Is it Best for Me to Opt Out of Social Security?

Introduction

This article examines what ministers need to know about social security.

Executive Summary

The coverage of ministers under Social Security is difficult to comprehend because of two rules. First, ministers always are self-employed for Social Security which means they must 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.

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

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 by the deadline with the IRS. This deadline is the due date of the federal tax return for the second year a minister has earnings from self-employment of $400 or more, if any part comes from the performance of services as a minister. This means the form is usually due by April 15 of the third year of ministry.

(3) religious opposition to accepting public insurance benefits

A minister must certify 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 3 factors to note that ministers often don't fully understand:

 (1) The tax regulations make it clear that "conscientious opposition" refers solely to religious opposition, and does not include non-religious conscientious opposition.

(2) The exemption is applicable only if the minister is opposed to the acceptance of Social Security benefits rather than to payment of the tax. Even if the minister has religious opposition to paying the tax, this alone will not suffice.

(3) Participation in private insurance programs is permitted, since these are not "public insurance."

(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. By signing Form 4361, applicants verify that they already satisfied this requirement.  This notification must occur prior to the time the exemption application is filed.

(5) IRS verification

Applications for exemption will never 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"  was adopted to prevent the abuse by ministers of exempting themselves from Social Security coverage solely because of financial advantages. To satisfy this requirement, a minister will be required to sign and return a statement the IRS mails to them to certify that they are requesting this exemption based upon the grounds listed on the statement.

Common questions

Some of the more common questions about the exemption from self-employment taxes:

(1) When does the exemption take effect?

Filing an exemption application doesn't qualify a minister for exemption. The exemption goes into effect only when the applicant receives back a 4361 form (it is filed in triplicate) from the IRS marked "approved." DON'T LOSE YOUR APPROVED FORM 4361!

(2) Will I receive a refund of the self-employment taxes I paid before I filed my Form 4361?

Yes.

If, after receiving an approved Form 4361, you find that you previously overpaid SE tax, you can file for a refund on Form 1040X before the period of limitations ends.

(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.

(4) Is an exemption from Social Security coverage irrevocable?

Yes, for the most part. However, there are a few limited opportunities 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. If a minister's spouse is fully insured under 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.

(6) Can ministers who have opted out of Social Security still purchase Medicare insurance after they reach age 65?

Yes.

(7) Social Security benefits based on secular employment

Many ministers have paid Social Security taxes as a result of secular employment.

If ministers are exempted from Social Security, 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 income received in the exercise of ministry, 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.