Contents
Introduction .............................................................................................................................1
Earned Income and Investment Income................................................................................1
Wages/Self-Employment Income..................................................................................... 1
Tip Income........................................................................................................................ 1
Passive Income................................................................................................................... 2
Investment Income ........................................................................................................... 2
Distributions ............................................................................................................................4
Per Capita Distributions ................................................................................................... 4
General Welfare Distributions........................................................................................... 4
Income Exempt from Federal Taxes.......................................................................................4
Introduction
Federally recognized Indian tribal governments aren’t subject to federal income tax but they
must pay employment tax on wages paid to employees. Members of a federally recognized
Indian tribe are subject to federal income and employment tax and the provisions of the Internal
Revenue Code (IRC), like other United States citizens.
Determinations on taxability must be based on a review of the IRC, treaties and case law. Rev.
Rul. 67-284, 1967-2 C.B. 55 states there is no provision in the IRC exempting amounts received by
an ”individual” from federal income tax solely on the grounds that the individual is a member of
a federally recognized Indian tribe. In addition to the exemptions enjoyed by other U.S. Citizens,
individual Indians may enjoy exemptions that derive plainly from treaties or agreements with the
Indian tribes concerned, or some act of Congress dealing with their affairs.
Discusses the taxability of common income types,
This publication:
Provides resources for more information, and
Provides guidance on reporting income on the individual’s federal income tax return and the
correct terminology to use to identify the income source on the return. These identiers help
ensure that income is correctly interpreted during the return processing.
Earned Income and Investment Income
Wages/Self-Employment Income
In most situations, members of federally recognized tribes who work for an employer or who
are self-employed are subject to federal income taxes on wages and self-employment income
earned. The amount received from an employer (Form W-2 wages) is reported on the “wages”
line of the individual’s tax return, while self-employment income is reported on Schedule C,
Profit or Loss From Business. They are subject to both income and FICA tax (including self-
employment tax). Generally, your employer must:
Withhold the employee’s share of taxes under the Federal Insurance Contributions Act (FICA),
Withhold federal income tax from employees’ wages, and
Pay federal employment taxes on wages paid to employees.
Note: IRC Section 7873 provides an exemption for income earned from the exercise of treaty-
based fishing rights.
Tip Income
Tip income is fully taxable, regardless of the source, and tips reported to the employer must be
included on the employee’s Form W-2, Wage and Tax Statement. If an employee receives $20
or more a month in cash tips, they must report 100% of those tips to the employer through a
written report. Cash tips include tips paid by cash, check, debit card and credit card. The written
report should include tips paid to the employee for charge customers, tips received directly from
customers and tips received from other employees under any tip sharing arrangement. Tips not
reported to the employer must be shown separately on the employee’s Form 1040, U.S. Individual
Income Tax Return, and Form 4137, Social Security and Medicare Tax on Unreported Tip Income,
must be attached.
For more information read Publication 531, Reporting Tip Income, Publication 3148, Tips
on Tips - A Guide to Tip Income Reporting for Employees Who Receive Tip Income, and
Publication 1244, Employee’s Daily Record of Tips and Report of Tips to Employer.
Passive Income
All forms of passive income are taxable unless excludable by law. There are two kinds of passive
activities:
1. Trade or business activities in which you do not materially participate during the year, and
2. Rental activities.
See Publication 925, Passive Activity and At-Risk Rules, for more information.
Investment Income
Income earned from investments, including interest, dividends, royalties, annuities and capital
gains, is generally includible in gross income and is taxable.
Almost everything you own and use for personal or investment purposes is a capital asset.
Examples are your home, household furnishings and stocks or bonds. When you sell a capital
asset, the difference between the amounts you sell it for and your basis, which is usually what
you paid for it, is a capital gain or a capital loss.
This must be distinguished from income earned from the use of restricted individual allotments
that are held in trust by the U.S. government. There is a limited exception from tax for income
directly derived from alloted land held in trust. See “Income Exempt from Federal Taxes” for
additional information.
All income earned from reinvestments (regardless of whether the reinvested money was taxable
or nontaxable) is generally includible in gross income subject to federal income tax.
The following table provides information on the most common types of earned and investment
income.
Type of Income Taxable Where Reported Reference
Wages received as an
employee, Form W-2
Yes “Wages, salaries,
tips” line on Form
1040
Rev. Rul. 67-284, 1967-2 C.B. 55
Tips from casinos
and other sources
– reported to the
employer
Yes “Wages, salaries,
tips” line on Form
1040
Publication 531, Reporting Tip Income
Tips from casinos
and other sources –
not reported to the
employer
Yes Form 4137, attach to
Form 1040
Employee must file Form 4137 if cash
and charge tips totaling $20 or more
in a calendar month were not reported
to the employer. The $20 rule applies
separately to the tips received while
working for each employer and not
to the total received. Also, must file if
Form W-2, box 8 shows allocated tips
that must be reported as income.
2
Type of Income Taxable Where Reported Reference
Amounts paid to Indian
Tribal Council members
Yes Appropriate “wages”
line on Form 1040
Income is listed on the individual’s
W-2. Although includible in gross
income, these amounts do not
constitute “wages” for purposes of:
• FICA,
FUTA, and
federal income tax withheld.
Rev. Rul. 59-354, 1959-2 C. B. 24
IRC Section 3121(b)(22)
Amounts paid to Indian
Tribal Council members
covered by a 218A
Agreement
Yes Appropriate “wages”
line on Form 1040
Income is listed on the individual’s
W-2. Although includible in gross
income, these amounts do not
constitute “wages” for the purposes
of:
FUTA, and
federal income tax withheld.
Rev. Rul. 59-354, 1959-2 C. B. 24
These amounts are wages for FICA
purposes.
IRC Section 3121(d)(4)
In business for
yourself; self-employed
Yes Form 1040 Schedule
C and Schedule SE
Publication 334, Tax Guide for Small
Business (For Individuals Who Use
Schedule C)
Reinvested “exempt”
income
Yes Form 1040 and any
applicable return or
schedule based on
the character of the
investment
Superintendent of Five Civilized Tribes
v. Commissioner, 295 U.S. 418 (1935)
Income from trust
land leased from the
tribe or another Indian
(for example, cattle
ranching on tribal
trust land used under
grazing permits)
Yes Form 1040 and any
applicable return or
schedule based on
the character of the
income
Has been held taxable on the
ground that the individual Indian has
no present or potential ownership
interest. Holt v. Commissioner, 364
F.2d 38 (8th Cir. 1966), cert. denied,
386 U.S. 931 (1967)
Income from allotted
land that has been
removed from trust
Yes Form 1040 and any
applicable return or
schedule based on
the character of the
income
Income earned from the land, or
gains derived from sale of the land, is
fully taxable once the allotted land is
removed from trust. Shepard v. U.S.,
162 F. Supp. 313, 315 – 316 (E.D. Wis.
1958)
Income from logging
operations on
reservation lands held
in trust for the tribe
Yes Form 1040 and any
applicable return or
schedule based on
the character of the
income
Fry v. U.S., 557 F.2d 646 (9th Cir.
1977), cert. denied 434, U.S. 1011
(1978)
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Distributions
Per Capita Distributions
The distribution of money or other things of value to all members of the tribe that are paid
directly from the net revenues of any tribal gaming activity or other sources of income, such as
income derived from unallotted common tribal lands is generally taxable and is usually reported
by the tribe on Form 1099-MISC, Miscellaneous Income.
However, per capita distributions made from funds the Secretary of the Interior holds in a
tribal trust account are generally excluded from the gross income of the members of the tribe
receiving the per capita distributions. See Notice 2015-67.
Tribal members report taxable per capita distributions on Form 1040, Schedule 1, Additional
Income and Adjustments to Income, on the line item “other income.” We suggest you describe
the type of income on the blank space on the “other income line” for example, “Indian gaming
proceeds,” “Indian gaming per capita distribution” or “non-gaming business proceeds.” Report
any applicable withholding shown on Form 1099-MISC as “federal income tax withheld” on Form
1040.
General Welfare Distributions
General welfare distributions are payments the tribe has set aside for special purposes or
programs, such as payments made for social welfare, medical assistance, education, housing or
other similar specifically identified needs. Under the Tribal General Welfare Exclusion Act of
2014, IRC Sections 139D and 139E, Rev. Proc. 2014-35 and Notice 2015-34 such payments
are excludable from gross income if certain criteria are met. Generally, the tribe will not
have to issue a Form 1099 for a general welfare payment to individual Indians.
Income Exempt from Federal Taxes
The exclusion of an amount from gross income for federal income and employment tax purposes
must derive plainly from treaties or agreements with the Indian tribes concerned, or some act
of Congress dealing with their affairs. The following table summarizes the treatment of the most
common types of exempt income.
Income Reference
Per capita payments from funds and the Secretary
of the Interior holds in a tribal trust account
25 U.S.C. Section 117b(a) and 25 U.S.C. Section
1407; Notice 2015-67
General welfare doctrine distributions Payments made under social benefit programs
for promotion of the general welfare may be
excludable from gross income. See the Tribal
General Welfare Exclusion Act of 2014, IRC
Section 139E, Notice 2015-34, Rev. Proc. 2014-
35
Certain benefit payments
Payments made from funds under both Title II-A
of the Economic Opportunity Act of 1964 and
Manpower Development and Training Act of 1962
to unemployed and underemployed residents of
an Indian reservation. Rev. Rul. 68-38, 1968-1 C.
B. 446
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Income Reference
Income derived by Indians from exercise of treaty-
based fishing rights
No tax is imposed on income derived by a
member of an Indian tribe directly or through a
qualified Indian entity or by a qualified Indian
entity from a fishing rights-related activity of
the tribe. This applies to federal income and
self-employment taxes, and to employment
taxes, including Social Security, Medicare and
unemployment tax. IRC Section 7873
Income derived directly from allotted and
restricted Indian lands
Income derived from the land is exempt if:
(1) The land in question is held in trust by the
United States government;
(2) such land is restricted and allotted and is held
for an individual noncompetent Indian, and not for
a tribe;
(3) the income is “derived directly” from the land;
(4) the statute, treaty or other authority involved
evinces congressional intent that the allotment
be used as a means of protecting the Indian until
such time as he becomes competent; and
(5) the authority in question contains language
indicating clear congressional intent that the land,
until conveyed in fee simple to the allottee, is not
to be subject to taxation.
All five tests must be met, or the income is
taxable.
This includes income from certain rentals
(including crop rentals), royalties, proceeds of
sales of the natural resources of the land, and
income from the sale of crops grown on the land
and from the use of the land for grazing purposes.
Rev. Rul. 67-284, 1967-2 C.B. 55; Rev. Rul. 62-16,
1962-1 C.B. 7; Rev. Rul. 56-342, 1956-2 C.B. 20
Income from allotted lands under certain
programs administered by the Stabilization and
Conservation Service of the Department of
Agriculture or similar programs
The nature of the payment and the program under
which it was issued determine taxability. Note: If
you receive a Form 1099-G, Certain Government
Payments, list the amount on Schedule F with
a note that you are a member of a federally
recognized tribe and refer to Rev. Rul. 69-289,
and then back the amount out of income.
If you receive an IRS notice, but do not need to
file, respond with the same note.
Rev. Rul. 69-289, 1969-1 C.B. 34
Income directly derived from the sale of reindeer
or reindeer products by Alaskan natives
The Reindeer Industry Act of 1937 (P.L. 75-413
Chapter 897), P.L. No. 99-514, 100 Stat. 2085,
2873 (Oct. 22, 1986), Section 1709 and Hadley
v. U.S. 1993 U.S. Dist. LEXIS 13467 (D. Alaska,
1993)
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