Should Ministers Opt Out of Social Security?

By Raul Rivera

There is a difference between being a know-it-all and being someone who is well informed. 

The former is a person who behaves as if he/she knows everything, when in reality he/she does not. The latter is a person who not only has a lot of knowledge about a wide range of subjects, but he/she also possesses the capability of asking smart questions and has a willingness to find the answers. 

As a minister, are you well informed as to what it means to “opt out” of social security? 

In my years of speaking with thousands of pastors and ministry leaders, I have found that most ministers are typically not well informed when it comes to opting out of social security.

Many pastors have simply been given bad advice, and as a result, their decisions and assumptions involving the self-employment tax exemption (also known as opting out of social security) have been based on faulty information. 

In this article, I will provide you with the information you need as a minister to make a well-informed decision regarding the self-employment tax exemption. 

What is the self-employment tax exemption? 

Section 1402 of the Internal Revenue Code allows a properly ordained minister of the gospel to apply for a self-employment tax exemption by filing Form 4361 with the IRS. 

For tax purposes, ministers have a “dual-tax status.” In short, this means that ministers are considered both an employee of the church and self-employed. Therefore, as a minister, you are responsible to withhold and pay the self-employment tax, which is 15.3% of your earnings. 

However, as a minister, you can apply to become exempt from paying the 15.3% self-employment tax and still receive the social security benefits, including disability and medical care if you follow certain steps.

4 Reasons to Opt Out of the Self-Employment Tax

Opting Out of social security is a common topic that pastors often ask us about at our conferences. If you have not yet done so, then I encourage you to register to attend one of our conferences! 

Below are 4 reasons to consider opting out of social security. 

1. As a minister, you have a conscientious opposition.

Applying to opt out of the self-employment tax requires you to be “conscientiously opposed.” The statement expressing your conscientious opposition on Form 4361 can be somewhat confusing, so for clarification purposes I have simplified it for you. 

In short, you are saying that,

“I certify that I am conscientiously opposed to the acceptance of any public insurance that makes payments toward the cost of medical care.”

The reasons for being “conscientiously opposed” can vary. For me, I felt that not opting out conflicted with my preaching that we "would be blessed in the city, and blessed in the fields . . . blessed when you come in, and blessed when you go out.”

2. Your religious principles compel you to opt out.

A rarely noticed provision in Form 4361 states that a person can opt out of social security because of religious principles. One of these principles may be that some believe putting money into the social security system is bad stewardship of what God has entrusted to them (parable of the ten talents).

Others may say that social security benefits are not inheritable, and it runs against Proverbs 13:22, which says, "A good person leaves an inheritance for his children's children.”

3. You have a limited window of opportunity to opt out.

Many do not realize this until it is too late, but section 1402 says that a minister, once ordained, faces a timing issue. 

The law states that your Form 4361 application must be signed and submitted to the IRS on, or before, the due date of your second personal tax return. This tax return should also state that you earned at least $400.00 in ministry as a minister.

Sound tricky? It is. 

We explain this in detail at all of our conferences and in our conference manual.

4. You are well informed of your options. 

The first and most important thing you need to have is knowledge of social security. The definition of social security according to IRS Form 4361 is as follows:

• Public insurance that makes payments to you in the event of death, disability, old age, or retirement; and
• Payments toward the cost of, or to provide services for, medical care.

In reality, the self-employment tax you pay covers retirement benefits like Medicare and Medicaid. Many folks do not know that social security and Medicare are all part of one program.

What to do after you apply for the self-employment tax exemption 

When ministers apply for self-employment tax exemption, they can keep the 15.3% of the income they make in ministry that usually goes to the IRS. The question then becomes, "What are you going to do with that money?"

There are two conditions that will dictate how to use the money. They are as follows:

1. Part-time minister: The majority of ministers who 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 until the time comes when the church can 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 is not paid in taxes. 

2. Full-time minister: If you are in full-time ministry, it is recommended to take a few precautions so that if an unforeseen, negative event occurs in your life, you are financially prepared. 

• Make sure to reach 40 credits: Most ministers entering ministry have 40 credits, because they have worked a job in the marketplace. You can check your credits by going to www.ssa.gov. When I went full-time in ministry, I only had 32 credits. When I was 26 years old, I knew I had over 30 years to get the 8 remaining credits. I looked for other income opportunities outside of ministry that allowed me to earn additional income that I reported on my tax return. This allowed me to reach the 40 credits I needed. 
• Purchase long-term disability insurance: After I reached 40 credits, I did not need to seek outside income opportunities. However, when I stopped earning income outside of ministry, my 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 the following two things: (1) keep earning outside income, or (2) purchase long-term disability insurance. You can use some of the money you save in taxes to do this.

(Recommended reading: “How Ministers Can Prepare for Retirement”)

Where should you go from here? 

There are times in our lives when we may be given some bad advice. However, if we are given bad advice, it is what we choose to do with it that matters. 

If opting out happens to be a subject that you are still unsure of, we can help!

Through our self-employment tax exemption service for ministers, we have helped hundreds of ministers across the country make a better, informed decision. If you would like to do the same, please give us a call at 877-494-4655. 

Handpicked articles for you:

• “3 Common Mistakes Churches Make When Paying Pastors”
• “How Pastors Misuse Church Credit Cards & What To Do About It”
• “10 Simple Steps to Ensure Legal Ordination”

---