Amounts paid to members of an Indian tribal council are includible in gross income. However, when such amounts represent payment for their services as tribal council members, they are not considered “wages” under the Federal Unemployment Tax Act (FUTA). They are also not considered wages under the Federal Insurance Contributions Act (FICA), which includes social security and Medicare taxes, and the withholding of income at the source.
IRC Section and Treas. Regulation
IRC Section 61 – Defines gross income for income tax purposes. Compensation for services is specifically included in Section 61(a)(1).
IRC Section 3121(a) – Provides the definition of wages for purposes of the Federal Insurance Contributions Act (FICA).
IRC Section 3306(b) – Provides the definition of wages for purposes of the Federal Unemployment Tax Act (FUTA).
IRC Section 3401(a) – Provides the definition of wages for federal income tax withholding purposes.
Treasury Regulation Section 31.3121(a)-1 – Defines wages as all remuneration for employment unless specifically excepted under Section 3121(a).
Treasury Regulation Section 31.3306(b)-1 – Defines wages as all remuneration for employment unless specifically excepted under Section 3306(b).
Treasury Regulation Section 31.3401(a)-1 – Defines wages as all remuneration for services performed by an employee for his employer unless specifically excepted under Section 3401(a), or excepted under Section 3402(e) (not applicable here).
Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)
Rev. Rul. 59-354 – Compensation paid to members of an Indian tribal council for their services as council members does not constitute wages for FICA, FUTA, and the collection of income tax at source on wages.
RS 01901.700 – Social Security Administration’s Program Operations Manual System – payments to members of an Indian tribal council for their services as council members are excluded from FICA withholding, FUTA, and the collection of income tax under the provisions of Rev. Rul. 59-354. As a result, such excluded wages are not covered under either social security or Medicare. Note: Earnings posted for members of Indian tribal councils for tax years 2005 and earlier should remain on earnings records and used in applicable benefit computations.
As American citizens, members of an Indian Tribe are subject to tax on all income unless an exception is expressly provided for by a federal statute or applicable treaty. No such statutory or treaty provision exempts from income payments made by an Indian tribe to the members of the tribe for service as an Indian tribal council members.
IRC Sections 3121(a), 3306(b) and 3401(a), along with the related regulations, define wages for FICA, FUTA, and federal income tax withholding, respectively. These definitions generally include all amounts paid for employment. The provisions do not differentiate whether the payments are made in cash or in a medium other than cash.
Revenue Ruling 59-354 sets forth a limited employment tax exception for amounts paid to tribal council members for services performed by them as council members. The revenue ruling holds that while these amounts are includible in the council member's gross income, they do not constitute wages for purposes of FICA, FUTA, and Federal income tax withholding. This holding is based on “[a] review of many court decisions and legislative enactments” focusing on the powers vested in any Indian tribe or tribal council by existing law. These decisions and enactments precluded a conclusion that the services performed by council members in their capacities as council members constituted employment for Federal employment taxes purposes. Therefore, the Revenue Ruling holds that the amounts paid to tribal council members for services performed by them as tribal council members were not wages for FICA, FUTA, and the collection of income tax at the source of wages.
This exception does not apply to salaries paid to:
• tribal council members for services performed in another capacity (other than as a council member),
• tribal council employees who are not tribal council members,
• employees of tribal business enterprises.
Because of this exception, wages paid to tribal council members for services rendered as tribal council members will not be used to calculate social security or Medicare benefits. This is a change effective for calendar years 2006 and thereafter.
Issue Indicators or Audit Tips
An inspection of Forms W-2 filed by the assigned tribe or tribal entity should be part of your examination procedures. For entities with many employees, request the information for the Information Return Analysis System (IRAS) program to assist in your inspection.
When completing the inspection, any employees with no social security or Medicare wages reported should be investigated further to determine whether the W-2 recipients were tribal council members for the year being reviewed and whether the amount reported in box 1 reflects the correct compensation for the council member named.
During the initial interview, verify that the tribe or tribal entity was familiar with the provisions of Revenue Ruling 59-354. If not, provide a copy of the ruling or help them locate it on the internet. If any FICA taxes were erroneously paid, notify your manager of the issue and help the tribe or tribal entity recover any overpayment.
Verify that only wages paid to council members for their services as council members were excluded from social security and Medicare withholding.