Ministers and Public Insurance
By Raul Rivera
Key Point: A minister can apply to become exempt from paying the 15.3% self-employment tax. Most ministers today that apply for the self-employment tax exemption will still receive the Social Security benefits, including disability and medical care if they follow certain steps.
Section 1402 of the Internal Revenue Code allows a properly ordained minister of the gospel to apply for self-employment tax exemption. Oftentimes, I hear ministers, CPAs, and tax professionals improperly refer to it as "opting out of Social Security." It should be referred to as self-employment tax exemption. The term "opting out" makes it sound like one is leaving the Social Security system; which is not true. During one of our conferences, I spoke to a minister who several years earlier considered applying for the exemption, but chose not to because he concluded that he did not have a conscientious opposition to Social Security. I genuinely admired his integrity and how he stayed true to his heart, but I also wondered if his decision was based on bad advice. I replied by saying, "When the topic on ministers and Social Security comes up during today's conference, listen to me teach then come talk to me afterwards. "
Bad advice #1
When I talk to ministers about Social Security I repeatedly hear them tell me what their accountant or peers have told them about Social Security and "opting out."
The most common piece of bad advice is, "If you 'opt out' you won't get any benefits when you retire". There are too many people who believe that when someone chooses to apply for self-employment tax exemption, he/she is choosing to leave the entire Social Security system and will never be able to receive any retirement benefits. That is not accurate.
It applies only to income earned in ministry
When you apply for the self-employment tax exemption, the law clearly provides that it applies only to income earned in ministry. Any other income earned outside of ministry is still subject to Social Security tax and qualifies to earn that person retirement benefits. The fact is: the majority of ministers entering the ministry today are people who have worked more than 10 years in a secular job. Therefore, when they enter the ministry, they are already vested in the system by having earned the required 40 credits. This means that they will qualify to receive retirement benefits.
Bad Advice #2
The second piece of bad advice is the belief that "most ministers are not conscientiously opposed to Social Security. Out of context, that may sound true, but is it? For example, if someone were to ask me, "Raul, when you reach retirement age, will you be opposed to receiving Social Security checks?" My answer would be, "Of course not." If I need Social Security when I reach retirement age, assuming it is still solvent, I will have no problem going to the Social Security office to request my benefits. After all, I have paid into the system the time and money required to be vested. I think the problem is that many advisors ask the wrong question. Instead of asking if as a minister you are opposed to Social Security, why not ask if you have any opposition to receiving public insurance for the work you perform in ministry. The actual law in section 1402(g)(1) and in IRS Form 4361 uses the term public insurance. I will explain below.
The 4 reasons to opt out
When the Ultimate Church Conference reached the topic on ministers and Social Security, I began by sharing that there is nothing better to build your confidence than knowing the facts. When someone knows all the facts, he/she is better able to make informed decisions. In essence, when I talk about the four reasons to "opt out", I really mean that there are four facts that may give you reason to make an informed decision with a clear conscience to "opt out." Let me share these important facts.
1. Knowledge: The first and most important thing you need to have is knowledge of exactly what Social Security means. For the purposes of ministers applying to become exempt from self-employment tax, the definition of Social Security according to IRS Form 4361 is as follows:
a. Public insurance that makes payments to you in the event of death, disability, old age, or retirement;
b. Payments toward the cost of, or to provide services for, medical care.
In reality, the self-employment tax you pay covers retirement benefits, Medicare, and Medicaid. Many folks do not know that Social Security and Medicaid are all part of one program. Remember this fact as I reveal the other three.
2. Conscientious: Part of applying to "opt out" with Form 4361 requires you to sign a somewhat confusing statement. If you break it down, however, you will likely realize that you qualify to "opt out." Below is the statement from the form:
I certify that I am conscientiously opposed to, or because of my religious principles I am opposed to, the acceptance (for services I perform as a minister, member of a religious order not under a vow of poverty, or Christian Science practitioner) of any public insurance that makes payments in the event of death, disability, old age, or retirement; or that makes payments toward the cost of, or provides services for, medical care. (Public insurance includes insurance systems established by the Social Security Act.)
Let me break down the above statement. Notice the words in bold. You can read them together without losing context. Let me put them together for you: I certify that I am conscientiously opposed to the acceptance of any public insurance that makes payments toward the cost of medical care. The reason why I chose to make those words bold is because when I said "yes" to the call of God on my life and entered full-time ministry, I did not have any health insurance. In fact, I was not even guaranteed that the church could afford to pay me every week. On top of that, my wife was expecting our second child. Some very well intentioned members of the church encouraged me to apply for Medicaid (Title XIX of the Social Security Act of 1965). While I was grateful for their concern, in good conscience, I could not accept Medicaid so that I could remain in ministry. I felt it conflicted with my preaching and teaching that we "would be blessed in the city, and blessed in the fields . . . blessed when you come in, and blessed when you go out." For me it was not retirement benefits, it was public medical insurance for services I performed in ministry.
3. Religious principles: A rarely noticed provision in the statement from Form 4361 is that you are opposed for religious principals. A common religious principal is simply the fact that some believe putting money into the Social Security system is bad stewardship (parable of the talent) of what God has entrusted to them. Others say that since Social Security benefits are not inheritable, it runs against Pr. 13:22, which says, "A good person leaves an inheritance for his children's children."
4. 2-year window: Finally, section 1402 says that a minister, once ordained, faces a timing issue. The law states that your 3361 application must be signed and submitted to the IRS on or before the due date of your 2nd personal tax return where you earned at least $400.00 in ministry as a minister. Sound tricky? It is. I explain it in detail in the conference manual.
What happened to the minister at the conference?
In case it is not clear, it is my personal opinion that most ministers, when empowered with the correct information, will truly know if they really qualify. Later that day, as we approached our afternoon break, the minister approached me and shared, "Had someone explained it to me as you did today, I would have signed and turned in my form." I was happy for him and responded, "So, I guess you will do that tomorrow!" With a downcast look on his face, he said, "I still can't sign it and send it in. My two-year window has expired." I said, "There is still hope."
Three things I recommend after you apply for the exemption
When ministers apply for the self-employment tax exemption, they are now able to keep the 15.3% of the income they make in ministry that is usually paid in to the IRS. The question becomes, "What will you do with that money?" There are two conditions that exist that will dictate how you ought to use that money. They are as follows:
1. Part-time minister: The majority of ministers that start churches today do so after having worked more than 10 years in the secular world. Additionally, most start their churches while still working a secular job. As the time passes the church begins to pay them a part time salary. If you find yourself in this category, you do not need to do anything special with the money that you do not have to pay in taxes.
2. Full-time minister: If you are now at the point that you are full-time in the ministry, you will need to make some slight adjustments to ensure that you stay in good shape should negative events occur in your life.
a. Make sure you reach 40 credits: If you are like most ministers entering ministry, you probably already have your 40 credits. You can check your credits by going to ssa.gov. When I went full-time in ministry, I only had 32 credits. At 26 years of age, I knew I had over 30 years to get my 8 remaining credits. I looked for other income opportunities outside of ministry that allowed me the chance to earn income that I reported on my tax return. That gave me the 40 credits I needed.
b. Purchase long-term disability insurance: After I reached my 40 credits, I no longer needed to seek outside income opportunities. However, when I stopped earning income outside of ministry, Social Security disability coverage ceased. This meant that if I got injured or passed away, my dependent children would not have received any coverage. Therefore, I had to do one of two things: keep earning outside income, or purchase long-term disability insurance. You can use some of the money you save in taxes to do that.
3. Invest in a tax-free Roth IRA: The Roth IRA is the best small investment a minister can make. He/she takes tax-free money and puts it into a tax-free investment. If you are exempt from paying self-employment tax, you have the opportunity to receive Social Security benefits and also tax-free Roth IRA income at retirement. Why not do it?
Get good advice
There is so much more to this topic, that when I wrote this article, the one thing I knew was that it would be impossible to cover every circumstance. Therefore, I recommend that you call us at 770-638-3444 and discuss your options with one of our consultants. It would be an honor to serve you.