Social Security exemption Archives

How Do Pastors Opt Out Of Social Security?

by Amy Monday, August 3, 2020

You’ve heard that as a pastor you can opt out of Social Security. But how do you actually do it? Here is a step-by-step guide showing how pastors can opt out of Social Security and the accompanying self-employment taxes. It’s really very simple:

Step 1: Qualify

Not just anyone can opt out of Social Security. There are certain criteria that must be met in order to do so:

You must be ordained, commissioned, or licensed by a church.
Your church must be a tax-exempt religious organization.
You must oppose receiving public insurance because of your religious principles or be conscientiously opposed to it.

Step 2: File IRS Form 4361

Form 4361 is a simple, one-page form that includes your basic information, your church’s information and a statement stating your opposition that you must sign. You must file the form by the due date for the tax return for the second year in which you begin to receive ministerial income of $400 or more. For example, if you get licensed in 2015 and earn $10,000 as a pastor that year and the next, you must file the form by April 15, 2017 (or October 15, 2017, if you request an extension). This article explains the timing in more detail.

Step 3: Inform Your Church

You must inform the church that licensed, ordained, or commissioned you that you have a religious or conscientious opposition to the acceptance of public insurance. There is not a specific way that you have to inform them, but it would be a good idea to have it in writing and keep a copy of whatever you give them.

Step 4: Verify Your Grounds For Exemption

Once the IRS receives your Form 4361, they will mail you a statement that describes the grounds for receiving an exemption under section 1402(e) of the Internal Revenue Code. The statement must be signed, verifying that you have read it and seek exemption on the grounds listed on the statement. You must mail it back to the IRS within 90 days of receiving it in order to be approved.

Step 5: Receive Approved Copy Of Form 4361

If your exemption is approved, you will receive a copy of your Form 4361 marked “approved” for your permanent records. Make sure to keep your approved Form 4361 in a very safe place, like a safety deposit box or fireproof lock box. My church keeps all of the pastors’ forms for them in the church’s safe. Remember, though, it is your responsibility, not the church’s, to maintain a copy. I’ve heard from pastors who have reached retirement age and had trouble with the IRS because they couldn’t produce their copy.

Once you opt out of self-employment taxes you can’t just take the money and run. If you do that, you will surely regret it later, as I’ve heard from many pastors over the years. Social Security provides some essential safety nets, and once you’ve opted out it’s up to you to make sure you have them in place for yourself. Click here to read about what you need to do to make sure you’ve got your back covered. One last thing: Remember, the decision to opt out of Social Security is permanent, so don’t take it lightly.

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Could The Clergy Act Of 2020 Allow You To Opt Back Into Social Security?

by Amy Monday, July 27, 2020

I have heard from countless pastors who opted out of Social Security in their youth only to regret it 30 years later. By that time, the idea of retirement has become more of a reality and they realize that they have done nothing to prepare. Apparently, California Congressman Kevin McCarthy has heard the same. In February, McCarthy introduced a bill that would allow pastors who had opted out to opt back in. The bill, H.R. 5904, is also called the Clergy Act of 2020.

What Does The Clergy Act Of 2020 Say?

The bill, which you can read here, is short and simple. It’s stated goal is, “To allow a period in which members of the clergy may revoke their exemption from Social Security coverage, and for other purposes.” It has been 20 years since the last time Congress allowed pastors to opt back into Social Security.

H.R. 5904 creates a 2-year window starting January 1, 2021, in which clergy can apply to revoke their Social Security exemption. The deadline would be the due date (including extensions) for the tax return of the second taxable year after December 31, 2020. In other words, the due date for your 2022 tax return, which is April 17, 2023, unless you file for a 6-month extension or use a non-calendar tax year.

How Can The Clergy Act Of 2020 Become Law?

Right now, the bill is in the first stage of the legislative process. It was introduced to the Committee on Ways and Means, who will determine if it should be sent on to the entire House of Representatives. If approved by the House, it would then be sent to the Senate. After passing votes in both the House and the Senate, it would go to the President to sign into law.

It’s not quite as simple as it sounds, though. Many bills don’t make it out of committee. Even if the House passes it, the Senate has to pass the exact same version of the bill. If they want to make changes, then it gets sent back to the House for approval. It can be a long and difficult process, especially considering how well our politicians are all getting along these days. On the government’s bill tracking website, Skopos Labs only gives the bill a 2% chance of being enacted. But there’s still a chance.

Should I Opt Back Into Social Security?

No matter the percentage chance assigned, it is a good idea to consider what you would do if the bill is signed into law. Would you take advantage of the opportunity to reenter the Social Security system?

I’ve been asked for recommendations on this. First of all, the decision to opt out is supposed to be made based on firmly held religious convictions and matters of conscience. I do not know what you think and believe and neither can I tell you what to believe. You’ll have to work that out with God himself.

I can only give you tips on how to view it from an economic perspective. Now, the IRS makes it abundantly clear that you are not allowed to opt out for economic reasons. Of course, the proposed bill says nothing about opting back in for economic reasons.

Whether or not it makes sense to opt back in from an economic perspective depends on your personal situation. If you are 50-years-old and have nothing saved for retirement, you would likely be better off opting back in. Without savings, even just a small Social Security retirement benefit can be a game-changer for you. Remember also, that the Social Security program provides more than just retirement benefits.

If you are young and saving responsibly, you may be better off from a numbers perspective to stay out of Social Security. Devin at socialsecurityintelligence.com ran the numbers and found that it is very possible to end up with more if you stay outside of the system, though you take on additional risk.

The key words there are “saving responsibly.” If you are young and think you’ll start saving later, then you are a good candidate for opting back in. Because later never comes. Yes, you may get a pay raise when you become senior pastor, but by that time you’ll also have 3 kids that want gymnastics and soccer lessons and 3 meals a day and you will feel like you have less margin then than you do now.

If you’re unsure how the numbers work out in your situation, I would encourage you to hire a financial advisor to do a complete analysis for you. There are a lot of good advisors out there, but if you need a recommendation, email me because I work with a great one.

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What Social Security Spousal Benefits Can A Pastor Who Has Opted Out Receive?

by Amy Monday, June 8, 2020

While pastors have the unique opportunity to opt out of the Social Security system, that doesn’t mean that they cannot participate at all. If your spouse has earned enough Social Security credits to be eligible for benefits, then you are eligible for some benefits as well. These are the spousal benefits that you can receive:

Medicare Benefits

Many people wrongly believe that opting out of Social Security means that you can no longer participate in Medicare. Everyone age 65 or older who is a US citizen or permanent resident and has lived in the US for at least 5 years is eligible for Medicare (and some other people, too). The difference that opting out makes is whether or not you have to pay for Part A, which is hospital insurance.

If you opt out with Form 4361, then you have to pay premiums for Part A while everyone else gets it for free. Unless your spouse is eligible for benefits. You can get premium-free Part A as a spousal benefit if you are at least 65-years-old and your spouse is at least 62-years-old. If your eligible spouse is only 60 when you turn 65 and sign up for Medicare, then you will have to pay Part A premiums for a couple of years until your spouse turns 62.

Retirement Benefits

You can also receive retirement benefits based on your spouse’s record if he or she is also collecting retirement benefits. To be eligible for spousal retirement benefits, you must be at least age 62 or caring for a qualifying child. To qualify, a child must be under age 16 or receiving Social Security disability benefits.

Social Security retirement benefits change based on when you start collecting them. The base benefit for spouses of eligible workers is half of the benefit the worker is eligible for at full retirement age. The benefit is reduced if taken before full retirement age (using the same schedule as eligible workers). For spousal benefits, they can be reduced to as little as 32.5% of the worker’s full retirement age benefit. Here is a calculator that illustrates the effects of claiming early benefits.

While workers can increase their benefits by waiting until after their full retirement age to collect them, that option is not available for spouses. No matter how long you wait, the most you can get is half of the benefit that your spouse is eligible for at full retirement age. At least while your spouse is alive.

Survivor Benefits

If your spouse passes away, you can still receive Social Security benefits based on their work record. Widows and widowers are eligible for a one-time lump sum payment of $255. Luckily, you are also eligible to receive their retirement benefits, since $255 won’t get you very far these days.

You can receive your spouse’s full retirement benefit at your full retirement age or can receive a reduced benefit as early as age 60. You can receive benefits as early as age 50 if you are disabled and the disability started before or within seven years of your spouse’s death. If you are not remarried and are taking care of your deceased spouse’s qualifying child (under 16 or disabled), then you can receive benefits at any age. Remarriage will not affect these benefits if you remarry after age 60 (or 50 if you are disabled).

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Q&A: Reader Questions About Social Security & Opting Out

by Amy Monday, May 25, 2020

Q: I’m having an accountant do my taxes who I believe hasn’t done taxes for pastors before. This is my first year in full-time ministry. My accountant is under the impression from Form 4361 that I have to be in ministry for 2 years before I can file for tax exemption. My understanding is that I just need to file this form within 2 years of claiming exemption. Can you help clarify?

A: You are correct. You can file Form 4361 the day you become a licensed minister if you want to. After 2 years, you have missed your opportunity and will be a part of the Social Security system permanently. Until you have an approved Form 4361 from the IRS you will have to pay Social Security taxes, but they can be refunded once you have an approved exemption.

Q: My husband is on staff at a local church as a licensed minister. He has been on staff for less than 2 years. Prior to that, he was in corporate America for 35 years. I understand that he is now considered self-employed. Please tell me the pros and cons of opting out of Social Security taxes. If he opts out, can he still draw Social Security and Medicare at retirement age since he has paid in for 35 years? We were told that Social Security is calculated on the 10 highest earnings years of employment. Is this true? I have a Form 4361 to fill out and send in to the IRS. I would like information prior to submitting that request. I am getting conflicting information from our CPA and staff lawyer.

A: Your husband is considered self-employed only for Social Security & Medicare (payroll) taxes. If he receives a W-2 from his church, then for income tax reasons he is still treated as an employee. (Confusing, I know.)

As for opting out of Social Security, that will not affect his eligibility for benefits that he has already earned. Social Security benefits are calculated based on 35 years’ worth of earnings. The minimum you need to have worked is 10 years, but they take numbers from 35 years to calculate your average earnings.

If he opts out, then he will not have to pay any payroll taxes on his pastoral income. When filing taxes, he would just calculate income taxes from his W-2 as he has been doing all of these years. If he doesn’t opt out, then he will have to pay 15.3% of his income in payroll taxes. When filing his tax return, he will have to fill out Schedule SE to calculate those taxes. The church is not allowed to pay payroll taxes for him.

Q: I am a retired teacher of 31 years. I retired in 2010, and am currently collecting Social Security. I entered the ministry as a pastor in 2010 and currently am pastoring. My accountant said I should not pay self-employment because I have enough paid in. I am a bit nervous. Can I lose what I currently am collecting, Medicare, etc. by filing 4361?

A: Opting out of Social Security will not affect the benefits that you are currently eligible for. However, you are only allowed to opt out of Social Security for religious reasons or matters of conscience. The IRS spells it out very clearly that you are not allowed to opt out for economic reasons. Also, if you have been pastoring since 2010 then you are no longer eligible to opt out. You only have about 2 years after you enter the ministry to elect that option.

Q: I am applying for spousal benefits from my deceased wife’s Social Security. I have a small $8,000 401(a) where I work as a chaplain who opted out with Form 4361. The Social Security rep is telling me I may be subject to WEP/GPO reduction if my 401(a) is a pension.

A: The Social Security Administration’s Operations Manual clearly states that “A monthly periodic payment to a minister based on service as a minister is not considered a pension for purposes of WEP.” You can refer the SS rep to this webpage.

Q: I filed a Form 4361 after seminary. I worked as a sole proprietor in secular work for 20 years. Now (last 7 years) I am working for a non-profit religious organization and they have been making payments to Social Security. How do I know if these payments will be credited to my Social Security benefits or not? If I have the organization stop these how do I know the effect on my future benefits?

A: The best thing for you to do is to set up an account at ssa.gov where you can see your earnings history. That way, you will know the amount of income for each year that the Social Security Administration (SSA) is using to calculate your benefits. You can see if the payments your organization has been making are being credited.

The SSA calculates benefits based on your highest 35 years’ earnings. If you have less than 35 years, they just use zeroes for the extra years up to 35. So, fewer years of work or lower pay will result in lower benefits.

If you are working as a “minister of the gospel” for your current organization, then they are not supposed to be paying Social Security for you. The definition of “minister of the gospel” is the same for Social Security and the housing allowance, so you can learn more about that here.

Q: We have a pastor that was cut from salary to hourly wages. With now paying hourly wages, is the church responsible to pay half of the Social Security and Medicare taxes?

A: As long as the pastor is still functioning as a pastor, she is still responsible for paying her own payroll taxes regardless of the hours that she works. It is not the church’s responsibility.

Q: I am an ordained minister and I am a real estate agent. The income I receive as a minister is very little and the income I receive from the real estate work is better. I have 3 questions:

1. Do I file Form 4361 and WAIT for an approval response from the IRS before I can file my regular taxes?

2. If I get the 4361 approved, does that mean I can include this form every time I file my real estate taxes and then not pay taxes? Then I would not have to pay taxes from my real estate earnings.

3. Later on in future years, I understand that once the 4361 is approved we can file form 2031 to revoke the renouncing of receiving public insurance (Social Security). How difficult is obtaining the 2031 approval?

A: Here are the answers to your questions:

1. Go ahead and file your taxes as usual. Once your Form 4361 is approved, you can request a refund of any Social Security taxes that you have paid for your ministerial services up to that point. Because of the coronavirus, this year’s tax filing deadline has been extended to July 15, so you can wait up until then if you would prefer to wait.

2. Form 4361 only applies to your ministerial earnings. Your real estate income is subject to Social Security and taxed as usual.

3. Filing Form 2031 to opt back into Social Security is not currently an option. Several times over the past 50 years Congress has enacted a special rule where ministers had a one-time opportunity to opt back into Social Security with that form, the last time being in 2002. As such, I would not count on that option being available in the future.

Do you have a question? Feel free to ask!

Also, some of these questions should really show you the importance of working with financial professionals who understand clergy issues!

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Can You Use IRS Form 2031 To Opt Back Into Social Security?

by Amy Monday, April 20, 2020

Someone wrote to me recently with some questions about Form 4361 that is used by clergy to opt out of Social Security. One of the questions was, how hard is it to get Form 2031 approved to revoke Form 4361 and opt back into Social Security? That is a very important question, so today we are going to address it.

What Is IRS Form 2031?

Let me start by explaining these forms. Form 4361 is what pastors use to opt out of participating in the Social Security system. Click on that sentence to learn more about it.

IRS Form 2031 is used to revoke Form 4361 and opt back into Social Security. It is an irrevocable election that makes you liable for self-employment tax and includes your ministerial earnings in Social Security and Medicare coverage.

Can You Use IRS Form 2031 Right Now?

I have heard from a number of pastors that opted out of Social Security when they were young and regretted it later on. I’ve heard from others who said that they now realize that they didn’t really have grounds to opt out and didn’t fully understand what they were proclaiming.

Does that mean that they can reverse their decision and opt back in with Form 2031?

No. At least not right now.

You see, Form 2031 has only been used on special occasions when Congress gave pastors a short window of time to opt back in. In 1978 and again in 1986 this option was made available. It was only a one-time opportunity and the election had to be made by the deadline of the tax return for the year after the law was passed.

The last opportunity to revoke exemption with Form 2031 was at the turn of the century. The Ticket to Work and Work Incentives Improvement Act of 1999 gave ministers a 2-year window in which they could change their minds about opting out of Social Security. The last deadline to opt back into Social Security was October 15, 2002. Suffice it to say, you’re too late now.

What Are Your Other Options?

Basically, you can’t opt back into Social Security with Form 2031 and there’s no guarantee that the opportunity to do so will ever appear again during your lifetime. What can you do, then?

First, if you really want to get back into the system, you can try to get the IRS to revoke your exemption. They have nullified a minister’s exemption because he did it solely for economic reasons, which is illegal. I don’t know anyone who has tried this, so let me know if you do.

If you don’t want to go to such extreme measures, put your own safety net in place. Provide for yourself that which the Social Security and Medicare system would have provided for you. Purchase life and disability insurance. Save for retirement, including Medicare Part A costs. This article explains what you need to do to make up for opting out of Social Security.

Finally, share your wisdom and experience with others. Let new pastors learn from your mistakes so that they don’t have to make the same ones. Just remember, though, that what is right for you isn’t necessarily right for everyone else. Opting out of Social Security is a personal decision and there isn’t one right or wrong answer.

If you would like to share your experience with opting out of Social Security, go ahead and do so in the comments!

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If You Opt Out Of Social Security Do You Still Get The Money You Already Put In?

by Amy Monday, November 18, 2019

Most pastors don’t go straight from high school or college into the pulpit. Usually, you spend a few years in the secular workforce before settling into your pastoral vocation.

I think that’s a good thing. It gives you some practical work experience, exposes you to how people outside of the church live and work, and, depending on where you work, it can make you really, really appreciate working with Christians once you’re on church staff. At least that was my experience.

Another thing that working a secular job before joining the ministry does is that it forces you to begin paying into the Social Security system. Remember, pastors are unique in their ability to opt out. Everyone else just has to do it and has no say in the matter.

But, what happens to the money that you put into the system if you choose to opt out once you become a licensed minister? Is it all gone or do you still get that money even though you’ve opted out?

How Social Security Eligibility Works

As with most things in the financial world, the answer to that question is it depends. Just like Jesus is always the right answer in Sunday school, it depends is always the right answer if you’re a financial advisor. It does depend, though, and it depends on how long you had paid into the system before opting out.

To be eligible for Social Security retirement benefits, you need to have earned a minimum of 40 “credits.” You can earn up to 4 credits a year. For 2019, you earn one for every $1,360 of wages you have subject to Social Security taxes. That number is adjusted for inflation, so it goes up a little bit each year.

That means that as long as you earn $5,440 this year, you will earn all 4 credits available to you. That’s pretty low, so most people that have even a part-time job earn their full 4 credits each year. Since it’s easy to max out your credits each year, most people who have worked and paid into the system for at least 10 years have acquired their required 40 credits.

The Real Answer

So, the answer to the original question is if you paid into the system for at least 10 years or otherwise earned 40 credits, then you will get money out of Social Security. You won’t necessarily get the money you put in, though, because the system doesn’t work that way.

With Social Security, you aren’t putting money into a retirement account with your name on it the way you do with an IRA or 403(b). You are giving the government money, which they pay out in benefits to people who are collecting payments today, in exchange for a promised future benefit.

Your promised future benefit is determined by your average income over your 35 highest earning years. Because they use 35 years’ worth of income for the calculation, if you only pay into the system for 10 years, then you’ll have 25 zeroes added in when calculating your average. That means your Social Security benefits will be significantly lower than those of someone who worked a high-paying job for over 35 years. But they will also have put in a lot more money than you since it is a flat percentage of income.

How To Know What You Are Eligible For

As you can see, if you’ve worked long enough in a secular job, you are eligible to receive Social Security benefits even if you’ve opted out. Did you know that you are probably eligible to receive other kinds of benefits as well?

Social Security pays more than just retirement benefits. They also pay disability and survivor benefits and cover some of the costs of Medicare. Depending on your age, you may be eligible for some of those benefits even if you don’t have a full 40 credits.

How do you know what kind of benefits you are eligible for and how many credits you have? Sign up with an account at ssa.gov. Once you set up your account with the Social Security Administration, you can review your earnings history and see your estimated benefits. It’s wise to do this now, even if you’re a long way from retirement, to ensure that they have the correct information in their system.

Also, if you were hoping for Social Security retirement benefits and find that you’re just a few credits shy, it might be worthwhile to pick up a side job for a little while just to earn those credits. Even if you’ve opted out as a pastor, any secular work you do will still require you to pay into the system and accrue credits. Opting out only applies to ministerial work.

Even If You’re Eligible, They Might Not Come Easily

Now, just because you’re eligible to receive Social Security benefits doesn’t mean it will be easy for you to file and receive them. Unfortunately, a pastor’s ability to opt out of the system is so unique that most Social Security Administration employees have no idea how it works.

Many pastors have been incorrectly denied benefits or been given bad information by Social Security employees who don’t understand how the law relates to pastors. If you find yourself in that situation, read this article here. It will tell you what to do to receive the benefits that are rightfully yours.

Want to learn more about Social Security for pastors? Check out the following articles:

Opting Out Of Social Security: A Step-By-Step Guide

The True Cost Of Opting Out Of Social Security

What Pastors Need To Know About Social Security Even If They’ve Opted Out

Can You Still Receive Social Security Benefits Even After Opting Out?

Can Pastors Opt Back Into Social Security?

How Medicare Works For Pastors Who Have Opted Out Of Social Security

How To Appeal A Social Security Benefits Decision

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Should Pastors Opt Out Of Social Security?

by Amy Monday, August 26, 2019

If you google the question should pastors opt out of social security? you will find a number of passionately written articles with strong opinions. But they’re all wrong. It’s not really a valid question, especially for an internet search. It’s like asking:

Should pastors preach exegetical or topical sermons?

Should offering come before or after the sermon?

Should I make tacos or hamburgers for dinner?

Should I marry a guy with black hair or brown hair?

You see, the problem with the question is that there isn’t one right answer. It’s subjective. It’s based on an individual pastor’s personal convictions and beliefs. And anyone who tries to tell you otherwise is a little too big for their britches, to put it nicely.

Why Pastors Opt Out Of Social Security

When you fill out Form 4361 to opt out of Social Security you have to sign a statement that says,

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.)

I certify that as a duly ordained, commissioned, or licensed minister of a church or a member of a religious order not under a vow of poverty, I have informed the ordaining, commissioning, or licensing body of my church or order that I am conscientiously opposed to, or because of religious principles I am opposed to, the acceptance (for services I perform as a minister or as a member of a religious order) 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, including the benefits of any insurance system established by the Social Security Act.

I certify that I have never filed Form 2031 to revoke a previous exemption from social security coverage on earnings as a minister, member of a religious order not under a vow of poverty, or Christian Science practitioner.

I request to be exempted from paying self-employment tax on my earnings from services as a minister, member of a religious order not under a vow of poverty, or Christian Science practitioner, under section 1402(e) of the Internal Revenue Code. I understand that the exemption, if granted, will apply only to these earnings. Under penalties of perjury, I declare that I have examined this application and to the best of my knowledge and belief, it is true and correct.

Why It Isn’t Wrong To Opt Out Of Social Security For Pastors

So, when someone online says that it’s wrong for pastors to opt out of Social Security, they are trying to impose their own beliefs on strangers. Does the Bible make any clear statements about the acceptance of public insurance? Not that I’m aware of (please correct me if I’m wrong).

The acceptance of public insurance is a personal conviction. To say that someone is wrong for having a sincere opposition to accepting public insurance is ridiculous. You cannot judge others’ convictions because you don’t know what God has asked of them.

Why It Isn’t Right To Opt Out Of Social Security For Pastors

On the other side of the argument, you’ll find very well reasoned articles claiming that all pastors should opt out of Social Security because it’s stupid to give the government your money when you know they’re just going to waste it. Opt out because you can do so much better on your own, they say. Personally, I agree with them on the financial side of it.

However, the government makes it very clear that you cannot opt out for financial reasons. IRS Publication 517 lists one of the conditions for a pastor to be able to file for an exemption from Social Security as “You file for other than economic reasons.” Clearly, you can only opt out based on non-financial convictions. Encouraging pastors to opt out of Social Security for financial reasons (even with pure motives) is actually encouraging them to break the law.

What’s the right answer, then? Spend some time alone with God and ask for clarity on your own personal convictions. If you find that you really don’t have any convictions regarding public insurance, then stay in the program with everyone else. If you can honestly sign the above statement, do it. Either way, ignore everyone else and listen to the Holy Spirit inside of you. Just make sure you don’t become a hypocrite based on your choice.

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Do Pastors Pay Social Security And Medicare?

by Amy Monday, July 15, 2019

So, you’re entering the ministry and you’re excited. You’re excited to devote your life to God’s work. You’re excited to make an eternal impact on the world. And you’re excited to do your taxes in a completely new way.

No, not really. If that kind of thing excited you, you would be a CPA instead of a pastor. Even though you’re new to pastoral ministry, you’ve probably already heard a thing or two about clergy taxes from seasoned veterans. And there’s a good chance that there are conflicts in what you’ve heard.

One of the biggest areas of confusion when it comes to a minister’s taxes relates to Social Security and Medicare. There are a lot of myths floating around, both inside and outside the church. Let me see if I can clear things up for you.

How Social Security & Medicare Taxes Work

Social Security and Medicare taxes are paid by all workers and deducted directly from their paychecks. Because of this, they are often called payroll taxes. Traditionally, the employee pays half of the taxes and the employer pays half of the taxes. Self-employed people, being both employee and employer, have to pay both halves, or the total tax.

For 2019, the Social Security tax rate is 6.2% each for employee and employer and the Medicare tax rate is 1.45% each. That means that 7.65% is automatically deducted from every employee’s paycheck. Self-employed people have to pay 15.3% total.

Social Security has a wage-base limit. That means that the Social Security tax only applies to the first $132,900 of income. Above that, the Social Security tax no longer applies. Medicare taxes always apply. In fact, they actually get higher if you earn a lot. High-income earners have to pay an extra Additional Medicare Tax, so they have an extra 0.9% withheld once their income exceeds $200,000.

Do Pastors Have To Pay Social Security & Medicare Taxes?

Social Security and Medicare taxes are pretty straightforward for most people. Not for pastors, though. Both how they pay them and whether or not they even have to are very unique for pastors. Unique, meaning complicated and causing lots of confusion.

First, let’s address whether pastors even have to pay Social Security and Medicare taxes. For everyone else, it’s required. They have no choice in the matter. But, pastors have a choice. At least regarding their ministerial income.

If you can honestly say, “I am conscientiously opposed to, or because of my religious principles I am opposed to” the acceptance of public insurance, then you can opt out. You only have a brief window of time where this option is available and you have to fill out an IRS form and follow their process. And, if you opt out, it’s permanent. You can never opt back into Social Security for your ministerial income. (Though you still may be able to receive benefits even after opting out.) For more information, follow the links in this paragraph.

How Do Pastors Pay Social Security & Medicare Taxes?

Thus, at the beginning of your ministry, you have the opportunity to opt out of the Social Security and Medicare programs and their taxes related to your ministerial income. Even if you opt out, any secular jobs you hold will still be subject to payroll taxes.

But what if you don’t opt out? Does it work for you just like it does for everyone else? No way! That would be too easy!

All pastors have to pay Social Security and Medicare taxes as if they were self-employed. Even if you work for a church and receive a W-2. And you have no choice in the matter, it’s the law. Churches aren’t even allowed to withhold payroll taxes for pastors. (Some non-pastoral church employees also have to pay their taxes this way as well.) If you want to learn more about these crazy rules, follow the links in this paragraph.

How do pastors actually pay these taxes, then, if they can’t do it as employees? Well, throughout the year, you should either be paying estimated quarterly taxes or having your church withhold taxes (technically, only income taxes) from your paycheck. Then, when you file your tax return, you have to fill out Schedule SE to calculate your Social Security and Medicare taxes.

On your tax return, your Schedule SE taxes are added together with your income taxes for your final tax bill. Because of this, even though your church can’t withhold payroll taxes for you, they can withhold extra income taxes to make up the difference. If you end up owing money, it means your church isn’t withholding enough or your estimated payments were too low. If you get a refund, it means the opposite.

There you have it, that’s how Social Security and Medicare taxes work for pastors. If you have further questions, ask them in the comments or send me a quick email!

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The Top 10 Personal Finance Blog Posts For Pastors Of 2018

by Amy Monday, December 31, 2018

The most popular Pastor’s Wallet blog posts of 2018, based on number of views.

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Step 1: Qualify

Step 2: File IRS Form 4361

Step 3: Inform Your Church

Step 4: Verify Your Grounds For Exemption

Step 5: Receive Approved Copy Of Form 4361

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Step 1: Qualify

Step 2: File IRS Form 4361

Step 3: Inform Your Church

Step 4: Verify Your Grounds For Exemption

Step 5: Receive Approved Copy Of Form 4361

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