by Richard R. Hammar, J.D., LL.M., CPA
Executive Summary
The coverage of ministers under Social Security has caused much confusion because of two special rules. First, ministers always are self-employed for Social Security with respect to their ministerial services. This means they pay the self-employment tax, not "Social Security" and "Medicare" taxes. Second, under very limited circumstances, ministers can exempt themselves from self-employment taxes with respect to services they perform in the exercise of ministry by filing a timely Form 4361 with the IRS. The treatment of ministers under Social Security is the subject of this lesson. We will give special attention to this of opting out of Social Security
Lesson
Overview
Ministers are treated very differently than other workers for Social Security purposes. First, they always are self-employed with respect to their ministerial services. This means they pay the self-employment tax, not "Social Security" and "Medicare" taxes. This special rule is explained fully in another lesson in this series. Second, under very limited circumstances, ministers can exempt themselves from self-employment taxes with respect to services they perform in the exercise of ministry by filing a timely Form 4361 with the IRS.
Exemption
Ministers are automatically covered under the Social Security system, but they are permitted to exempt themselves from coverage if they meet the following conditions:
(1) minister
Only ministers who are ordained, commissioned, or licensed by a tax-exempt church or religious organization qualify for exemption.
(2) file Form 4361
The exemption application (Form 4361) must be filed on time with the IRS. The deadline is the due date of the federal tax return for the second year in which a minister has net earnings from self-employment of $400 or more, any part of which derives from the performance of services in the exercise of ministry. In most cases, this means the form is due by April 15 of the third year of ministry.
(3) religious opposition to accepting public insurance benefits
A minister certifies on Form 4361 that "I am conscientiously opposed to, or because of my religious principles I am opposed to, the acceptance (for services I performed as a minister . . .) 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." The form states that "public insurance includes insurance systems established by the Social Security Act." There are three important factors to note that new ministers often do not fully understand: (1) The tax regulations make it clear that "conscientious opposition" refers solely to religious opposition. Non-religious conscientious opposition to receiving public insurance benefits (including Social Security) does not qualify. (2) The exemption is available only if a minister is opposed on the basis of religious considerations to the acceptance of Social Security benefits rather than to payment of the tax. A minister may have religious opposition to payment of the tax, but this alone will not suffice. The individual must have religious opposition to accepting Social Security benefits upon his or her retirement or disability. (3) Participation in private insurance programs is permitted, since these are not "public insurance." As a result, a minister who files the exemption application may still purchase life insurance or participate in retirement programs administered by non-governmental institutions (such as a life insurance company or pension board).
(4) notification of ordaining, commissioning, or licensing church or denomination
Applicants for exemption must inform their "ordaining, commissioning, or licensing body" that they are opposed to Social Security coverage for services they perform in the exercise of ministry. By signing Form 4361, applicants verify that they have satisfied this requirement. Ministers who plan to apply for exemption from Social Security coverage must be sure to notify the church or denomination that ordained, commissioned, or licensed them regarding their opposition to Social Security coverage and presumably of their intention to file an exemption application. This notification must occur prior to the time the exemption application is filed.
(5) IRS verification
No application for exemption will be approved unless the IRS "has verified that the individual applying for the exemption is aware of the grounds on which the individual may receive an exemption . . . and that the individual seeks an exemption on such grounds." This "verification" requirement was adopted to prevent the widespread practice of ministers exempting themselves from Social Security coverage solely on the basis of financial considerations. To satisfy this requirement, ministers must sign and return a statement the IRS mails to them to certify that they are requesting an exemption based on the grounds listed on the statement.
Common questions
Some common questions pertaining to the exemption from self-employment taxes are addressed below.
(1) When is an exemption effective?
Filing a timely exemption application does not necessarily qualify a minister for exemption. An exemption is effective only when an applicant receives back one of the three 4361 forms (it is filed in triplicate) from the IRS marked "approved." Ministers should be careful not to lose an approved Form 4361.
(2) Will I receive a refund of self-employment taxes I paid before filing Form 4361?
Yes. To illustrate, ministers who wait until close to the deadline for filing an exemption application will have paid self-employment taxes on their ministerial income for two years. IRS Publication 517 contains the following instructions for claiming a refund of these taxes:
If, after receiving an approved Form 4361, you find that you overpaid SE tax, you can file a claim for refund on Form 1040X before the period of limitations ends. This is generally within 3 years from the date you filed the return or within 2 years from the date you paid the tax, whichever is later. A return you filed, or tax you paid, before the due date is considered to have been filed or paid on the due date. If you file a claim after the 3-year period but within 2 years from the time you paid the tax, the credit or refund will not be more than the tax you paid within the 2 years immediately before you file the claim.
(3) Can the period for filing an exemption application be extended or renewed?
No. The fact that you did not acquire an opposition to Social Security until years after you became a minister will not "restart" or delay the filing deadline. One court did allow a minister to requalify for an exemption who met the following conditions: (1) change of church affiliation; (2) reordained by his new church; (3) developed an opposition, based on his new religious convictions, to the acceptance of Social Security benefits; and (4) submitted an exemption application (Form 4361) by the due date of the federal tax return for the second year in which he had net self-employment earnings of $400 or more, any part of which comes from the performance of ministerial services in his new faith.
(4) Is an exemption from Social Security coverage irrevocable?
Yes. However, Congress has provided a few limited opportunities over the past several years for exempt ministers to revoke an exemption.
(5) Can ministers who have opted out of Social Security receive retirement and Medicare benefits based on the fully insured status of their spouse?
Yes, according to the Social Security Administration. To the extent that a minister's spouse is fully insured under Social Security as a result of nonministerial services, Social Security benefits the minister receives as a result of his or her spouse's Social Security coverage are not based on services performed in the exercise of ministry and so are not precluded by the minister's exemption. However, the minister's benefits will be reduced by the so-called "windfall elimination provision." Under this provision, the Social Security Administration can reduce the benefits of persons who did not pay Social Security taxes, such as exempt ministers seeking benefits on the basis of their spouse's coverage. For more information on this important limitation, contact your nearest Social Security Administration office.
(6) Can ministers who have opted out of Social Security purchase Medicare insurance after they reach age 65?
Yes.
(7) What benefits are provided under the Social Security program?
The basic benefits are retirement benefits, disability benefits, survivor benefits, and Medicare. Note that retirement benefits, disability benefits, and survivor benefits are inflation adjusted each year, and are tax-free for most taxpayers. These benefits are available to persons who have at least 40 quarters of covered work.
(8) Social Security benefits based on secular employment
Many ministers have paid Social Security taxes as a result of secular employment. If they exempt themselves from Social Security by filing a timely Form 4361, will they lose all benefits that would have been paid as a result of their secular employment? The answer is no. An exemption from Social Security only applies to services performed in the exercise of ministry, and so exempt ministers will receive benefits based on their secular employment (assuming that they otherwise qualify). In most cases, eligibility for benefits requires at least forty quarters of coverage.
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