By Joseph Stenken, J.D.
The Internal Revenue Code provides churches and the religious with different tax rules than what generally apply to others. Among these different rules are that churches themselves are tax exempt and so generally do not pay income taxes. Another is that for retirement plans, “church plans” are subject to different rules than qualified plans of most other organizations.
Ministers are subject to two rules that treat them differently than other employees. One is that all ministers are treated as self-employed for Social Security tax purposes even if they are employees of a church. Also, what might be the biggest difference between ministers and other taxpayers is that ministers may be able to opt out of Social Security and Medicare completely under certain circumstances.
Ministers who are employees of a church are a type of hybrid employee. For regular income tax purposes they are employees. But for Social Security purposes they are considered self-employed and do not have Social Security taxes withheld. In fact, ministers are not even required to have income tax withheld although they may voluntarily elect to do so.
As mentioned above, ministers and other religious workers may be able to opt out of the federal Social Security and Medicare system. But these individuals cannot just opt out because they do not want to be in these federal insurance systems. Instead they must certify to the federal government that they conscientiously object to paying taxes and taking part in a federal social insurance program.
In order to opt out of the Social Security the minister must file IRS Form 4361. This form must be filed by the due date for the second year the minister had earnings from self-employment from ministerial income. So this election must be made early in a minister’s career. And the election the minister makes to opt out of Social Security is irrevocable.
However, opting out of Social Security brings with it other considerations.
Retirement Savings Needed
If the pastor decides to opt out of Social Security and Medicare then saving for retirement is a must. While many might feel that Social Security retirement benefits for people with modest income amounts are not what they should be, benefits for those with higher income levels are even lower as a percentage of earnings while that person was working. Deciding to opt out of Social Security will mean that there is no back-up for a person’s retirement years. It will be completely on the individual.
Disability Insurance Needed
One overlooked benefit of Social Security are its disability benefits. Opting out of Social Security benefits means no disability benefits for the worker or the worker’s family. The Social Security Administration has estimated that one in four 20 years olds can be expected to be out of work for at least one year due to disability (Social Security Administration, Disability and Death Probability Tables for Insured Workers Born in 1997, Table A).
Medical Insurance in Retirement Needed
Opting out of Social Security also means that Medicare Part A benefits are not available unless they are paid for. For those with less than 40 quarters of Social Security coverage Medicare Part A will cost $458 per month in 2020. This amount is adjusted each year. For someone with between 30 and 40 quarters of coverage Medicare Part A costs $252 per month. This is a per person cost so for a married couple the cost would be more than $900 per month if neither member of the couple qualified for Medicare Part A.
About the author:
Joseph Stenken, J.D., CLU®, ChFC®, is an Advanced Markets Product Consultant at Ameritas Life Insurance Corp. He is also a co-author of The National Underwriter Company’s The Tools and Techniques of Retirement Planning and Retirement Planning.