Tag Archives Social Security

Why Don’t Churches Pay Payroll Taxes For Ministers?

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Tax season has just come to an end and most of us are either eagerly awaiting a return or bemoaning how much we had to pay. The rest of you filed an extension and are still trying to get your papers together or get your tax preparer to answer your calls. Isn’t tax season fun?

If you haven’t opted out of Social Security, then you would have filed Schedule SE to calculate your Social Security and Medicare taxes, also called payroll taxes. Front and center, in the biggest, boldest print is the title for Schedule SE: Self-Employment Tax. But if you’re a church employee and not self-employed, why are you filling out a form for self-employment taxes? Allow me to enlighten you.

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

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Yes.

There you have it, shortest blog post ever.

But in all seriousness, this is an important matter that can make a huge difference during your retirement. If you didn’t take saving for retirement seriously during your early years, even just receiving a little help from the Social Security Administration could make a big impact your monthly income in retirement.

Sounds great. So how does it work? Well, there are two ways:

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How Does The Minister’s Housing Allowance Affect Social Security Retirement Benefits?

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Purchase The Complete Guide to the Clergy Housing Allowance by Amy Artiga

Here at Pastor’s Wallet, we talk a lot about the clergy housing allowance because it’s such a unique benefit for pastors. In fact, I even wrote a book on the topic, as you can see from the above graphic. Today, we are going to talk about how the housing allowance affects Social Security benefits. 

You see, your housing allowance is considered compensation for your ministerial services. However, there are a lot of different programs that use compensation numbers and only about half of them count the housing allowance in their calculations. What about Social Security?

Does The Housing Allowance Count As Compensation For Social Security Purposes?

The housing allowance affects different aspects of Social Security retirement benefits in different ways. Let’s take a look at our two main concerns regarding compensation and Social Security; benefit accumulation and taxability of benefits.

Benefit Accumulation

As you’ve read in other posts on this blog, Social Security benefits are awarded based on a worker’s earnings history. They look at your top 35 years’ worth of earnings and add in zeroes if you have less than 35 years of work history. Those earnings that they use to calculate benefits DO include your housing allowance. 

Both the cash housing allowance and the parsonage allowance count as income when calculating Social Security retirement benefits. Even if you only get paid $20,000 per year, if you also live for free in a parsonage that is worth $20,000 a year, your Social Security earnings report will show that you had $40,000 of income. 

How does the Social Security Administration know how much your parsonage is worth? You tell them on Schedule SE. All pastors are required to pay Social Security and Medicare taxes as if they were self-employed. That means, instead of having an employer withhold and pay those taxes through the FICA system, you have to calculate them on Schedule SE along with your regular tax return and pay them that way. Thus, your housing allowance is included and affects your Social Security retirement benefits. To see what the Social Security Administration has on file as your personal earnings history, set up an account with them at ssa.gov

Taxability of Benefits

While you’re working and earning money, your income affects the size of the Social Security retirement benefit you will be eligible for in the future. Then, once you start collecting your benefit, your income affects whether or not that benefit is taxed. 

Yes, you may have to pay taxes on your Social Security retirement benefits. The percentage of your benefits that are taxed depends on your income and there are three different tiers. For 2021, a single person’s Social Security benefits are not taxed if their provisional income is under $25,000 (it is $32,000 for a married couple). For single tax filers earning between $25,000 and $34,000 or married couples earning between $32,000 and $44,000, up to 50% of benefits may be taxable. Above those limits, up to 85% of your Social Security benefits can be subject to income taxes.  

This will affect you if you or your spouse start to collect Social Security benefits while you are still working. The big question for pastors is, does your housing allowance count as income? Will your housing allowance make more of your Social Security benefits taxable?

It’s your lucky day, the answer is no. The income used to calculate the taxability of Social Security benefits is called “provisional income.” When calculating provisional income, you pull your income numbers from the front of Form 1040 and Schedule 1 and the housing allowance does not appear on either of those. All that to say, your cash housing allowance or parsonage allowance should not increase the taxability of your benefits. 

Work With A Professional

If you’re trying to figure out your taxes and Social Security benefits, I recommend working with a professional who understands the ins and outs of clergy tax issues. Most tax professionals do not understand these issues, so make sure to find one who does. 

How can you determine if a tax professional understands clergy taxes? Ask these two questions:

  1. Are pastors employees or self-employed for Social Security tax purposes?
  2. Is a pastor’s church salary subject to income tax withholding?


If they don’t answer these two questions correctly, look elsewhere. Chances are, you will know more than they do (because you read this blog, of course!). In case you’re wondering, here are the answers to the questions:

  1. Pastors are always self-employed for Social Security tax purposes. Learn more.
  2. Pastors are not subject to income tax withholding. Learn more.

For a list of reader-recommended (I have not worked with them personally) tax preparers, check out the end of this article. I myself do not prepare tax returns.

Purchase The Complete Guide to the Clergy Housing Allowance by Amy Artiga
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When Can Pastors Claim Social Security Retirement Benefits?

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You’ve been paying in year after year. After year. After year. And paying double on top of that. Over fifteen percent of your income has been going towards Social Security since you entered the ministry. When does it all pay off? When do you start receiving the benefits?

You can file for and begin receiving your Social Security retirement benefits any time between ages 62 and 70. However, what you receive at age 62 is vastly different than what you would receive at age 70.

Primary Insurance Amount

When determining your Social Security retirement benefits, the Social Security Administration (SSA) starts by looking at your earnings history. Your highest 35 years of earnings, to be exact. The index your earnings to account for inflation and come up with your “averaged indexed monthly earnings.” How much money did you make while you were working? 

It adjusts every year for inflation, but for someone turning 62 in 2021, the first $996 of averaged indexed monthly earnings provides a 90% benefit and the next $5,006 of averaged indexed monthly earnings provides a 3% benefit. As such, very low-income earners can earn as much as 90% of their average earnings for their retirement benefit.

The earnings from which retirement benefits are calculated are capped. In 2021, the cap is $142,800. Anything above that does not increase your retirement benefit. The highest possible benefit that someone can have earned is $3,895 per month for 2021. 

What they calculate based on your earnings history is called your Primary Insurance Amount (PIA).

Full Retirement Age

I mentioned that you can collect retirement benefits any time between the ages of 62 and 70, but there is one specific age that the SSA considers your full retirement age (FRA). It is based on your date of birth as laid out in the chart below:

Your FRA is when you are eligible for the PIA I explained above. I know, it’s starting to look like a middle schooler’s text feed with so many acronyms. Would you prefer I write them out?

When you reach your full retirement age you are eligible for your primary insurance amount. But what happens if your full retirement age is 67 and you want to start collecting at age 62? They decrease your benefit amount. The primary insurance amount is decreased by 5/9 of 1% for each month you claim early, up to 36 months. If you claim even earlier, then it is reduced 5/12 of 1% per month. For example, if your full retirement age is 67 and you claim benefits at age 62, your PIA is reduced by 30%.

It works in reverse as well. Your primary insurance amount is increased by 8% for every year you wait to collect benefits after your full retirement age. Only until age 70, though. There is no benefit in waiting any longer.

How To Decide When To Claim Benefits

Things are set up so that whenever you begin collecting benefits, whether age 62, 70, or some time in between, if you live the average life expectancy you will collect the same total amount over your lifetime. The break-even point where it all evens out is around age 82 or 83.

So, is there an optimal time to start collecting retirement benefits? 

That will depend on your own unique situation. Often when we do an analysis, it turns out best to wait as long as possible to increase the monthly benefit amount. One of the reasons for that is that when one spouse passes away, the surviving spouse gets to collect the greater of either his or her own benefit or the deceased spouse’s benefit. For that reason, in situations where one spouse’s earned benefit is much higher than the other’s (as is usually the case for a pastor who has opted out of Social Security but has an eligible spouse), it is often best for the higher-earning spouse to wait to maximize their benefit.

Another thing to take into consideration is your health and family history. If you have health problems or a family history of shorter lifespans, you may be better off collecting benefits sooner. 

What is best for you? I wouldn’t know for sure unless I looked at your exact numbers and even then, I have no way of knowing when God will call you home. None of us do, so you just have to make the best decision possible with the information that you do have.

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The 4 Most Important Retirement Planning Decisions Ministers Need to Make

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This is a guest post by Chris Cagle, author of RetirementStewardship.com and The Minister’s Retirement book. I recently published a book review on his book and it got such a good reception that I asked him to write something specifically for you.

In my book, The Minister’s Retirement, I address many of the fundamental questions that pastors have about planning for, and living in, retirement. Wise planning involves making decisions consistent with biblical stewardship principles and implemented using wisdom and practical knowledge gained through experience. I call this “retirement stewardship.”

Some decisions are more critical than others, so in this article, I discuss the ones I consider of greatest importance based on the extent to which they can help a pastor to “retire with dignity.”

1.  The Social Security Decision

Although Christians have mixed opinions about it, Social Security is an expression of God’s common grace. It can be a blessing to Christians and non-Christians alike, especially those with limited savings and no other sources of retirement income.

For most U.S. workers, participation in Social Security is mandatory (which is objectionable to some). You can think of it as a type of public insurance that the federal government administers. It provides specific benefits to regular retirees and those who are survivors, disabled, or indigent. At its inception in the 1930s, Congress intended it to be a safety net for the neediest seniors and other vulnerable groups, not a “be all” retirement plan for the retired masses.

Social Security now provides about a third of the income for older retirees, and over half need it for more than 50% of their retirement income. That means that a large segment of the retired population would be in big financial trouble in retirement without it. Therefore, deciding whether to participate in the program and, eventually, when to start receiving benefits if they do, is one of the most critical ministers will make.

As defined by the IRS, a minister can decide not to participate in the Social Security program. If they opt-out and don’t contribute, they won’t be eligible for specific Social Security health and retirement benefits when they retire. That means they will have to find alternatives for retirement income, disability insurance, and paying for Medicare insurance.

Opting-out can’t be a purely financial decision (in order to avoid Self-Employment Contribution Act (SECA) taxes). According to the IRS, it has to be on religious grounds. In such cases, the church might consider giving the pastor an additional “allowance” for a portion of the 15.3 percent SECA tax. The pastor could use that to boost his retirement savings or to purchase a deferred income annuity or cash-value life insurance product to help fund his retirement, as he can’t directly apply it to the SECA tax.

Social Security is a good source of retirement income—it functions much like a lifetime inflation-adjusted income annuity. If they participate, some pastors’ benefits upon retirement will be their only source of income, making the opt-out decision of utmost importance.

2.  The Retirement Saving Decision

You’ve heard this drumbeat over and over: “Save as much as you can now for retirement because Americans are living longer than ever and your chances of running out of money are greater than ever.” Well, this isn’t just a catchy phrase; it’s a plea to everyone to save enough so that they can “retire with dignity.” The younger you are, the greater your opportunity to get this right. You only have one shot at it!

That’s why a pastor should start saving for retirement as early as possible, preferably in a 403(b)-retirement plan if one is available. Ideally, he would save at least enough to get the church’s matching contribution, which might be 3 to 6 percent of his salary. Saving early starts up the compounding engine of long-term growth, enabling savings to grow exponentially.

A distinct advantage of the 403(b) is that the church automatically makes the pastor’s deposit from his salary. Along with its matching contribution of some percentage (typically in addition to his salary), it directly deposits them into the pastor’s retirement account. Contribution amounts deposited are exempt from the self-employment tax and federal income tax, and the distributions are eligible for the housing allowance at retirement.

The Roth IRA is also a very popular retirement savings vehicle. Nonetheless, pastors should only use it only in certain situations as no part can be claimed as a housing allowance in retirement. A pastor without access to a church- or denomination-sponsored retirement plan or who is maximizing their 403(b) contributions and wants to use one to set aside more savings in a separate account is a good candidate for the Roth IRA.

3. The Investing Decision

Saving consistently over a long time carries more weight in future outcomes than whether you invest in fund X or Y or hold 60 percent in stocks or 70 percent. But that doesn’t mean that a pastor’s investment choices don’t matter. It’s possible to take too much risk or too little. He may have sufficiently diversified his investments between stocks, bonds, and alternatives relative to his stage of life and risk tolerance.

Some people’s strategy for investing is to “play the markets.” They buy and sell and try to time market ups and downs to make a profit.  Although there is the occasional success story, this has been proven to be a losing strategy in the vast majority of cases.

Here’s the reality: the stock market is us—all of us—we are the market. So, it’s actually a little foolish for the average person to believe that they, or even a competent paid adviser, can “beat the market.” Mr. Market is the sum of all the feelings, sentiments, beliefs, and behaviors of everyone who invests in the market—many who are much more knowledgeable and experienced than you or I. So, apart from the nominal economic growth that we all benefit from, you’ve got to beat somebody else at the same game and by more than what it costs you to come out ahead. And that someone could be a very knowledgeable and experienced Wall Street hedge fund manager running a multi-million-dollar portfolio.

My point is that it really doesn’t make sense to go toe-to-toe with the professionals on Wall Street, especially when we’re talking about the money that you will need to live on in retirement. You’ll be much better off owning a cheaply-managed basket containing many different stocks—a “mutual fund.” I like index funds as they virtually ensure that, at a minimum, you’ll capture your portion of the economic growth of whatever sectors you’re investing in at a relatively low cost. If you want to pay more for “well-run” mutual funds, be my guest, but keep in mind that less than 20 percent of them will actually do better than the indexes.

A pastor can invest in a 403(b) using the same vehicles as any qualified or non-qualified retirement accounts (stocks, bonds, and alternatives). I strongly suggest no-load mutual funds and ETFs with low management fees. Passively managed index funds have become very popular with investors, as have retirement target-date funds. A pastor can read up on and study this topic and make their own choices, but they may have better things to do with their time (praying, studying, preaching, evangelizing, counseling, etc.).

Here is where an experienced financial planner/advisor can help. However, pastors should be wary of commission-based stock and insurance brokers and choose a fee-only planner or advisor they trust. They should also be very cautious about investing with a financial professional in their congregation; it can quickly become sensitive. If the pastor’s not happy or wants to make a change, relational difficulties can easily arise. That said, seeking wise counsel from someone in the church—perhaps the church business manager or stewardship deacon or pastor—is always a good idea. They may offer some high-level suggestions and point you to a reputable professional.

4.  The Home Purchase Decision

For many retirees, including pastors, home equity will be an “ace in the hole.”

For those reasons and others, most pastors should try to purchase a home and take full advantage of the tax benefits of homeownership. Churches have mostly gotten out of the parsonage business, so it’s beneficial to pastors and their families for several reasons. They can build their net worth by paying down principal and with market appreciation. Plus, the federal income tax law provides generous benefits to the pastor who is buying a home. Income taxes can be reduced and perhaps eliminated because of the housing allowance and additional deductions for mortgage interest and real estate taxes.

The goal is to have a paid-for house at retirement, thereby reducing housing expenses and making home equity available in retirement if needed. Home equity often becomes a large part of a retiree’s total net worth. They can tap it for income in various ways—equity line of credit, second mortgage, or reverse mortgage. That said, most financial professionals suggest using it only as a last resort.

God is on his throne

A pastor who makes wise decisions in these four areas and, most importantly, follows biblical principles of financial stewardship day in and day out will be doing what he can to put himself and his family on solid financial footing before and during retirement. God is on his throne, so the rest is up to Him.

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

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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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