Tribal council members are employees
An Indian tribe may pay its members for services they perform as tribal council members. The tribe must report the income as wages to the IRS on Form W-2. Though the tribe does not withhold, the tribal council member is still required to pay federal income taxes. Note: Tribes should not report this income on Form 1099-MISC, Miscellaneous Income (PDF).
Reporting tribal council pay
Revenue Ruling 59-34 (PDF) states that tribes report wages they pay to their members for tribal council member services, but they do not withhold. When you complete Form W-2, report the income in box 1 "Wages, tips, other compensation." Additionally, in box 14 "other" you should indicate Revenue Ruling 59-354. This will show why there are no amounts listed in the boxes for federal income tax withheld (box 2) or FICA (boxes 3, 4 and 7).
It is a good practice for tribes to provide the council member with either a copy of the revenue ruling or a statement advising them that their Form W-2 is treated differently. Tribal council members will need to report the income and pay federal taxes when they file their Form 1040. The IRS may also require estimated tax payments from the council members. Some tribes give council members the option to have federal income taxes voluntarily withheld to avoid the estimated tax requirements.
Note: Tribal council members can now obtain Social Security and Medicare coverage provided their Indian tribe has entered into a voluntary agreement with the Commissioner of the Social Security Administration pursuant to the Tribal Social Security Fairness Act of 2018, also known as a Section 218A agreement. Wages paid to tribal council members pursuant to a Section 218A agreement are subject to FICA. Such wages remain exempt from FUTA and federal income tax withholding.
What if the tribal council member is employed in another capacity with the tribe?
If the tribe employs the council member in another capacity, the council member is an employee subject to income tax withholding and FICA with respect to that position.
The tribe may elect to issue a separate Form W-2, Wage and Tax Statement, for each position held by the council member.