# Tax Exempt & Government Entities > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3A63a2d8a521adc2df ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text Tax Exempt & Government Entities INDIAN TRIBAL GOVERNMENTS Employment Tax for Indian Tribal Governments Publication 4268 (Rev. 8-2022) Catalog Number 37833J Department of the Treasury Internal Revenue Service www.irs.gov Table of Contents Chapter 1 Introduction to Employment Tax for Indian Tribal Governments............................................... 1 Chapter 2 Employee or Independent Contractor.......................................................................................... 4 Chapter 3 Treatment of Certain Payments.................................................................................................... 9 Chapter 4 Tipped Employees ......................................................................................................................18 Chapter 5 Employee Business Expense Reimbursements........................................................................24 Chapter 6 Fringe Benefits.............................................................................................................................27 Chapter 7 Retirement Plans.........................................................................................................................31 Chapter 8 Cafeteria Plans.............................................................................................................................40 Chapter 9 Scholarships & Educational Assistance.................................................................................... 41 Chapter 10 Earned Income Tax Credit .........................................................................................................44 Chapter 11 Employment Taxes......................................................................................................................45 Chapter 12 Preparation of Payroll Checks....................................................................................................57 Chapter 13 Form 941, Employer’s Quarterly Federal Tax Return................................................................62 Chapter 14 Form 943, Agricultural Employees.............................................................................................76 Chapter 15 Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.............................81 Chapter 16 Form 945, Annual Return of Withheld Federal Income Tax.....................................................84 Chapter 18 Electronic Filing Requirements for Form W-2, Wage and Tax Statement...............................92 Chapter 19 Reporting Compensation & Non-Compensation Payments on Form 1099-MISC & Form 1099-NEC...........................................................................................................................95 2 Chapter 20 Records Retention.................................................................................................................... 100 Chapter 21 Penalties.................................................................................................................................... 103 Chapter 22 IRS Notices and Letters............................................................................................................107 Chapter 23 The Collection Process.............................................................................................................110 Glossary of Terms ...................................................................................................................... 113 3 Chapter 1 Introduction to Employment Tax for Indian Tribal Governments The office of Indian Tribal Governments (ITG) at the Internal Revenue Service was established to help Indian tribes address their federal tax matters. ITG uses partnership opportunities with Indian tribal governments, tribal associations and other federal agencies to respectfully and cooperatively meet the needs of the Indian tribal governments and the federal government, and to simplify the tax administration process. This publication provides information and tips for maintaining good records, preparing payroll, and filing and depositing employment taxes. It is provided for general information only and should not be cited as legal authority. Visit www.irs.gov/tribes for further information on any of the topics covered in this publication. Are Federally Recognized Tribal Governments Subject to Employment Taxes? Generally, Indian tribes in their role as employers are subject to federal employment tax laws and procedures. It is a well-established principle of tax law that in the ordinary affairs of life, Indians are U.S. citizens and are subject to the payment of federal income taxes. Where a business enterprise or political subdivision of an Indian tribe is organized and operated by the tribe itself, the enterprise is considered a private tribal activity. When workers perform services in the employ of a private tribal activity, these services also constitute employment. The federal statutes, regulations, case law, revenue rulings and other sources of tax authority establish the role of Indian tribal governments as employers. As such, tribal governments are required to follow substantially the same procedures as other employers. There are some special provisions that apply to tribal governments addressed in later chapters of this publication. If you have questions about anything contained in or omitted from this publication, go to www.irs.gov/tribes. Employment Tax Requirements Employers are required to withhold and pay employment taxes. Employment taxes include income tax, Social Security and Medicare taxes (also known as Federal Insurance Contributions Act (FICA) taxes) withheld from an employee’s wages, plus the employer’s share of FICA taxes and federal unemployment (FUTA) taxes, when applicable. The withheld (employee’s) portion of employment taxes is referred to as “trust fund” taxes. FUTA is addressed in Chapter 15. In addition to your responsibilities for withholding, depositing and reporting federal taxes, your state taxing authority or tribal governmental taxing agency may also have tax reporting requirements. This publication is designed to assist you in complying with federal tax requirements. You should contact your state and, in some cases, tribal taxing agencies for information concerning state and tribal tax requirements. Who is an Employee? Employees are defined in the Treasury Regulations as every individual who performs services subject to the will and control of an employer, both as to what is to be done and how it is to be done. The right to discharge or to fire an employee is an important indicator that the person having the right to discharge is an employer. The employee may have considerable discretion and freedom of action as long as the employer has the legal right to control both the method and the result of the employee’s work. 1 Chapter 1: Introduction to Employment Tax for Indian Tribal Governments An employee may be called a partner, an agent or an independent contractor and still meet the criteria of an employee. The description is immaterial if the legal relationship of employer and employee exists. Managers and other supervisory personnel are employees. A corporate officer is an employee. Tribal council members are employees, but receive special treatment for purposes of employment taxes. Tribal council members and other situations unique to Indian tribes are discussed in Chapter 3. Who is an Employer? The Treasury Regulations define an employer as any person for whom an employee performs or performed any service. An employer may be an individual, a corporation, a partnership, a trust, an estate, an Indian tribe, educational institutions, organizations, federal/state/local governmental entities and other entities. In addition to this publication, we offer a number of products and services to assist you. Workshops1 available for presentation at your location „ Employment Tax „ Gaming Tax „ Tip Reporting & Tip Agreements „ Title 31 (Bank Secrecy Act Overview & Compliance) The “ITG Tax Kit” is a webpage available at www.irs.gov/government-entities/indian-tribalgovernments/itg-tax-kit, which contains the following forms, publications and web links for additional services that are the most useful to tribal entities (The freely available Adobe Acrobat Reader software is required to view, print and search the forms and publications): Forms „ Form W-2 - Wage and Tax Statement „ Form W-2G - Certain Gambling Winnings „ Form W-3 - Transmittal of Wage and Tax Statements „ Form W-4 - Employee’s Withholding Certificate „ Form W-9 - Request for Taxpayer Identification Number and Certification „ Form 11-C - Occupational Tax and Registration Return for Wagering „ Form 720 - Quarterly Federal Excise Tax Return „ Form 730 - Monthly Tax Return for Wagers „ Form 940 - Employer’s Annual Federal Unemployment (FUTA) Tax Return „ Form 941 - Employer’s Quarterly Federal Tax Return 1 2 Additional topics not listed can be provided as requested/needed www.irs.gov/tribes Chapter 1: Introduction to Employment Tax for Indian Tribal Governments „ Form 941-X - Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund „ Form 941-X - Instructions „ Form 944 - Employer’s Annual Federal Tax Return „ Form 944 - Instructions „ Form 945 - Annual Return of Withheld Federal Income Tax „ Form 1042 - Annual Withholding Tax Return for U.S. Source Income of Foreign Persons „ Form 1042-S - Foreign Person’s U.S. Source Income Subject to Withholding „ Form 1096 - Annual Summary and Transmittal of U.S. Information Returns „ Form 1099-INT - Interest Income „ Form 1099-MISC - Miscellaneous Income „ Form 1099-NEC - Nonemployee Compensation „ Form 5754 - Statement by Person(s) Receiving Gambling Winnings „ Form 8027 - Employer’s Annual Information Return of Tip Income and Allocated Tips „ Form 13551- Application to Participate in the IRS Acceptance Agent Program Publications „ Publication 15 - (Circular E), Employer’s Tax Guide „ Publication 15-A - Employer’s Supplemental Tax Guide „ Publication 15-B - Employer’s Tax Guide to Fringe Benefits „ Publication 15-T - Federal Income Tax Withholding Methods „ Publication 515 - Withholding of Tax on Nonresident Aliens and Foreign Entities „ Publication 509 - Tax Calendars „ Publication 526 - Charitable Contributions „ Publication 531 - Reporting Tip Income „ Publication 1281- Backup Withholding for Missing and Incorrect Name/TIN(s) „ Publication 3908 - Gaming Tax Law and Bank Secrecy Act Issues for Indian Tribal Governments „ Publication 4268 - Employment Tax for Indian Tribal Governments4 „ Publication 5343 - Helpful Hints for Indian Tribes and Tribal Entities to Avoid Penalties on Federal Tax Deposits and Information Returns „ Publication 5424 - Income Tax Guide for Native American Individuals and Sole Proprietors Services „ SSA/IRS Reporter - Information for employers who file business returns „ EFTPS: The Electronic Federal Tax Payment System - The easiest way to pay your federal taxes „ Electronic Filing Options for Business and Self-Employed Taxpayers - Information for businesses and self-employed taxpayers who file and pay electronically 3 www.irs.gov/tribes Chapter 2 Employee or Independent Contractor It is critical that the tribe and its wholly-owned entities correctly determine whether the individuals providing services for them are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors. Employees A person who works for you may be classified as a common law employee, a statutory employee or an independent contractor. The classification of the worker determines which forms you must file and which taxes you must pay. Note: Wholly-owned tribal government entities may be exempt from federal unemployment taxes. Please refer to Chapter 15 for further information. Internal Revenue Code (IRC) Section 3121(d)(2) defines “employee” as “any individual who, under the usual common law rules applicable in determining the employer/employee relationship, has the status of an employee.” The “usual common law rules” referred to in the statute and the regulations, are those factors to which the courts have looked over the years to decide whether a person is an employee. Generally, an employer/employee relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services. This control includes the result to be accomplished by the work, the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what will be done but how it will be done. It is not necessary the employer actually direct or control the manner in which the services are performed; it is sufficient the employer has the right to do so. The right to discharge is also an important factor indicating that an employer/ employee relationship exists. In determining whether a worker is an employee or an independent contractor under the common law rules, three main categories must be considered: 1) Behavioral control, 2) Financial control, and 3) Relationship of the parties. 1) Behavioral control—Facts that show whether there is a right to direct or control how the worker does the work include: „ Instruction the business gives to the worker, such as: — How, when or where to do the work — What tools or equipment to use — What assistants to hire to help with the work — Where to purchase supplies and services — What work must be performed by a specified individual — What order or sequence to follow „ Type of training the business gives the worker 4 Chapter 2: Employee or Independent Contractor 2) Financial control—Facts that show whether there is a right to direct or control the business part of the work include: „ Significant investment—the extent of the worker’s investment „ Expenses—the extent to which the worker has unreimbursed business expenses „ Opportunity for profit or loss—the extent to which the worker can realize a profit or loss „ The extent to which the worker makes services available to others „ How the business pays the worker 3) Relationship of the parties—Facts that illustrate how the business and worker perceive their relationship include: „ Employee benefits—whether the business provides the worker with employee-type benefits „ Written contracts describing the relationship „ The permanency of the relationship „ The extent to which services performed by the worker are a key aspect of the business Even after evaluating the above factors, there will be times when it is difficult to determine whether an individual is a common law employee or self-employed and should be treated as an independent contractor. Many individuals who have personal service contracts with tribal governments may be employees rather than independent contractors. The mere existence of a contract does not mean the individual is not an employee. It’s important to the worker that the employment status be determined as quickly as possible so the earnings can be properly reported. To request a determination from the IRS as to whether a worker is an employee, file a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Further information is provided in Chapter 3. Some workers may be considered statutory employees (even though they are considered independent contractors under the common law rules) if they fall into any one of four categories and they meet three additional conditions. The law defines certain workers as employees by statute. These categories include: „ Drivers who distribute certain food products or deliver laundry or dry cleaning, „ Full-time life insurance sales agents, „ Individuals who work at home on materials and goods you supply and must be returned to you, and „ Full-time traveling or city salespersons who turn in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants or other similar establishments. See Publication 15-A, Section 1, Who are Employees? for further information. Independent Contractors The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, but not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to self-employment tax. A Form 1099-NEC, Nonemployee Compensation, should be furnished to independent contractors and filed with the IRS. An individual is not an independent contractor if they perform services that can be controlled by a payer (what will be done and how it will be done). This applies even if individuals are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed. If an employer/employee relationship exists (regardless of what 5 www.irs.gov/tribes Chapter 2: Employee or Independent Contractor the relationship is called), the individual is not an independent contractor and their earnings are generally not subject to self-employment tax. Misclassification of Employees If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you will be held liable for employment taxes for that worker (IRC Section 3509). In some instances, you may have reasonable basis for not treating a worker as an employee and may be entitled to relief under Section 530 of the Revenue Act of 1978. If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any period beginning after 1977. Workers who believe they have been improperly classified as independent contractors by an employer can use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report (on their Form 1040) the employee’s share of uncollected Social Security and Medicare taxes due on their compensation. The Voluntary Classification Settlement Program (VCSP) is an optional program that provides taxpayers with an opportunity to reclassify their workers as employees for future tax periods for employment tax purposes with partial relief from federal employment taxes for eligible taxpayers who agree to prospectively treat their workers (or a class or group of workers) as employees. To participate in this voluntary program, the taxpayer must meet certain eligibility requirements, apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS. For more information go to: Voluntary Classification Settlement Program | Internal Revenue Service. Misclassified Workers to File Social Security Tax Form Form 8919 is used to figure and report an employee’s share of the uncollected Social Security and Medicare taxes due on their compensation if they were an employee but their employer treated them as an independent contractor. By filing this form, their Social Security earnings will be credited to the employee’s Social Security record. Generally, a worker who receives a Form 1099 for services provided as an independent contractor must report the income on Schedule C, Profit or Loss from Business, and pay self-employment tax on the net profit, using Schedule SE, Self-Employment Tax. However, sometimes the worker is incorrectly treated as an independent contractor when they are actually an employee. When this happens, Form 8919 will be used by workers who performed services for an employer but the employer did not withhold the worker’s share of Social Security and Medicare taxes. In addition, the worker must meet one of several criteria indicating they were an employee while performing the services. The criteria include: „ The worker has filed Form SS-8 and received a determination letter from the IRS stating they are an employee of the firm. „ The worker has been designated as a Section 530 employee by their employer or by the IRS prior to January 1, 1977. „ The worker has received other correspondence from the IRS that states they are an employee. 6 www.irs.gov/tribes Chapter 2: Employee or Independent Contractor „ The worker was previously treated as an employee by the firm and they are performing services in a similar capacity and under similar direction and control. „ The worker’s co-workers are performing similar services under similar direction and control and are treated as employees. „ The worker’s co-workers are performing similar services under similar direction and control and filed Form SS-8 for the firm and received a determination that they were employees. „ The worker has filed Form SS-8 with the IRS and has not yet received a reply. NOTE: In the past, misclassified workers often used Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to report their share of Social Security and Medicare taxes. Misclassified workers should no longer use this form. Instead, Form 4137 should now only be used by tipped employees to report Social Security and Medicare taxes on allocated tips and tips not reported to their employers. Examples of Employees Example 1: The tribal business pays Tom $500 per week to clean the tribal office complex. Tom only works for the tribe. He doesn’t have the right to hire or fire any assistants, and he is required to personally do the work. The tribe provides Tom’s supplies and tools. Based on these facts, Tom is considered an employee and the tribe should withhold income and employment taxes. Tom will be issued a Form W-2. Example 2: Bill works as a deputy for the tribal police department. When Bill is off-duty, he has been repairing the roof of the tribal hospital. Bill doesn’t do roofing for other customers. The tribe determined when the work was to be done, provided the supplies needed and determined how Bill will be paid. Based on these facts, Bill is considered an employee of the tribe for both jobs and should be issued a Form W-2 showing the withheld income and employment taxes. Example of an Independent Contractor The tribe pays Paul $1,000 per week to clean the bingo halls. Paul operates his own janitorial service providing cleaning services to numerous entities. He has the right to hire and fire his own employees and provides his own supplies. The tribe doesn’t have the right to control Paul. Therefore, Paul is not an employee of the tribe and would be issued a Form 1099-NEC, Nonemployee Compensation, to report his compensation. If you have a question about the treatment of any of your workers, see Topic No. 762, Independent Contractor vs. Employee, at www.irs.gov/taxtopics/tc762, Publication 15A, Employer’s Supplemental Tax Guide, or go to www.irs.gov/tribes and click on the “Employment Tax for Tribes” link. 7 www.irs.gov/tribes Chapter 2: Employee or Independent Contractor Agricultural Labor (Farm Work) There are special rules for Social Security and Medicare withholding on agricultural workers. Employment taxes for farmworkers must be filed on Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, and must be separate from other workers’ employment taxes filed on Form 941. See Publication 51, Section 4, Social Security and Medicare Taxes, for more information. Crew Leaders A crew leader is an employer of farmworkers. A crew leader is a person who furnishes and pays (either on their own behalf or on behalf of the farm operator) workers to do farm work for the farm operator. If there is no written agreement between you and the farm operator stating that you are their employee and if you pay the workers (either for yourself or for the farm operator), then you are a crew leader. Crew leaders are independent contractors and should be issued Form 1099-NEC, Nonemployee Compensation, to report the nonemployee compensation. References „ Publication 15, (Circular E), Employer’s Tax Guide „ Publication 15-A, Employer’s Supplemental Tax Guide „ Publication 15-T, Federal Income Tax Withholding Methods „ Publication 51, (Circular A), Agricultural Employer’s Tax Guide „ Publication 1779, Independent Contractor or Employee „ Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding „ Form 8919, Uncollected Social Security and Medicare Tax on Wages „ Form 8952, Application for Voluntary Classification Settlement Program (VCSP) 8 www.irs.gov/tribes Chapter 3 Treatment of Certain Payments In this chapter, we’ll discuss how certain payments are treated. Some of these payments are specific to Indian tribes, while others are not. For example, payments made from fishing rightsrelated activities and payments made to tribal council members are tribal specific issues. Payments made to elected and appointed officials and those payments made as bonuses apply to all employers. The proper treatment of these payments for withholding and reporting purposes is sometimes confusing. The next four sections of this chapter discuss payments for fishing rights-related activities, tribal council members, bonuses and payments to elected and public officials. If you have questions about any of these payments, or how they are to be treated, go to www.irs.gov/tribes and click on the “Employment Tax for Tribes” link. See also Publication 15 and Publication 15A. Fishing Rights-Related Activities Any income derived by a member of an Indian tribe, either directly or through a “qualified Indian entity” (defined later in this chapter), or by a “qualified Indian entity” from a fishing-rights related activity of that member’s or entity’s tribe is exempt from federal and state taxation (income tax, income tax withholding, FICA, unemployment tax and self-employment tax). Wages are not exempt if paid by an employer who is not a member of the same tribe or is not a qualified Indian entity. Wages are also not exempt if paid to an employee who is not a member of the tribe whose fishing rights are exercised. Tribal members must fish in their own waters to be exempt. Fishing rights-related activity means an activity (including aquaculture) directly related to harvesting, processing or transporting fish harvested in the exercise of recognized fishing rights of the tribe or to selling fish, but only if members of the tribe perform substantially all the harvesting. A recognized fishing right must have been secured as of March 17, 1988, by a treaty between the tribe and the United States, by an Executive Order or an Act of Congress. 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 (defined later in this chapter). Tax Return Preparation „ Do not include exempt wages on Form 941, Form 940 or Form W-2. „ 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 an employee’s wages may be issued to the employee to be used for various non-tax purposes, such as bank loans. 9 Chapter 3: Treatment of Certain Payments Special Definitions A “qualified Indian entity” is 100% owned by a federally recognized Indian tribe or tribal members, and substantially all management functions are performed by tribal members. It may be jointly owned by more than one tribe or members of more than one tribe. 90% rule for processors and transporters - If the entity engages to any extent in any substantial processing or transporting of fish, then at least 90% of the annual gross receipts of the entity must be derived from the exercise of protected fishing rights of tribes whose members own at least 10% of the equity interests in the entity. Note: If a processor or transporter fails to meet the 90% rule, all income from that year is taxable. Examples of categories of tribal employees whose wages may be exempt or partially exempt: „ Fishers, processors (including smoking), transporters „ Hatchery workers „ Environmental and conservation workers „ Enforcement staff and tribal court personnel „ Support staff, for example, secretary, accounting, payroll „ Program director, executive director „ Fishery biologist „ Fishery aide „ Fishery and habitat policy analyst „ Water quality biologist „ Habitat inventory and assessment technician „ Legislative analyst „ Information and education services „ Data analyst „ Policy analyst „ Public information staff Tribal Council Members 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. Revenue Ruling 59-354 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. Note: Tribes with voluntary agreements under Section 218A of the Social Security Act should see Tribal Social Security Fairness Act of 2018, below. Tribal officials are liable for federal income tax on these wages, and some may voluntarily have this tax withheld to avoid making quarterly estimated tax payments or personal year-end deficiencies. Council members’ salaries will be shown in box 1, Wages, tips, other compensation, of the Form W-2. Additionally, in box 14, Other, you should include “Revenue Ruling 59-354” and the total amount subject to 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). 10 www.irs.gov/tribes Chapter 3: Treatment of Certain Payments Note: If the tribal council member requests to have federal income taxes withheld, box 2 will reflect these voluntarily-withheld amounts. Voluntary withholding of FICA taxes to receive Social Security and Medicare credit isn’t generally permitted, except as provided under the Tribal Social Security Fairness Act of 2018 discussed in the next section. Exhibit 3.1 (at the end of this chapter) is a sample of a Form W-2 for a tribal council member. Tribal council members may receive two Forms W-2, one for tribal council member wages and one for services performed in another capacity. See Form W-2 instructions for further information. Part of your responsibility as an employer is to provide the council member with either a copy of Revenue Ruling 59-354 or a statement advising them that their W-2 is treated differently (such as, salaries do not constitute wages for purposes of FICA or federal withholding taxes per Revenue Ruling 59-354). Tribal Social Security Fairness Act of 2018 The Tribal Social Security Fairness Act of 2018 allows federally recognized Indian tribes to extend Social Security coverage to tribal council positions voluntarily through an agreement with the Commissioner of Social Security under Section 218A of the Social Security Act. Under this new legislation, if a tribe chooses to enter into an agreement for coverage, then all tribal council positions are covered. Coverage will apply to any current and future tribal council members and cannot be terminated once granted. Interested tribes need to complete the Tribal Council Member Coverage Agreement to request coverage. Tribes will communicate directly with SSA regional specialists to execute the agreements. Coverage is effective the month after the month the agreement is signed, unless the tribe requests a later effective date. Tribes may request retroactive coverage for periods for which they have already paid FICA taxes and not received a refund. Retroactivity can go back as far as needed without limit as long as FICA taxes were paid. If you did not pay FICA during the retroactive period, you will not be charged. You cannot pay into the retroactive period. Visit the SSA at www.ssa.gov/people/aian/ for more information on the Tribal Social Security Fairness Act Claim for Over Collected Employee Social Security and Medicare Taxes If the Indian tribal government withheld Social Security taxes and Medicare taxes from a tribal council member’s salary, those over collected taxes may be refunded to the tribal council member in one of two ways: 1) by the tribal council member filing Form 843, Claim for Refund and Request for Abatement, or 2) the tribal government may file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, and refund the member’s share of FICA taxes (to correct prior period Forms 941). When filing Form 941-X, a written statement must be obtained from each tribal council employee stating that the employee has not claimed, and will not claim, refund or credit for the amount of over collection. The Indian tribal government can make a claim for both the employer and the employee shares of Social Security and Medicare taxes for those employees who provide the required written statements. 11 www.irs.gov/tribes Chapter 3: Treatment of Certain Payments For those employees who do not provide statements, you (as the employer) can make a claim for only the employer’s share of Social Security and Medicare taxes. Next, complete the Form 941-X for each Form 941 being corrected. When completing the Form 941-X, be sure to complete Part 1 by checking the appropriate boxes and signing at the bottom of Part 5. The tribe then reimburses the council members for their share of the Social Security and Medicare taxes. Finally, complete Form W-2c, Corrected Wage and Tax Statement, for each employee for whom adjustments were made to Social Security and Medicare taxes. This corrects the previous Form W-2 filed. Submit the Forms W-2c along with the Form W-3c to the Social Security Administration. Benefit Payments for Training or Retraining Revenue Ruling 63-136 addresses the issue of benefit payments, received by individuals undergoing training or retraining under the Area Redevelopment Act (75 Stat. 47-63), or the Manpower Development and Training Act of 1962 (76 Stat. 23-33). Examples of state-funded retraining programs are the Job Training Partnership Act (JTPA) and the Work Investment Act (WIA). A tribe may establish its own work employment program. As stated in Revenue Ruling 63-136, these benefit payments are not taxable. The payments are intended to aid the recipients in their efforts to acquire new skills to prepare them for better employment opportunities. As such, the payments fall into the same category as other unemployment relief payments and are not includible in the recipient’s gross income. Bonuses Bonuses that the tribe pays an employee are includable in the employee’s income and are shown as wages on Form W-2. If the bonuses are paid to the employee in the form of goods or services, the fair market value of the goods or services will be added to the employee’s income. Bonuses are considered supplemental wages paid in addition to the employee’s regular wages. How you withhold on bonuses depends on whether the bonus is identified as a separate payment from regular wages. Bonus Combined with Regular Wages If you pay bonuses with regular wages but do not specify the amount of each, withhold income tax as if the total were a single payment for a regular payroll period. Bonus Identified Separately from Regular Wages If you pay bonuses separately (or combine them in a single payment and specify the amount of each), the income tax withholding method depends partly on whether you withhold income tax from your employee’s regular wages. If you withheld income tax from an employee’s regular wages, you can use one of the following methods for the bonus: a) Withhold a flat 22% (no other percentage allowed). b) Add the bonus and regular wages for the most recent payroll period this year. Figure the income tax withholding as if the total were a single payment. Subtract the tax already withheld from the regular wages. Withhold the remaining tax from the bonus. 12 www.irs.gov/tribes Chapter 3: Treatment of Certain Payments If you did not withhold income tax from the employee’s regular wages, use method b, above. (This would occur, for example, when the value of the employee’s withholding allowances claimed on Form W-4 is more than the wages.) Regardless of the method you use to withhold income tax on bonuses, they are subject to Social Security, Medicare and FUTA (if applicable) taxes. Example 1: – Form W-4 after 2020 You pay Sharon a base salary on the first of each month. She is single and didn’t complete Steps 2, 3 or 4 on the Form W-4. Her July 1 pay is $2,000. Using the current wage bracket tables, you withhold $95 using the standard rate. On July 15 you pay Sharon a bonus of $1,000. Electing to use supplemental payment method b, you: 1) Add the bonus amount to the amount of wages from the most recent pay date ($1,000 + $2,000 = $3,000). 2) Determine the amount of withholding on the combined $3,000 ($213 using the wage bracket tables). 3) Subtract the amount withheld from wages on the most recent pay date from the combined withholding amount ($213 - $95 = $118). 4) Withhold $118 from the bonus payment. Example 2: The facts are the same as above, except you elect to use the flat rate method of withholding on the bonus. You withhold 22% of $1,000, or $220, from Sharon’s bonus payment. Example 3: – Form W-4 Prior to 2020 You pay John a base salary on the first of each month. His most recent Form W-4 is from 2018. He is single and claimed one withholding allowance. He didn’t enter an amount for additional withholding. His July 1 pay is $1,000. You decide to use the Wage Bracket Method of withholding. Using Worksheet 3 and the withholding tables in section 3 of Pub. 15-T, you withhold $29 from this amount. In August John receives his salary and a bonus of $500, which you combine with regular wages and don’t identify separately. You withhold based on the total of $1500. The correct amount of withholding from the tables is $78. Stipend Payments A stipend is a fixed sum of money paid periodically for services or to defray expenses. The fact that remuneration is termed a “fee” or “stipend” rather than salary or wages is immaterial. Wages are generally subject to employment taxes and should be reported on Form W-2. Refer to Publication 15 (Circular E), Employer’s Tax Guide, section 5, Wages and Other Compensation, for rules on accountable and nonaccountable plans for employee business expenses. Stipends or fees paid to an employee or an independent contractor are generally reportable. However, if the stipend is intended to be a reimbursement of expenses and the requirements for an accountable plan are met, the stipend may not be reportable. Elected and Public Officials To determine whether an elected or public official is an employee, tribal governments would apply the ‘common law’ factors. The tribal government should use the three-prong test to determine whether a common law employment relationship exists. The three prongs are: 1) Behavioral control; 2) Financial control; and 3) The relationship of the parties. 13 www.irs.gov/tribes Chapter 3: Treatment of Certain Payments Each determination is based upon its unique facts and circumstances. If there is any question whether a person is a public official, obtain a copy of, or a reference to, the statute or ordinance relating to the establishment of the position. For more information on employer-employee relationships, refer to Chapter 2 of Publication 15 and Chapter 2 of Publication 15-A, Employer’s Supplemental Tax Guide. If you would like the IRS to determine whether services are performed as an employee or independent contractor, you may submit Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Election Workers If an election worker’s compensation is subject to withholding of FICA tax, reporting is required for all compensation, regardless of the amount. If an election worker’s compensation is not subject to withholding of FICA tax, information reporting is required for payments that aggregate $600 or more in a calendar year. See Revenue Ruling 2000-6 to determine when an election worker’s compensation is subject to withholding of FICA tax. In the following examples, all the wages paid have been for services as an election worker only. 1) If wages paid during the year are less than $600, no Form W-2 is required. The wages are not subject to FICA or federal income tax withholding. The election worker must report the earnings as wages. 2) If wages paid during the year are between $600 and $1,999, file a Form W-2. FICA and federal income tax withholding are not required. The election worker must report the earnings as wages. 3) If wages are equal to or greater than $2,000 for 2022 (this amount is indexed for inflation), a W-2 must be issued. The wages are subject to FICA, but not federal income tax withholding. The election worker must report the earnings as wages. For later years, see Special Rules for Various Types of Services and Payments in Publication 15 for the FICA wage requirement for Election Workers. 14 www.irs.gov/tribes Chapter 3: Treatment of Certain Payments Per Capita Payments When a tribe distributes revenue to all its members or groups of members, it has provided a per capita payment. Under IGRA, a federally recognized Indian tribe may use net revenues from Class II or Class III gaming activities to make per capita payments to its tribal members only if four conditions are met: 1. It must prepare a plan to allocate revenues only for IGRA authorized uses to: — fund tribal government operations or programs, — provide for the general welfare of the Indian tribe and its members, — promote tribal economic development, — donate to charitable organizations, or — fund local government and agency operations. 2. The Secretary of the Interior must approve the revenue’s use, particularly when it’s for funding tribal government operations or programs and for promoting tribal economic development. 3. The tribe must protect and preserve minors’ and other legally incompetent persons’ interests who are entitled to receive any of the per capita payments. The tribe disperses these payments to their parents or legal guardian for their health, education or welfare, under a plan approved by the Secretary and the tribe’s governing body. 4. The per capita payments are subject to federal taxation and tribes notify members of this tax liability when payments are made. Gaming Distributions to Minors The IGRA requires protections of the minors’ interests for gaming revenue distribution. To satisfy this requirement, many tribes establish trusts for minors and legal incompetents. A tribe may serve as the grantor and owner of the trust. Revenue Procedure 2011-56 clarifies that deposits into a trust are taxable at the time the deposits are made. If the funds are left in the trust account until the beneficiary reaches the age of majority the principal and interest are not reported as taxable income to the beneficiary. The revenue procedure states that when an IGRA trust earns money or receives a deposit, the beneficiaries are not required to include those amounts in their gross income. However, beneficiaries who receive trust distributions would include the amounts as taxable income when actually or constructively received. Example: Jane, a minor, is a member of a federally recognized tribe. The tribe creates a trust for her. She cannot receive any distributions from the trust before she reaches age 18. Therefore, Jane does not include the trust’s income as part of her gross income. She is not in constructive receipt of the funds placed in trust or income earned by the trust, because she doesn’t have the unqualified right to receive immediate payment. As a result, the accumulated per capita distributions and the related income are not taxable. However, if the tribe gives the trustee (Jane’s legal guardian) approval to access the funds, those funds become taxable. 15 www.irs.gov/tribes Chapter 3: Treatment of Certain Payments Withholding Requirements of Distributions from Net Gaming Revenue Per capita distributions from gaming are subject to federal taxation under IRC Section 3402(r). Tribes must notify its members of the tax liability when it makes the payments, reporting the per capita distributions on Form 1099-MISC, Miscellaneous Income. When the tribal members receive their Forms 1099-MISC, they report the income on the “Other Income” line of their Form 1040, U.S. Individual Income Tax Return, and include a description as “Indian gaming profits.” These distributions are also subject to withholding. The Social Security number of all payees should be secured prior to making payments. Otherwise, the tribe is potentially liable for backup withholding provisions under IRC Section 3406. In the payments section of Form 1040, the payee should report any withholding reflected on Form 1099 as “federal income tax withheld from Forms W-2 or 1099.” The tribe determines the withholding amount based on the total payment to the tribal member for the year. Publication ublication 15-T, Federal Income Tax Withholding Methods contains the withholding tables (identified as “Tables for Withholding on Distributions of Indian Gaming Profits to TribalMembers”). The tribe is potentially liable for the difference between the amount required to be withheld under the tables and the amount actually withheld. The withholding tables are revised each year and generally published in January. There is a threshold for requiring withholding which often changes annually. Once the threshold distribution amount is reached, withholding is required between 10-24%. Example: A tribe distributes $28,000 of per capita payments to tribal members during 2022. A regular monthly per capita payment of $1,500 is issued during the months January through December. During December, an additional per capita payment is made of $10,000, for a cumulative distribution of $9,000. The computation for withholding on monthly per capita payments would be based on the $1,500 monthly payment for January to November and for December, the aggregate payment amount of $11,500. Using the tables for 2022 for monthly distributions, payments of $1,500 are subject to 10% withholding on the amount over $1,079, or $42.10 (.10 x $421). The December payment would be $1,267.79 plus 24% of the amount over 8,502, or $1,987.31 ($1,267.79 + $719.52 (.24 x ($11,500 - $8502))). To avoid incorrect withholding, payments during a chosen distribution period should be aggregated as in the example above. Form SS-8 Occasionally, an Indian tribal government will be unable to determine whether a worker is an employee or is self-employed and should be treated as an independent contractor. Many individuals who have personal service contracts with Indian tribal governments may be employees rather than independent contractors. The existence of a contract does not mean that the individual performing the service is not an employee. It is important to the worker that the employment status be determined as soon as possible so the earnings can be properly reported. If no clear resolution is possible, consider filing a Form SS-8 with the IRS for a determination. A Form SS-8 is used to gather information to determine whether a worker is an employee for federal employment taxes. 16 www.irs.gov/tribes Chapter 3: Treatment of Certain Payments All pertinent facts about the individual’s work arrangement should be obtained and submitted to the IRS on a Form SS-8. A Form SS-8 may be submitted by the tribal government or by the worker. If a contract has been executed between the worker and the entity, a copy of the contract should be furnished with the Form SS-8. When a Form SS-8 is submitted to the IRS, all the facts are analyzed and the determination of a worker’s status is presented to the employer in the form of a determination or letter ruling. Several problems arise for a worker when incorrectly treated as an independent contractor. To begin with, the worker would probably pay more taxes (that is, Self-Employment Contributions Act (SECA) taxes) than if the worker were being treated correctly as an employee. As an employee, only the employee’s portion of the Social Security and Medicare taxes are withheld and paid from the employee’s wages. As an independent contractor, the worker is not eligible for any unemployment benefits or other benefit plans that the worker would have as an employee. Also, as an independent contractor, the worker may have to pay estimated tax payments each quarter. References „ Internal Revenue Code Section 7873 „ Publication 15, (Circular E), Employer’s Tax Guide „ Publication 15-A, Employer’s Supplemental Tax Guide „ Publication 15-T, Federal Income Tax Withholding Methods „ Revenue Ruling 59-354 „ Revenue Ruling 63-136 „ Revenue Ruling 2000-6 „ Form 843, Claim for Refund and Request for Abatement „ Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund Exhibit 3.1 Sample Form W-2 for Tribal Council Member Note: The below sample Form W-2 only applies to tribes that do not have an agreement under Section 218A of the Social Security Act with the Commissioner of Social Security. 17 www.irs.gov/tribes Chapter 4 Tipped Employees Tips are Wages Tips are defined as wages under IRC Sections 3121(a) and 3401(a). Tips received by an employee in the course of employment should be reported to the employer whether received directly from customers or indirectly in the form of shared tips or tip-outs from fellow employees. For purposes of FICA, the term “wages” means all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash (unless specifically excepted). For purposes of federal income tax withholding, the term “wages” is similar to the one for FICA. All tips your employees receive are taxable income subject to federal income tax. Cash tips include tips received directly from customers, tips from other employees under any tip-sharing arrangement and charged tips (for example, credit and debit card charges) that are distributed to the employee. Both directly and indirectly tipped employees must report tips received to you. Cash tips of $20 or more an employee receives in a calendar month while working for any one employer are wages subject to FICA and income tax withholding. Cash tips include charged tips, and tips paid by check or other cash equivalents. Even though these tips are taxable income, tips of less than $20 received by an employee during a calendar month while working for a particular employer are not wages for FICA or federal income tax withholding purposes. Once the amount of tips received in a calendar month reaches $20 from any one employer, the entire amount of tips received must be reported to the employer and included in wages (not just the amount over $20). An employee who receives $20 or more in cash tips must report those tips in writing to you by the tenth day following the month in which the tips are received (or more often if required by the employer). Employees who receive tips of less than $20 in a calendar month are not required to report their tips to you but must report these amounts as income on their tax returns and pay taxes, if any. Service Charges Service charges added to a bill or fixed by the employer that the customer must pay will not constitute a tip when paid to an employee, but rather constitute non-tip wages. These non-tip wages are subject to Social Security, Medicare and federal income tax withholding. Common examples of service charges (sometimes called auto-gratuities) in service industries are: „ Large party charge (restaurant), „ Bottle service charge (restaurant and night-club), „ Room service charge (hotel and resort), „ Contracted luggage assistance charge (hotel and resort), and „ Mandated delivery charge (pizza or other retail deliveries). These service charges are treated as wages and are includible on Form W-2. Large Food and Beverage Establishments If you operate a large food or beverage establishment, you must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, for each calendar year, and may be 18 Chapter 4: Tipped Employees required to allocate tips to your employees. A large food or beverage establishment is a food or beverage operation where: „ Food and beverages are provided for consumption on the premises, „ Tipping is a customary practice, and „ There are more than 10 employees who work more than 80 hours on a typical business day. For the Form 8027 filing requirement: „ Casino buffets are included if tipping is customary. „ Ten or more employees include all employees at the establishment, not just the tipped employees. „ If you own more than one establishment, you must file a separate Form 8027 for each establishment. „ If there is more than one business operating within a single building, and if the receipts for the businesses are recorded separately, then each business should file a separate Form 8027. File Form 8027 by the last day of February for the preceding calendar year. However, if you file electronically, the due date is March 31, for the preceding calendar year. You may request an extension on Form 8809, Application for Extension of Time to File Information Returns, if you file the request before the due date of the return. Refer to Publication 1239, Specifications for Electronic Filing of Form 8027, to file electronically. Allocated Tips IRC Sections 6053(c)(2) and (3) require large food and beverage establishments to allocate tips to those employees who report tips of less than 8% of gross receipts to them (or a lower rate approved by the IRS). You may base the allocation on each employee’s share of gross receipts or share of total hours worked, or on a written agreement between you and your employees. You are required to report the amount allocated on Form W-2 in the box labeled “Allocated Tips” for each employee to whom you allocated tips. Penalties may be imposed for both failing to file and failing to furnish a correct Form W-2 for each form on which you fail to include this required information. Do not withhold income, Social Security or Medicare taxes on allocated tips, since your employee did not report these amounts to you. See Exhibit 4.1 for an example. Whether or not you are required to allocate tips, your employees must continue to report all tips to you, and you must use the amounts they report to figure payroll taxes. Tip Rate Reduction Requests You may request a reduced allocation rate by submitting a petition that clearly demonstrates that a rate less than 8% should apply. Refer to Instructions for Form 8027 on how to apply. IRC Section 3121(q) IRC Section 3121(q) provides that tips are deemed to have been paid by the employer for purposes of FICA tax and requires that employers withhold both the employer and employee shares of FICA. It also provides that unreported tips are subject to employer FICA tax. IRC Section 3121(q) allows the IRS to assess the employer’s share of FICA taxes on reported tips (for example, where the employee did not furnish a statement reporting the tips or to the extent the statement is inaccurate or incomplete). When determining the employer’s additional FICA tax liability, the tips are deemed paid on the date the Notice and Demand is made to the employer by the IRS. 19 www.irs.gov/tribes Chapter 4: Tipped Employees Employer’s General Responsibilities The employer is responsible for deducting and depositing the employee’s FICA tax on tips included in the written report furnished by the employee to the extent that collections can be made from the employee’s wages (under the employer’s control, excluding tips) on or after the time the written statement is furnished. Additional FICA Tax Payable An employee’s regular pay may not be enough for the employer to withhold all the taxes an employee owes on the regular pay and reported tips. If this happens an employee may give the employer more money to cover the taxes. If the employee’s pay under the employer’s control, including any additional money given by the employee, is not enough to cover all the taxes, Treasury Regulations Section 31.3102-3(a)(1) clarifies the sequence the employer must follow when paying over the withheld taxes: 1) All taxes (FICA, federal withholding, and state and local) on regular pay, exclusive of tips 2) Social Security and Medicare taxes on reported tips 3) Federal, state and local taxes on reported tips The employer must furnish to the employee a written statement showing the amount of employee FICA on tips that exceeds the tax the employer can collect from the wages under the control of the employer. The statement is provided on the employee’s Form W-2. The employee is required to report and pay over to the IRS the portion of employee tax that the employer was unable to withhold due to the lack of employee wages available to cover the liability. Example: Employee taxes on wages and tips exceed regular wages: Grady is a blackjack dealer for a tribal casino. He routinely receives tips as a part of his compensation as a dealer. The casino pays him a salary of $200 per week. He receives tips in cash each day that he works. Grady keeps a daily tip record and reports tips to his employer every other Friday. He has a Form W-4, Employee’s Withholding Allowance Certificate, on file with his employer (the casino) from 2018. It reflects that he is single with one exemption. For the two-week period ending April 12, Grady reported $1,200 in cash tips to his employer. His regular wages for the same two-week period are $400. The casino tip policy allows Grady to keep his cash tips at the time he receives them. The following computation illustrates that Grady’s total withholding for wages and tips exceeds his regular wages, causing him to owe taxes to his employer. Gross Regular Pay..........................................................................................$400.00 Tips Reported............................................................................................... $1,200.00 Deductions Deductions from Gross Regular Pay Deductions from Tip Income Total FICA $30.60 $91.80 $122.40 Federal Withholding $100.00* $200.00* $300.00* State Withholding $26.00 $78.00 $104.00 Total $156.60 $369.80 $526.40 Net Paycheck Zero** * The withholding amounts are for this example only. The withholding tables were not consulted for federal or state withholding taxes. 20 www.irs.gov/tribes Chapter 4: Tipped Employees **The employee owes the amount of tax that exceeds his regular paycheck ($526.40 – $400.00 = $126.40). Because all tips are taxable wages to the employee, this situation creates a withholding shortfall for Grady. The withholding on his wages plus his tips exceeds his biweekly paycheck from his regular salary. If Grady does not make arrangements with his employer to pay all his FICA and withholding, his taxes will be applied in the following order: 1) Withholding on regular wages (FICA, federal income, state income) ($156.60) 2) FICA withholding tax on tips ($91.80) 3) Federal income tax withholding ($151.60 of the $200 due) Net paycheck = $0 ($400 less $156.60, $91.80 and $151.60) Grady owes $48.40 in federal income tax withholding and $78 in state withholding. Because Grady’s regular pay is not enough for his employer to withhold all the taxes he owes on his regular pay plus his reported tips, he may give his employer money until the close of the calendar year to pay the rest of the taxes. His employer may also collect any taxes that remain unpaid from his next paycheck. If withholding taxes remain uncollected at the end of the year, Grady may be subject to a penalty for underpayment of estimated tax. In the example, Grady’s regular paycheck paid all his FICA (Social Security and Medicare taxes). This is not always the case; sometimes an employee may owe Social Security and Medicare taxes uncollected at the end of the year. These uncollected taxes will be shown in box 12 of Form W-2 and must be reported on the employee’s Form 1040, U.S. Individual Income Tax Return. Employer Tip Employment Tax Responsibilities „ Include tips as wages, withholding FICA and federal income tax, and include on Form 941 and Form W-2 „ Allocate tips when required „ File the information report, Form 8027, if required Employer and Employees’ Recordkeeping Responsibilities (Specific to Large Food and Beverage Establishments) The written statement furnished by the employee to the employer for tips received by the employee must be signed by the employee and should disclose: „ The name, address and SSN of the employee. „ The name and address of the employer. „ The period for which, and the date on which, the statement is furnished. If the statement is for a calendar month, the month and year should be specified. If the statement is for a period of less than one calendar month, the beginning and ending dates of the period should be shown (for example, January 1 through January 8, 20XX). „ The total amount of tips received by the employee during the period covered by the statement, which are required to be reported to the employer. 21 www.irs.gov/tribes Chapter 4: Tipped Employees No particular form is required; however, Form 4070 (included in Publication 1244, Employee’s Daily Record of Tips and Report to Employer) may be used unless the employer provides some other form. If the employer chooses to use another form, the form must meet the requirements of Treasury Regulation Section 31.6053-1(b)(2)(ii): „ The form is to be used solely for the purpose of reporting tips, „ It meets the requirements of subparagraph (1) (of the regulations as listed above), and „ A blank copy must be made available to the employee for completion and retention by the employee. In lieu of a special form for tip reporting, Treasury Regulation Section 31.6053-1(b)(2)(ii) provides that an employer may provide regularly used forms (such as time cards) for the employees to use in reporting tips. The form must include the period for which, and the date on which, the statement is furnished, the total amount of tips the employee received and identifying information, which will ensure identification of the employee by the employer. Tip Rate Determination and Education Program (Tip Agreements) The IRS began its Tip Rate Determination/Education Program (TRD/EP) for businesses where tip income is customary to improve and ensure compliance by employers and employees with statutory provisions on tip income. Employers may participate in the TRD/EP. The program primarily consists of voluntary tip compliance agreements developed to improve tip income reporting by helping taxpayers to understand and meet their tip reporting responsibilities. These voluntary tip compliance agreements offer many benefits for the employer and the employee. Employers in the food and beverage industry or industries with tipped employees other than the gaming industry may enter into a Tip Rate Determination Agreement (TRDA). Businesses in the gaming industry may enter into a Gaming Industry Tip Compliance Agreement (GITCA). The IRS will assist applicants in understanding and meeting the requirements for participation. For more information about GITCA and TRDA agreements, search for Market Segment Understandings (MSU) by using keyword “MSU tips” on IRS.gov. References „ Publication 15, (Circular E), Employer’s Tax Guide „ Publication 15-T, Federal Income Tax Withholding Methods „ Publication 531, Reporting Tip Income „ Instructions for Form W-2, Box 1 and box 8 „ Publication 3148, Tips on Tips - A Guide to Tip Income Reporting for Employees Who Receive Tip Income „ Publication 3144, Tips on Tips - A Guide to Tip Income Reporting for Employers in Businesses Where Tip Income is Customary „ Instructions for Form 941, Line 5b, Taxable Social Security Tips „ Form 8027 and instructions, Employer’s Annual Information Return of Tip Income and Allocated Tips „ Publication 1239, Specifications for Electronic Filing of Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips 22 www.irs.gov/tribes Chapter 4: Tipped Employees References for your employees „ Publication 1244, Employee’s Daily Record of Tips and Report to Employer (This publication includes Form 4070, Employee’s Report of Tips to Employer, and Form 4070A, Employee’s Daily Record of Tips.) „ Form 4137, Social Security and Medicare Tax on Unreported Tip Income Exhibit 4.1, Form W-2, Wage and Tax Statement, showing allocated tips 23 www.irs.gov/tribes Chapter 5 Employee Business Expense Reimbursements Publication 15, (Circular E), Employer’s Tax Guide, defines employee business expense reimbursements. A reimbursement or allowance arrangement is a system by which you pay the advances, reimbursements, and charges for your employees’ business expenses. The reimbursement policy of the employer will determine the proper tax treatment of these reimbursed employee business expenses. This chapter addresses the two basic types of reimbursement arrangements that can exist between an employer and an employee and how you handle these reimbursements for income tax purposes. There are two general types of expense reimbursement plans that an employer may use to reimburse employees for out-of-pocket business expenses: 1) An accountable plan, and 2) A nonaccountable plan. The principal difference is whether employees are required to substantiate expenses (accountable plan) to their employer for the amounts they incur for job related expenses, or not (nonaccountable plan). Accountable Plan Amounts paid under an accountable plan are not wages and are not subject to income tax withholding and payment of Social Security, Medicare, State Unemployment Tax Act (SUTA) and Federal Unemployment Tax Act (FUTA) taxes. To qualify as an accountable plan, the plan must contain the following features: „ The employee’s expenses must be incurred in connection with services as an employee with no personal expenses. „ The employee must substantiate expenses to the employer within a reasonable period of time from when the expenses were incurred. „ The employer must require that any excess advance or reimbursement over the actual substantiated expense be returned within a reasonable period of time. If the expenses covered by this arrangement are not substantiated, or amounts in excess of expenses are not returned within a reasonable period of time, the amount is treated as paid under a nonaccountable plan. A reasonable period of time depends on the facts and circumstances. It is considered reasonable if the employees: 1) Receive the advance within 30 days of the time they incur the expense. 2) Adequately account for the expenses within 60 days after the expenses were paid or incurred. 3) Return any amounts in excess of expenses within 120 days after the expense was paid or incurred. Also, it is considered reasonable if you give your employees a periodic statement (at least quarterly) that asks them to either return or adequately account for outstanding amounts and they do so within 120 days. 24 Chapter 5: Employee Business Expense Reimbursements Nonaccountable Plan Simply stated, a reimbursement plan that doesn’t meet the requirements for an accountable plan is a nonaccountable plan. Under a nonaccountable reimbursement plan, the employee is generally not required to substantiate any expenses to the employer. Payments to your employee for travel and other necessary expenses of your business under a nonaccountable plan are treated as supplemental wages subject to income tax withholding, Social Security, Medicare, SUTA and FUTA taxes. The payments are treated as paid under a nonaccountable plan if: „ Your employee is not required to or does not substantiate timely those expenses to you with receipts or other documentation, or „ You advance an amount to your employee for business expenses and your employee is not required to or does not return timely any amount not used for business expenses. See Section 7 of Publication 15 for more information on supplemental wages. Per Diem or Other Fixed Allowance A per diem allowance is a fixed amount of daily reimbursement an employer gives an employee for lodging, meals and incidental expenses when the employee is away from home on business. You may reimburse your employees by travel days, miles or some other fixed allowance. In these cases, your employee is considered to have accounted to you if the payments do not exceed rates established by the federal government. The standard mileage rates are updated annually. See www.irs.gov/tax-professionals/standard-mileage-rates for the current rates. The federal per diem rates for meals and lodging in the continental U.S. are published by the U.S. General Services Administration (GSA). Per diem allowances may be used only if the time, place and business purpose of the travel are substantiated by adequate records or other evidence. An employee can satisfy the substantiation requirements for business vehicle expenses in two general ways: 1) An employee can submit periodically to the employer a log of business miles driven. The expense is deemed substantiated to the extent of the standard mileage rate. 2) An employee can submit documentation of actual vehicle expenses (gas, maintenance, insurance and so on) with support for the percentage of business use of the vehicle (for example, a log showing both business and personal mileage). If the per diem or allowance exceeds the federal rate, and you do not require your employees to return the difference between the two rates, you must report the excess amount as wages. This excess amount is subject to income tax withholding, and payment of Social Security, Medicare and FUTA taxes. Report the nontaxable (substantiated) portion of the per diem or mileage allowance in box 12 of Form W-2 using code L. Example: The tribe sent an employee on a five-day business trip to Phoenix and gave the employee a $400 advance to cover meals and incidental expenses ($80 per day). The federal per diem for meals and incidental expenses for Phoenix is $51.75 for the first and last day of travel and $69 for non-travel days. The tribe does not require the employee to return the difference between the advance and the federal per diem rate allowed for Phoenix: 25 www.irs.gov/tribes Chapter 5: Employee Business Expense Reimbursements Per Diem Daily Rates Advance travel payment Total $400.00 First and last day per diem ($69.00 x 0.75) $51.75 $103.50 3 non-travel days $69.00 $207.00 Total federal diem allowed $310.50 Taxable per diem $89.50 The $89.50 excess federal per diem amount will be included in box 1 on Form W-2. Box 12 will show $310.50 using code L. References „ Publication 15, (Circular E), Employer’s Tax Guide „ Publication 15-B, Employer’s Tax Guide to Fringe Benefits „ Publication 463, Travel, Gift, and Car Expenses „ Publication 5137, Fringe Benefit Guide „ Instructions for Forms W-2 and W-3 Exhibit 5.1 - Reporting Reimbursements Table Reporting Reimbursements If the type of reimbursement (or other expense allowance) arrangement is under Then the employer reports on Form W-2: An ACCOUNTABLE PLAN with: — Actual expense reimbursement — Adequate accounting made and excess returned No amount. — Actual expense reimbursement — Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. — Per diem or mileage allowance up to the federal rate — Adequate accounting and excess returned No amount. — Per diem or mileage allowance up to the federal rate — Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. The amount up to the federal rate is reported only in box 12 – it is not reported in box 1. — Per diem or mileage allowance exceeds the federal rates — Adequate accounting up to the federal rate only and excess not returned The excess amount as wages in box 1. The amount up to the federal rate is reported only in box 12 – it is not reported in box 1. A NONACCOUNTABLE PLAN with: Either adequate accounting or return of excess, or both, not required by plan The entire amount as wages in box 1. No reimbursement plan The entire amount as wages in box 1. 26 www.irs.gov/tribes Chapter 6 Fringe Benefits Publication 15-B, Employer’s Tax Guide to Fringe Benefits, addresses the question, “Are fringe benefits taxable?” If you provide your employees with a taxable fringe benefit, the benefit is subject to employment taxes and must be reported on Form W-2. However, you can use special rules to withhold, deposit and report the employment taxes. See Section 4 of Publication 15-B, Rules for Withholding, Depositing and Reporting. What is a Fringe Benefit? A fringe benefit is any property, service, cash or cash equivalent in addition to regular pay provided to an employee by an employer in connection with the performance of services. Treasury Regulation Section 1.61-21 states that gross income includes compensation for services, including fees, commissions, fringe benefits or similar items. Whether a particular fringe benefit is taxable depends on whether there is a specific statutory exclusion that applies to the benefit. Employers should treat taxable fringe benefits as wages for employment tax purposes. Because the tax treatment of fringe benefits can vary depending on the facts and circumstances under which they are provided, it may be helpful to follow a three-step analysis: 1) Identify the particular fringe benefit and start with the assumption that its value will be taxable as compensation to the employee. 2) Check to see if there are any statutory provisions that exclude the fringe benefit from the employee’s gross income. 3) Value any portion of the benefit that is not excludable for inclusion in the employee’s gross income. Examples of fringe benefits include: „ Accident/health benefits „ Allowances not accounted for (for example, clothing) „ Automobile allowances „ Awards and prizes „ Back pay awards „ Bonuses „ Cafeteria plans „ Club memberships „ Dependent care assistance programs „ Educational reimbursements „ Employee discounts „ Frequent flier credits „ Group term life insurance „ Law enforcement housing assistance „ Legal counseling „ Local transportation for commuting „ Lodging on the employer’s premises „ Meal money „ Moving expense reimbursements „ Parking „ Professional licenses or dues for professional organizations 27 Chapter 6: Fringe Benefits „ Severance pay „ Scholarships and fellowships „ Sick pay „ Stipends „ Travel reimbursement „ Use of vacation homes „ Vacations These fringe benefits may or may not be taxable to the employee who receives the benefit. Refer to Publication 15-B to determine if fringe benefits are taxable and how to value them. Employer-Provided Vehicles Employer-provided vehicles are sometimes available for employees to use during off-duty hours. The personal use of a tribally-owned vehicle is a taxable fringe benefit. Personal use includes the value of commuting to and from work in the vehicle, even if the vehicle is taken home for the convenience of the employer. The value of the fringe benefit must be included in income as wages and is subject to income and employment taxes. The three methods that can be used to determine the value of the vehicle provided to the employee are the: 1) Commuting value rule, 2) Cents-per-mile rule, or 3) Automobile lease rule. There are certain employees designated as “control employees” who must use the automobile lease rule. A “control employee” is a government employee who is either an elected official or whose compensation is equal to or exceeds Federal Government Executive Level V. (See the Office of Personnel Management website for compensation information.) See Chapter 3 of Publication 15-B for further information on control employees. Qualified Nonpersonal Use Vehicle A qualified nonpersonal use vehicle is any vehicle the employee is not likely to use more than minimally for personal purposes because of its design. Qualified nonpersonal use vehicles are: „ Clearly marked police and fire vehicles „ Unmarked vehicles used by law enforcement officers - the officer must be authorized to carry a firearm, execute search warrants and make arrests „ An ambulance or hearse used for its specific purpose „ Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds „ Delivery trucks with seating for the driver only or driver plus a folding jump seat „ A passenger bus with a capacity of at least 20 passengers used for a specific purpose „ School buses „ Tractors and other special purpose farm vehicles If an employee drives one of these vehicles home, the personal use of the vehicle is not a taxable fringe benefit. 28 www.irs.gov/tribes Chapter 6: Fringe Benefits All Other Employer-Provided Vehicles If you have an employer-provided vehicle that does not qualify as a nonpersonal use vehicle, and the employee uses the vehicle for personal use (which includes commuting), the personal use of the vehicle is a noncash taxable fringe benefit. It is the employer’s responsibility to determine the actual value of this fringe benefit and to include the taxable portion in the employee’s income. Example: A tribally-owned pickup truck that is not a police vehicle has the name of the tribe marked on the vehicle. Usually the employee is allowed to take the vehicle home because he is “on call.” The vehicle is not a qualified nonpersonal use vehicle, thus, the commuting is a noncash taxable fringe benefit. The value of the personal use of this vehicle must be included as wages to the employee, and it is subject to income and employment taxes. Lodging on Your Business Premises You can exclude the value of lodging furnished to an employee from the employee’s wages if: „ It is furnished on your business premises, „ It is furnished for your convenience, and „ The employee accepts it as a condition of employment. This exclusion does not apply if you allow your employee to choose to receive additional pay instead of lodging. On your business premises. For this exclusion, your business premises is generally your employee’s place of work. For your convenience. Whether you furnish lodging for your convenience as an employer depends on the facts and circumstances. You furnish the lodging to your employee for your convenience if you do this for a substantial business reason other than to provide the employee with additional pay. This is true even if a law or an employment contract provides that the lodging is furnished as pay. However, a written statement that the lodging is furnished for your convenience isn’t sufficient. Condition of employment. Lodging meets this test if you require your employees to accept the lodging because they need to live on your business premises to be able to properly perform their duties. Examples include employees who must be available at all times and employees who couldn’t perform their required duties without being furnished the lodging. It doesn’t matter whether you must furnish the lodging as pay under the terms of an employment contract or a law fixing the terms of employment. Example: Joan, an employee of a hospital, is given the choice of living at the hospital free of charge or living elsewhere and receiving a cash allowance in addition to her regular salary. If Joan chooses to live at the hospital, the hospital cannot exclude the value of the lodging from her wages because she is not required to live at the hospital to properly perform the duties of her employment. Example: A police officer of an Indian tribal government is required to live in housing furnished by the tribe, as a condition of employment. The tribe requires this as a matter of security for the residents in the neighborhood and as a convenience for the tribe to protect the housing facilities. The value of the lodging is not included in the police officer’s salary since the housing is a condition of employment, it is on the business premises and it is a convenience to the tribe. 29 www.irs.gov/tribes Chapter 6: Fringe Benefits References „ Publication 15, (Circular E), Employer’s Tax Guide „ Publication 15-A, Employer’s Supplemental Tax Guide „ Publication 15-B, Employer’s Tax Guide to Fringe Benefits „ Publication 15-T, Federal Income Tax Withholding Methods „ Publication 463, Travel, Gift, and Car Expenses „ Publication 525, Taxable and Nontaxable Income „ Publication 970, Tax Benefits for Education „ Publication 5137, Fringe Benefit Guide „ Instructions for Forms W-2 and W-3 30 www.irs.gov/tribes Chapter 7 Retirement Plans This chapter provides basic information on the retirement plans that Indian tribal governments may have, as well as annual reporting requirements that apply to these plans. Since this area of law can be quite complex, this chapter is not all-inclusive. Your retirement plan administrator should address more detailed questions. Retirement Plans that Indian Tribal Governments May Maintain: 1) Simplified Employee Pension Plan (SEP) – SEPs provide a simplified method for employers to make contributions to a retirement plan for their employees. Instead of setting up a qualified plan with a separate trust, the employer contributes to an Individual Retirement Account or Annuity (IRA) (commonly referred to as a SEP-IRA) set up for each plan participant that meets the requirements of IRC Section 408(k). 2) SIMPLE IRA Plan – A Savings Incentive Match Plan for Employees (SIMPLE) IRA plan is described under IRC Section 408(p). This plan provides small employers with a simplified method to contribute toward their employees’ and their own retirement savings. Employees may choose to make salary reduction contributions and the employer is required to make either matching or nonelective contributions. Contributions are made to an IRA set up for each employee (a SIMPLE IRA). A SIMPLE IRA plan can be established only if the employer had 100 or fewer employees who earned $5,000 or more in compensation during the preceding year. An employer cannot sponsor a SIMPLE plan if they currently sponsor another plan. 3) 401(k) Plan – A 401(k) plan is also referred to as a cash or deferred arrangement (CODA). A 401(k) plan is a qualified plan (under IRC Section 401(a)) that includes a feature allowing an employee to elect to have the employer contribute a portion of the employee’s wages (pre-tax or Roth contributions) to an individual account under the plan. The CODA must be part of a profit-sharing, stock bonus or pre-ERISA money purchase plan. Indian tribal governments are allowed to maintain 401(k) plans, effective January 1, 1997. 4) 403(b) Plan – A 403(b) plan (also called a tax-sheltered annuity (TSA) plan) is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Contributions may be deferred and invested in annuity contracts or mutual funds. Employees save for retirement by contributing to individual accounts. Employers can also contribute to employees’ accounts. Indian tribal governments are eligible to maintain this type of plan only in limited circumstances. Generally, the organization associated with the tribal government must be an educational institution, a 501(c)(3) organization or a grandfathered Indian tribe (see definitions). 5) Qualified Plan – A qualified plan, also referred to as a 401(a) plan, satisfies the requirements of IRC Section 401(a). Examples of qualified plans include profit-sharing, money purchase, 401(k), target benefit or defined benefit plans. All these plans, with the exception of certain qualified plans, are deferred compensation plans that allow employees to save for retirement on a pre-tax basis. Note: Indian tribal governments cannot maintain governmental deferred compensation plans under IRC Section 457. They are not an eligible employer for 457 purposes. 31 Chapter 7: Pension Plans Limits on Contributions and Benefits There are limits to how much employers and employees can contribute to a plan (or IRA) each year. The plan must specifically state that contributions or benefits cannot exceed certain limits. The limits differ depending on the type of plan. IRC Section 415 requires the limits to be adjusted annually for cost-of-living increases. Definitions Deferred Compensation – Deferred compensation is an amount the employer deducts from the employee’s current compensation and pays to a retirement plan. Employees do not pay tax on qualified deferred compensation until distributions are received (except with Roth contributions). Participation in a deferred compensation plan allows employees to “defer” or delay, receiving a portion of their wages until a later date, generally when they retire or reach a distributable event. Rollover – The contribution or direct transfer of a qualified plan distribution to another plan within 60 days. The plan receiving the rollover may be any of the following: „ Another qualified plan „ An IRA „ A SEP-IRA „ A SIMPLE IRA (after two years) „ For distributions made after December 31, 2001, a Section 403(b) plan 501(c)(3) Organization – Defined generally as one organized and operated exclusively for the following purposes: „ Religious „ Charitable „ Scientific „ Public safety testing „ Literary or education „ To encourage national or international amateur sports competition „ For the prevention of cruelty to children or animals These organizations include: „ Charities „ Social welfare agencies „ Private hospitals „ Health care organizations „ Private schools „ Religious institutions „ Research facilities Grandfathered Indian Tribe – An Indian tribal government; a subdivision, agency or instrumentality of an Indian tribal government; or a corporation chartered under federal, state or tribal law that is owned in part by any of the foregoing is treated as an employer described in 501(c)(3) with respect to any annuity contract purchased in a plan year beginning before January 1, 1995. Catch-Up Contributions – Elective deferrals that are made under IRC Section 414(v) in excess of the limits under IRC Sections 402(g), 403(b), 408(p) and 415 to 401(k), 403(b), SARSEP (SEP that includes a salary reduction arrangement), SIMPLE IRA or SIMPLE 401(k) plans. Catch- 32 www.irs.gov/tribes Chapter 7: Pension Plans up contributions may be made only by participants who are at least age 50 by the end of the year in which the catch-up contributions are being made. Qualified Plan – A qualified plan is a plan that meets the requirements of IRC Section 401(a). These requirements are generally designed to ensure that the plan is established and operated for the benefit of a broad class of employees. Meeting the requirements entitles the plan sponsor, the trust or other funding vehicle and participants to certain income tax advantages. Nonqualified Plan – A nonqualified plan is a plan that does not meet the requirements of IRC Section 401(a). As a result, the plan sponsor, participants and trust or other plan funding vehicle are generally not entitled to income tax benefits, unless the plan is intended to be, and meets the requirements of, for example, Section 403(b) plans, SEPs, SIMPLE plans and certain IRAs. Salary Reduction Arrangement – An agreement where the employee chooses to have part of their pay contributed to a retirement plan rather than receive it in cash. Elective Deferral – Contributions made by the employer at the election of the employee to a retirement plan via a salary reduction agreement. The elective deferrals are excluded from the employee’s gross income (compensation) (except Roth contributions) and include deferrals under a 401(k), 403(b), SIMPLE IRA or SARSEP plan. Nonelective Contributions – Employer contributions made to any type of plan, excluding those employer contributions made under a salary reduction agreement. Employer contributions also do not include matching contributions. Income Tax Withholding Generally, the participant’s pre-tax contributions (deferred compensation) plus any earnings on these contributions will not be included in gross income until that amount is paid or made available to the participant or beneficiary. Therefore, this amount will not be subject to income tax withholding at the time the contribution is made. However, the total amount contributed during the tax year will be reflected in box 12 on the participant’s Form W-2. Social Security, Medicare and FUTA Taxes Qualified plans, TSAs, SEPs and SIMPLE IRA plans – Generally, elective deferrals made by an employee are excluded from the employee’s gross income. However, they are included in wages for purposes of Social Security, Medicare and FUTA taxes. Employer contributions to these plans are not included in the definition of wages and are not subject to Social Security, Medicare or FUTA taxes unless the payment is made for services rendered. Nonqualified Deferred Compensation Plans – Annual deferrals under a nonqualified plan are treated as wages subject to Social Security, Medicare and FUTA taxes in the tax year in which the later of the following occurs: „ When the services are performed, or „ When there is no substantial risk of forfeiture of the employee’s right to the deferred amount. A substantial risk of forfeiture exists where rights in property that are transferred are conditioned on the future performance of services or the occurrence of a condition related to the purpose 33 www.irs.gov/tribes Chapter 7: Pension Plans of the transfer. Annual deferrals mean the amount of compensation deferred under the plan whether by salary reduction or nonelective employer contribution during a taxable year. Example: The tribe’s nonqualified plan provides for elective deferrals from current salary, as well as a 1% of salary nonelective contribution for each employee who participates in the plan and who is employed with the tribe during the plan year. All deferrals and contributions, including the tribe’s contributions, are fully and immediately vested. Because these contributions are not subject to a substantial risk of forfeiture (and the services to which they relate have already been performed), the elective deferrals are required to be taken into account as wages for purposes of the Social Security, Medicare and FUTA tax at the time of the deferral. The tribe’s nonelective contribution is required to be taken into account as wages at the time of the contribution for purposes of the Social Security, Medicare and FUTA tax. Example: Assume the same facts as above, except the plan has two year vesting for the tribe’s nonelective contribution. In this case, an employee’s right to the nonelective contributions (and the associated earnings) are subject to a substantial risk of forfeiture until the employee has been employed by the tribe for three years. The tribe’s nonelective contributions (and earnings thereon) are not wages for purposes of the Social Security, Medicare and FUTA taxes until the employee has completed three years of service. At that time, the aggregate amount of the tribe’s nonelective contributions, plus earnings, is required to be taken into account as wages for purposes of the Social Security, Medicare and FUTA tax. Once an individual has met the vesting requirements, future nonelective contributions by the tribe are required to be taken into account as wages for these purposes when the contribution is made. The following are examples of how you would prepare a Form W-2 to reflect deferred compensation depending on whether the plan is a qualified plan or a nonqualified plan. Example - Qualified Plan: Sarah earned $30,000 during the year. She elected to contribute 10% ($3,000) to her employer’s qualified 401(k) plan. The employer also contributed 5% ($1,500) to the plan on Sarah’s behalf. Sarah had federal withholding of $3,000, Social Security withholding of $1,860 and Medicare withholding of $435. Sarah’s W-2 will reflect: „ Box 1 - $27,000 ($30,000 gross wages less $3,000 elective deferral) „ Box 3 - $30,000 – Although Sarah’s elective deferrals are not included in gross wages for federal income tax purposes, they are includable wages for the Social Security tax „ Box 5 - $30,000 – Sarah’s elective deferrals are includable wages for Medicare tax purposes „ Box 12 - D $3,000 – Code D is the code for elective deferrals to a 401(k) plan (See W-2 instructions for other retirement plan codes) „ Box 13 - Check the Retirement plan box „ Box 14 - $1,500 – This is the nonelective employer contribution made for Sarah. This is not a mandatory entry. If your state has a state income tax, then box 16 on Form W-2 will normally be the same amount as the amount shown in box 1 provided the employee was a resident of the state for the entire year. 34 www.irs.gov/tribes Chapter 7: Pension Plans Exhibit 7.1-Qualifed Plan Form W-2 Example - Nonqualified Plan: Assume the same facts as above except the plan is a nonqualified plan and there is no substantial risk of forfeiture of the deferred amount. „ Box 1 - $27,000 „ Box 3 - $31,500 – Note: both Sarah’s contributions (elective deferrals) and the employer’s contributions (nonelective deferrals) are includable wages for the Social Security tax „ Box 5 - $31,500 – Same as above with regard to the Medicare tax „ Box 12 - D $3,000 „ Box 13 - Check the Retirement plan box „ Box 14 - $1,500 – Not mandatory 35 www.irs.gov/tribes Chapter 7: Pension Plans Exhibit 7.2-Nonqualiifed Plan Form W-2 Catch-Up Contributions Participants age 50 and over may contribute additional elective deferral “catch-up contributions” to 401(k), 403(b), SIMPLE IRA or SARSEP plans. Catch-up contributions are combined with regular contributions for W-2 reporting. Example: Jerry, age 52, earned $25,000 during the year. He contributed 10% ($2,500) of his salary to his employer’s qualified 401(k) plan. In addition, Jerry contributed $500 in catch-up contributions during the year. His employer contributed $1,250 to the plan for Jerry. Jerry had federal withholding of $2,800, Social Security withholding of $1,550 and Medicare withholding of $363. Jerry’s W-2 will reflect: „ Box 1 - $22,000 ($25,000 gross wages less $3,000 ($2,500 elective deferral plus $500 catch-up contribution)) „ Box 3 - $25,000 – The elective deferral and catch-up contributions are includable wages subject to Social Security tax „ Box 5 - $25,000 – Same as above with regard to the Medicare tax „ Box 12 - D $3,000 – Elective deferral and catch-up contributions are combined in this box using the proper retirement code (see W-2 instructions) „ Box 13 - Check the Retirement plan box „ Box 14 - $1,250 – Not mandatory 36 www.irs.gov/tribes Chapter 7: Pension Plans Exhibit 7.3-Catch-Up Contributions Form W-2 Distributions Reporting of distributions from these plans must be made on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., rather than Form W-2. For each year the employee receives a payment from the plan, the plan administrator or annuity provider is required to issue the employee a Form 1099-R no later than January 31 of the following year. Loans to employees from a plan may be considered distributions and taxable. Note: On occasion, the annuity provider may send withholding from distributions to the plan sponsor or employer. In these cases, the plan sponsor must file Form 945, Annual Return of Withheld Federal Income Tax, to report the withheld amounts. Indian Tribes and 403(b) Plans Indian tribes and wholly owned tribal entities (with the exception of tribally owned public schools and qualified 501(c)(3) organizations) do not currently qualify to establish a 403(b) plan for their employees. Contributions to a 403(b) plan are not allowable and are not excludable from gross income by the employees. Tribes that entered into a contract for a 403(b) plan prior to January 1, 1995, are allowed to continue the plan and make current contributions for the employees who were participating before January 1, 1995, as if they were a 501(c)(3) organization. Current employee contributions are excludable from the employee’s gross income as authorized in IRC Section 403(b)(1). 37 www.irs.gov/tribes Chapter 7: Pension Plans If the tribe entered into a contract for a 403(b) plan after December 31, 1994, the plan is not qualified under the IRC and the tribe should refer to the IRS Voluntary Correction Program, which explains acceptable methods to voluntarily correct the situation. If the tribe ceases contributions, this program explains how the tribe may receive a letter giving them 403(b) status for prior years. There is a fee to participate in the program. Form 5500 Most retirement plans covered by ERISA are required to file a Form 5500, Annual Return/Report of Employee Benefit Plan. An exception to this requirement is a “governmental plan.” IRC Section 414(d) provides that a “governmental plan” includes a plan established and maintained for its employees by the government of the United States, by the government of any state or political subdivision thereof, or by any agency or instrumentality of any of the foregoing. Certain plans of Indian tribal governments (ITG) are also governmental plans under 414(d). Specifically, Section 906(a)(1) of the Pension Protection Act of 2006 (PPA) amended Section 414(d) to provide that the term ‘governmental plan’ includes a plan that is established and maintained by an Indian tribal government (as defined in Section 7701(a)(40)), a subdivision of an Indian tribal government (determined in accordance with Section 7871(d)), or an agency or instrumentality of either, and all the participants of which are employees of the entity substantially all of whose services as an employee are in the performance of essential governmental functions but not in the performance of commercial activities (whether or not an essential government function). Notice 2006-89 provides that the IRS and Treasury anticipate issuing guidance on Section 414(d) and that, until that guidance is issued, an ITG plan will be treated as satisfying the requirements to be a governmental plan under Section 414(d) if it complies with those requirements based on a reasonable and good faith interpretation of Section 906(a)(1) of PPA. Section III.B. of the notice provides certain approaches that, if taken by September 30, 2007, permit separate plans to be established for commercial ITG employees and for other ITG employees who perform essential governmental functions (governmental ITG employees) under the reasonable and good faith compliance standard. Section III.E. indicates that the relief provided in Section III applied pending the issuance of further guidance relating to Section 414(d), including the amendment made by PPA Section 906(a)(1). Since the issuance of Notice 2006-89, the IRS and Treasury have continued to consult with Indian tribal government representatives. Based on those consultations and the comments received in response to Notice 2006-89, and until future guidance is issued, the transition relief provided under Notice 2006-89 has been revised so that the date “September 30, 2007” in Section III.B. of Notice 2006-89 was replaced with “the date that is six months after guidance is issued under §414(d) of the Code, as amended by section 906 of the Pension Protection Act of 2006, on the determination of whether a retirement plan maintained by an Indian tribal government is a governmental plan with the meaning of §414 (d).” 38 www.irs.gov/tribes Chapter 7: Pension Plans This extension is conditioned on the plans involved not being amended, for periods before the extended date, to reduce benefits unless the reduction: 1) Does not vary based on whether the participant is a governmental Indian tribal government employee or a commercial ITG employee, or 2) Is made to the plan for commercial ITG employees and is the minimum reduction necessary to satisfy the requirements of the IRC. If a reduction occurs that does not meet either of these conditions, the extension provided under the notice ends on the date the reduction goes into effect. References „ Publication 15, (Circular E), Employer’s Tax Guide „ Publication 15-A, Employer’s Supplemental Tax Guide „ Publication 15-T, Federal Income Tax Withholding Methods „ Publication 505, Tax Withholding and Estimated Tax „ Publication 560, Retirement Plans for Small Business „ Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans) „ Instructions for Forms W-2 and W-3 „ Announcement 2001-93, Reporting Elective Deferral Catch-up Contributions on the 2002 Form W-2 „ Form 5500, Annual Return/Report of Employee Benefit Plan 39 www.irs.gov/tribes Chapter 8 Cafeteria Plans Section 125 of the Internal Revenue Code makes it possible for employers to offer their employees a choice between cash and a variety of nontaxable benefits. A cafeteria plan is a written benefit plan maintained by an employer for the benefit of its employees. It provides participants an opportunity to receive certain benefits on a pre-tax basis. The plan must allow employees to choose between two or more benefits consisting of cash (or a taxable benefit which is treated as cash) and certain “qualified benefits.” The written plan must include: „ A specific description of each benefit available under the plan and the period of coverage „ The rules governing which employees are eligible to participate in the plan „ The procedures for making elections under the plan, including: —` when elections may be made, — the rules governing irrevocability of elections, and — the periods for which elections are effective „ The manner in which employer contributions may be made, such as by salary reduction agreement between the employer and employee, by nonelective employer contributions or both „ The maximum amount of employer contributions available to any participant „ The plan year Examples of qualified benefits of a cafeteria plan are: „ Accident and health benefits (but not Archer medical savings accounts or long-term care insurance) „ Adoption assistance „ Dependent care assistance „ Group-term life insurance coverage „ Health savings accounts, including distributions to pay long-term care services Filing Requirements Contributions to a cafeteria plan are usually made under salary reduction agreements between the employer and the employee in which the employee agrees to contribute a portion of his or her salary on a pre-tax basis to pay for the qualified benefits. Salary reduction contributions are not actually or constructively received by the employee. Therefore, those contributions are not considered wages for federal income tax purposes. In addition, those sums generally are not subject to FICA and FUTA. Employers may report the employee’s nontaxable cafeteria plan benefits on the Form W-2, in box 14. If you maintain a cafeteria plan, you must report on Form 5500 information about the plan each year by the last day of the 7th month after the plan year ends. References „ Publication 15, (Circular E), Employer’s Tax Guide „ Publication 15-A, Employer’s Supplemental Tax Guide „ Publication 15-B, Employer’s Tax Guide to Fringe Benefits „ Publication 15-T, Federal Income Tax Withholding Methods „ Form 5500, Annual Return/Report of Employee Benefit Plan „ Publication 502, Medical and Dental Expenses „ Publication 503, Child and Dependent Care Expenses „ Form 8839, Qualified Adoption Expenses (attachment to Form 1040) 40 Chapter 9 Scholarships & Educational Assistance Educational Assistance Programs IRC Section 127 addresses educational assistance programs and whether this assistance should be included in income. An educational assistance program must be a written plan that benefits employees. The plan may not discriminate in favor of highly compensated employees. Gross income of an employee does not include amounts paid or expenses incurred by the employer for educational assistance to the employee. The income exclusion from employee gross income is limited to $5,250 per employee in educational assistance during a calendar year. The excludable amount is not subject to income tax withholding or other employment taxes. The education need not be job-related. For purposes of IRC Section 127, the term “educational assistance” means: „ The payment, by an employer, of expenses incurred by or for an employee for the employee’s education (including, but not limited to tuition, fees and similar payments, books, supplies and equipment); and „ The provision, by an employer, of courses of instruction for an employee (including books, supplies and equipment), but does not include payment for or the provision of tools or supplies which may be retained by the employee after completion of a course of instruction, or meals, lodging or transportation. The term “educational assistance” also does not include any payment for, or the provision of, any benefits for any course or other education involving sports, games or hobbies. If you don’t have an educational assistance plan or you provide more than $5,250 to an employee in annual education assistance, the payment is taxable unless it qualifies as a “working condition” fringe benefit. See chapter 2, Publication 15-B, Employer’s Tax Guide to Fringe Benefits, for more information. Scholarships A scholarship or fellowship grant is any amount paid or allowed to, or for the benefit of, an individual to aid the individual in the pursuit of study or research. A scholarship may, for example, be in the form of a reduction owed by the recipient to an educational organization for tuition, room and board, or any other fee. IRC Section 117 provides an exclusion from income for certain scholarships made to an individual who is candidate for a degree. IRC Section 170 defines an educational institution as an educational organization, which maintains a regular faculty, a curriculum and has a regularly enrolled body of students on site. Nontaxable Benefits Only “qualified scholarships” may be excluded from income. Where participants are degree candidates, these payments will ordinarily be excludable from the recipient’s gross income to the extent of their qualified tuition and related expenses. The student may be either an undergraduate or graduate. 41 Chapter 9: Scholarships & Educational Assistance A qualified scholarship is defined as any amount expended for “qualified tuition and related expenses,” which includes: „ Tuition and fees required for the enrollment or attendance of a student at an eligible educational institution. „ Course-related expenses, such as fees, books, supplies and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in the course of instruction. Qualified education expenses do not include the cost of: „ Room and board „ Incidental living expenses „ Travel „ Research „ Clerical help „ Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Thus, scholarship receipts that exceed expenses for “qualified tuition and expenses” are not excludable from a recipient’s gross income (scholarship amounts used to pay these costs are taxable). The scholarship may be tax free only if the student is a candidate for a degree at an educational institution. Thus, in the case of non-degree candidates, the entire amount of the scholarship is includable in gross income of the recipient regardless of its use. Reporting Taxable Scholarship Benefits Do not issue Form 1099-MISC to report scholarship or fellowship grants. A scholarship or fellowship grant represents payment for services when the grantor requires the recipient to perform services in return for granting of the scholarship or fellowship. A requirement that the recipient pursue studies, research or other activities primarily for the benefit of the grantor is treated as a requirement to perform services. A scholarship or fellowship grant conditioned on either past, present or future services by the recipient, or on services that are subject to the direction or supervision of the grantor represents payment for services and is considered wages. The grantor of this amount is subject to certain withholding and reporting requirements on wages, including withholding for income taxes and filing of Forms W-2. The application of Social Security and Medicare taxes depends on the nature of the employment and the status of the grantor. Exceptions You do not have to include in income the part of any scholarship or fellowship that represents payment for teaching, research or other services if you receive the amount under the: „ National Health Service Corps Scholarship Program, or „ Armed Forces Health Professions Scholarship Financial Assistance Program. You must also be a candidate for degree at an eligible educational institution, and use part of the scholarship or fellowship to pay qualified education expenses. 42 www.irs.gov/tribes Chapter 9: Scholarships & Educational Assistance You are not required to report other taxable scholarship or fellowship payments (to a degree or non-degree candidate) to the IRS on any form. The recipient of these payments is responsible for determining whether the payment is, in whole or in part, includable in gross income for federal income tax purposes. You may wish to advise scholarship recipients that the amount of their scholarship or fellowship stipends that exceeds their qualified tuition and related expenses, if any, is generally includible in gross income for federal income tax purposes. References: „ Publication 15, (Circular E), Employer’s Tax Guide (Section 15, Special Rules for Various Types of Services and Payments, for students) „ Publication 15-A, Employer’s Supplemental Tax Guide (Section 5, Wages and Other Compensation, Scholarship and Fellowship Payments) „ Publication 15-B, Employer’s Tax Guide to Fringe Benefits, (Section 2, Fringe Benefit Exclusion Rules, Working Condition Benefits) „ Publication 970, Tax Benefits for Education „ Instructions for Forms W-2 and W-3 43 www.irs.gov/tribes Chapter 10 Earned Income Tax Credit The Earned Income Tax Credit (EITC) is a refundable tax credit for certain workers whose earned income is below a certain level. Because it is a “credit,” the EITC is subtracted from the amount of tax owed, if any, on the worker’s individual income tax return. As a refundable credit, any excess over the total tax is refunded to the individual. Even workers who have not filed a tax return in the previous year because their wages were below the minimum income level requirements to file may be able to get the credit – but only if they file a tax return. Therefore, you must notify each employee who worked for you at any time during the year, and from whom you did not withhold any income tax about EITC. You will meet the notification requirements by giving the employee either Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC), your own written statement as long as it has the exact wording of Notice 797 or the official IRS Form W-2, Wage and Tax Statement, which contains a statement on the back of Copy B. You do not need to notify employees who claimed exemption from withholding on Form W-4, Employee’s Withholding Allowance Certificate. The amount of the credit depends on a worker’s wages and family size. To claim the EITC, a worker must file a tax return. But many of the workers who are eligible for the EITC do not ordinarily file tax returns because their incomes are too low to trigger any federal tax liability. These workers may have had little or no exposure to the federal tax forms that explain what the EITC is and how to claim it. The IRS website provides extensive resources on the EITC for individuals, employers and tax professionals. References „ Publication 15, (Circular E), Employer’s Tax Guide „ Publication 15-A, Employer’s Supplemental Tax Guide „ Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC) 44 Chapter 11 Employment Taxes Employers must deposit and report employment taxes with the Internal Revenue Service. Employment taxes are: „ Amounts you should generally withhold from your employees’ wages for income, Social Security and Medicare taxes, and „ Matching amounts of Social Security and Medicare tax you pay on behalf of your employees. Employer Identification Number An employer identification number (EIN) is a nine-digit number that IRS assigns in the format XX-XXXXXXX. It is used to identify the tax accounts of employers and certain other entities that have no employees. The IRS uses the number to identify taxpayers that are required to file various tax returns. EINs are used by employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates of decedents, government agencies, certain individuals and other business entities. Use your EIN on all the items that you send to the IRS and the Social Security Administration (SSA). If the employer does not already have an EIN, it will need to get one if the employer: „ Pays wages to employees; „ Is required to withhold taxes for non-wage payments; „ Operates as a corporation, partnership; or „ Files any of these tax returns: — employment; — excise; — fiduciary; or — alcohol, tobacco and firearms. You can get an EIN by applying: „ Online, „ By fax, or „ By mail. Apply Online The online EIN application is the preferred method for taxpayers to apply for and obtain an EIN. Once the application is completed, the information is validated during the online session and an EIN is issued immediately. The online application process is available for all entities whose principal business, office or agency, or legal residence (in the case of an individual), is located in the United States or U.S. Territories. The principal officer, general partner, grantor, owner, trustor, must have a valid taxpayer identification number (Social Security number, EIN, or individual taxpayer identification number) to use the online application. Note: Taxpayers who apply for an EIN online have the option to view, print and save their EIN assignment notice at the end of the session. Apply by Fax Taxpayers can fax the completed Form SS-4, Application for Employer Identification Number, to the appropriate fax number (see Instructions for Form SS-4, Where to File or Fax) after ensuring that the Form SS-4 contains all the required information. If it is determined that the entity needs 45 Chapter 12: Preparation of Payroll Checks a new EIN, one will be assigned using the procedures for the entity type. If the taxpayer’s fax number is provided, a fax will be sent back with the EIN within four business days. Apply by Mail The processing time frame for an EIN application received by mail is four weeks. Ensure that the Form SS-4 contains all the required information. If it is determined that the entity needs a new EIN, one will be assigned using the procedures for the entity type and mailed to the taxpayer. Find where to mail Form SS-4 in the Instructions for Form SS-4. Other Important Information Daily Limitation of an EIN To ensure fair treatment for all taxpayers, the IRS limits EIN issuance to one per responsible party per day. This limitation applies to all requests for EINs whether online or by fax or mail. Form SS-4 When completing Form SS-4 Indian tribal governments should select the “Indian tribal governments/enterprises” box on Line 9a, Type of entity. Designating this box will let IRS know the entity’s status as a federally recognized Indian tribal government. This will reduce errors and facilitate processing of tax returns by routing them to specially trained employees. It allows IRS to code the returns so any questions will be directed to the IRS Indian Tribal Governments office. Because it takes several weeks to receive an EIN after the Form SS-4 has been filed, apply for the EIN well before tax returns are due. An EIN may be obtained sooner by using the online EIN application process or by fax. Federal Employment Taxes Employment taxes represent the income, Social Security and Medicare (FICA) taxes withheld from the wages of an employee plus the employer’s share of Social Security taxes and federal unemployment (FUTA) taxes. The withheld (employee’s) portion of employment taxes is referred to as “trust fund” taxes. FUTA is addressed later in this publication. If the tribe is required to withhold income or Social Security and Medicare taxes, Form 941, Employer’s Quarterly Federal Tax Return, reporting the amounts withheld must be filed. However, other forms are used under certain circumstances. „ Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, is used for to report income tax withheld and Social Security and Medicare taxes on wages paid to farmworkers, including household employees working in a private home on a for-profit farm. „ Form 944, Employer’s Annual Federal Tax Return, is used for employers whose liability for Social Security, Medicare and withheld federal income taxes for the calendar year is $1,000 or less. „ Form 945, Annual Return of Withheld Federal Income Tax, is used to report income tax withheld from non-payroll payments, such as pensions, IRAs, gambling winnings, Indian gaming profits and backup withholdings. 46 www.irs.gov/tribes Chapter 11: Employment Taxes Alternative Signature Method (Revenue Procedure 2005-39). Effective with returns filed after June 2005, corporate officers or duly authorized agents may sign any of the following forms by facsimile (such as, by rubber stamp, mechanical device or computer software program): 1) The Form 94X series, 2) Form 1042, 3) Form 8027, 4) Form CT-1, or 5) Any variant of the designated form (for example, Form 941-X). Officers or agents using a facsimile means of signature are personally responsible for ensuring that their facsimile signature is affixed to returns. The person filing the form must retain a letter, signed by the officer or agent authorized to sign the return, declaring under penalties of perjury that the facsimile signature appearing on the form is the signature adopted by the officer or agent and that the facsimile signature was affixed to the form by the officer or agent or at the officer’s or agent’s direction. The let [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A63a2d8a521adc2df. Public record. Not legal advice.