If you need to know the basics of self-employment tax, please refer to my post on that topic. This post attempts to help ministers decide whether or not to waive their obligation to pay self-employment taxes. Is it wise? What are the consequences?
Certain sects such as Old Order Amish, Mennonite, and Christian Science practitioners prohibit church members from participating in social security and Medicare. Some ministers may also be conscientious objectors to paying self-employment taxes.
Can Some People Really Skip Paying Self-Employment Tax?
Congress created an exception to the self-employment tax mandate. Taxpayers may file form 4361: Application for Exemption From Self-Employment Tax for Use by Clergy, Members of Religious Orders and Christian Science Practitioners[2]. When completing the form, the minister’s reasoning should include his/her personal religious or philosophical basis for not paying self-employment taxes. If a minister plans to file for an exemption, the request must be approved by the IRS. Some requests are denied by the IRS – seek guidance from a knowledgeable professional before submitting claims! Furthermore, certain types of clergy, such as chaplains for the U.S. Armed Forces, are forbidden to file for the exemption[3].
The choice to file form 4361 has serious and permanent implications. Once a taxpayer has opted out of participating in self-employment tax, that choice is irrevocable, even if he decides later to participate. Congress has very occasionally provided windows of opportunity to revoke a previous exemption (the last opportunity was offered in 2001).
Members of the clergy need to understand that this exemption is only for ministerial income – if a minister has other employment, all of that income is subject to SECA. Being exempt from the tax also means ineligibility for the benefits at retirement. For young clergy, retirement feels far away, but the relief from payment of the tax is immediate. Filing form 4361 to be exempt from paying the tax may be extremely tempting to young ministers, who are typically surviving on a relatively low salary and paying student loans for seminary education.
The Risks of Waiving
Considering that SECA is a substantial tax burden on clergy – in fact, it is the greatest tax burden for ministers, why would it be a bad idea to file for an exemption and stop paying it?
The greatest risk is an unexpected death of a minister, and the risk that his/her spouse and children could potentially be left with no income and no safety net. For clergy with employed spouses who pay into the social security system, perhaps this is not such a great risk. However, if the spouse is a stay-at-home parent, and the clergy has little to no life insurance for the spouse, the family is in a precarious situation in the future.
Consider also: should the clergy live (and work) until age 75, and then pass away, in the absence of any retirement savings his spouse could potentially need an income to survive 20 – 25 additional years! At that point in her life, she might be too elderly to maintain full-time employment.
What if You Save for Retirement – and Choose to Waive Social Security Benefits?
If a minister chooses to file for the exemption, there needs to be savings and insurance in place to provide financial security for himself and his family in the future. Term life insurance, long-term disability insurance, long-term care insurance, and a well-funded retirement plan are essential parts of living out retirement years in the absence of social security and Medicare benefits.
Finally, for those who need more information about this topic straight from the IRS website, please refer to the link posted in the footnotes[2].
Most tax preparers (including C.P.A.s) are not experts in clergy tax preparation! Be careful who you hire. Ask questions about their expertise. Need to speak with a tax professional who is knowledgeable on clergy tax topics? Call Heritage Income Tax at (513) 900-9513 and ask for Aubrey. You may also reach me at aubrey@heritageincometax.com.
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[1] The author, Aubrey Corcoran, E.A., M.A. is the owner of Heritage Income Tax, Ltd. She is a graduate of the Income Tax School and a former high school science teacher. The views expressed in this paper are her own, and are not intended as a substitute for professional tax planning or legal advice. [2]About form 4361, Application for Exemption From Self-Employment Tax for Use By Clergy, Members of Religious Orders and Christian Science Practitioners https://www.irs.gov/forms-pubs/about-form-4361 [3] id