Fishing rights-related income is exempt from federal and state taxes if it meets certain criteria stated in IRC Section 7873.
Is income earned from fishing taxable to Indians?
Members of Indian tribes with recognized fishing rights and qualified Indian entities of these tribes qualify for this exemption provided they meet certain criteria. Tribal members’ wages paid by another tribal member or a qualified Indian entity that are directly related to fishing rights-related activities are also exempt from income, Social Security, Medicare and unemployment taxes.
Note: Treaty fishing rights-related income that is exempt from Social Security, Medicare and unemployment taxes will result in reduced benefits under those programs.
What are recognized fishing rights?
IRC Section 7873 states the exemption from taxation would apply to fishing rights secured as of March 17, 1988 by one of the following:
- Treaties between the United States and the Indian tribe
- Executive Order
- Act of Congress
Your responsibilities as an employer
As an employer exercising fishing rights-related activities you should:
- Verify your status as a qualified Indian entity.
- Verify your employee’s proof of tribal membership.
- Verify time allocated to fishing versus non-fishing activity. For example, consider a game warden that is responsible for protecting other wildlife and has other duties, as well as patrolling the treaty waters of his tribe. His employer should verify the percentage of time he engages in fishing rights-related activities of his tribe.
- Maintain records to support each employee’s time allocation.
- Maintain records to support the 90% gross receipts rule.
- Do not include exempt wages on the following forms:
- Wages paid for non-fishing activities are subject to all applicable employment taxes and employment tax reporting, including Form W-2.
- If only fishing rights-related income is paid to an individual, no Form W-2 is required.
- A letter stating the amount and tax-exempt nature of his/her wages may be issued to the employee to be used for various non-tax purposes, such as bank loans.
Retirement Plans and IRAs
Compensation Indians earn from a fishing rights-related activity is eligible for qualified retirement plan contributions. The income can also be used for contributions to an IRA, but an IRA deduction isn’t allowed.
Exempt fishing rights-related income deposited into an IRA remains exempt when withdrawn. However, any amounts earned from the contributions are considered taxable upon withdrawal.
Earned Income Tax Credit (EITC)
Treaty fishing rights related income does not qualify when calculating the EITC. The EITC is calculated based on a person’s earned income. Earned income includes wages, salaries, tips and other employee compensation, but only if the compensation is includible in gross income. Earned income also includes net income from self-employment.
Indian Tribe A has a treaty signed prior to March 17, 1988 that grants fishing rights in all waters in State S. Individual V owns and manages 100% of Company F. Individual V is a member of Tribe A. Company F harvests fish in Tribe A’s treaty waters. Company F hires Employee W. Employee W is also a member of Tribe A. Company F is a qualified Indian entity. Company F’s income is exempt from income tax. Income derived by Individual V and Employee W are exempt from federal income, self-employment, FICA and unemployment taxes.
Indian Tribe B has a treaty signed prior to March 17, 1988 that grants fishing rights in the territorial waters off State T. Company G is 100% owned and managed by Tribe B and its members. Company G harvests fish in Tribe B’s treaty waters. Employees X and Y are members of Tribe B. Employee Z is a member of Tribe C, which doesn’t share the fishing rights in Tribe B’s treaty waters. Company G is a qualified Indian entity. Employees X and Z are fishermen who spend 100% of their time harvesting fish in Tribe B’s treaty waters. Employee Y is a tribal game warden who spends 60% of her time on treaty fishing related duties and 40% of her time on duties related to hunting. Company G’s income is exempt from income tax. Income derived by Employee X is exempt from federal income, FICA and unemployment taxes. Only 60% of Employee Y’s income is exempt from such taxes. The remaining 40% of Employee Y’s wages and 100% of Employee Z’s wages are subject to all regular employment taxes.
Company H is owned by members of Indian Tribe D and Indian Tribe E. Tribes D and E have a treaty signed prior to March 17, 1988 that grants them fishing rights in River U. Company H receives 80% of its gross receipts from processing fish harvested in River U. It receives the remaining 20% from processing fish harvested elsewhere. Because Company H is a processor and less than 90% of its gross receipts is from fishing rights-related activities of Tribes D and E, it isn’t a qualified Indian entity. Therefore, none of the income earned by Company H is excluded from income tax as fishing rights-related income. In addition, wages paid by Company H to its employees are subject to all regular employment taxes.
Indian Tribes J and K each have a treaty signed prior to March 17, 1988 that grants fishing rights in Lake L and Lake M, respectively. Company N is 100% owned and managed by members of Tribes J and K and harvests fish in Lakes L and M. Individual O is a member of Tribe J and is employed by Company N. Individual O spends 70% of his time fishing Lake L and 30% of his time fishing Lake M. Company N is a qualified Indian entity. Company N’s income is exempt from income tax. Wages paid to Individual O are 70% exempt from federal income, FICA and unemployment taxes. The remaining 30% is subject to all regular employment taxes because Tribe J doesn’t have treaty fishing rights in Lake M.