115-243) does not affect an Indian tribal council member's status as an employee for any tax purpose other than FICA taxes.
Internal Revenue Code (IRC) Section 3121(a) provides that for purposes of FICA, "wages" means all remuneration for employment. IRC Section 3401 provides a similar definition for income tax withholding purposes. IRC Section 3121(b) defines the term "employment" as any service of whatever nature performed by an employee, unless otherwise excepted. IRC Section 3121(d)(2) defines "employee" as including any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee. Section 3121(d)(4) further defines "employee" as including any individual who performs services that are included under an agreement entered into pursuant to section 218 or 218A of the Social Security Act.
Revenue Ruling 59-354 concludes that the services performed by Indian tribal council members do not constitute "employment", and that the remuneration paid does not constitute "wages" for FICA or income tax withholding purposes. The revenue ruling does not address whether Indian tribal council members are employees under the usual common law rules. However, the IRS has concluded in informal advice that elected tribal council members are common law employees for Federal employment tax purposes (see e.g., CCA 199906001 and CCA 201119032).
The Act added section 218A to the Social Security Act (42 U.S.C. 418a). Section 218A provides that any Indian tribe may enter into a voluntary agreement with the Commissioner of Social Security for the purpose of extending social security coverage to members of the Indian tribe's tribal council for services performed as tribal council members.
The Act also amended IRC section 3121(b), adding a new subparagraph (22) stating that the term employment does not include "service performed by members of Indian tribal councils as tribal council members in the employ of an Indian tribal government, except that this paragraph shall not apply in the case of service included under an agreement under section 218A of the Social Security Act."
Additionally, the Act amended IRC section 3121(d)(4) to include within the definition of "employee" any individual who performs services that are included under an agreement entered into pursuant to section 218A of the Social Security Act.
Section 2(c) of the Act provides that "[n]othing in this Act or the amendments made by this Act shall be construed to affect application of any Federal income tax withholding requirements under the Internal Revenue Code of 1986."
CCA 201926011 concludes that:
"[T]he Act does not affect an Indian tribal council member's status as an employee for any tax purpose other than FICA taxes. ...Although services performed by tribal council members not covered under a section 218A agreement are excepted from employment for FICA purposes, the tribal council members are presumably common law employees for other purposes, including for retirement plan purposes.
Similarly, Indian tribal council members who are covered under a section 218A agreement are considered to be employees for FICA purposes, but their services may be excepted from employment for other employment tax purposes. Indeed, Rev. Rul. 59-354 continues as good authority for the proposition that services performed by such Indian tribal council members are excepted from employment and remuneration for such services is excepted from wages for income tax withholding purposes, irrespective of whether or not an Indian tribe has entered into a 218A agreement."
Issue Indicators or Audit Tips
When examining a tribal government, ask if the tribe has entered into a Section 218A agreement with the Social Security Administration. If so, request a copy.
If the tribe has a signed Section 218A agreement, check for proper withholding and reporting of wages paid to tribal council members.
Remember, Revenue Ruling 59-354 is still applicable for federal income tax withholding for all tribes, and for FICA purposes for tribes without a Section 218A agreement.