Understand the Long Term Ramifications
Sitting in my office a wife is crying and worried. She worries about what would happen to her and her two young children at home if her pastor husband and primary wage earner dies in a car accident doing visitation or on a youth trip.
What are they going to do for income and health care in retirement. This emotional toll appears too frequently when pastors opt out of Social Security.
Unfortunately, what happens all too often is the new seminarian shows up to his first day of work. A well meaning treasurer or elder says, “sign this it will save you thousands on taxes.” The new youth minister or associate minister, never one for finance signs without reading the form 4361 or thinking about the consequences of his action.
Frequently it is the spouse who is worried about their future, struggling to meet today's finances and unable to save who wonders what their life will look like in retirement. “Will he avoid burn out or can he continue to do pulpit supply until we are 80?”
Social Security was originally designed to be a “safety net” for the few who were impoverished but it is becoming the keystone of health care for the retired and a significant financial component of those over 66.
Making the decision to become a minister is a reflection of a spiritual calling and a desire to help, but it is important to understand that it is also a profession that has a number of unique treatments under the law.
One aspect that few people are aware of is that from a tax perspective, ministers are considered to be self-employed.
This means that they are responsible for paying their own Social Security payroll taxes, a payment which is typically paid by an employer. These taxes can represent a significant portion of income.
Why Can Ministers Opt Out?
If you are a minister, it is important for you to understand that you have the option to opt out of the Social Security system altogether.
This ability was created for the benefit of those members of the clergy who believe that any form of public insurance is a sin, or that it violates the principles of the separation of church and state.
Though this ability may be appealing to you from a financial perspective, it is important to remember that if you don’t pay Social Security taxes, then you don’t receive Social Security when you retire or upon becoming disabled, and your family also will be ineligible to receive Social Security benefits should something happen to you.
What’s the Process?
Opting out of social security should be carefully considered. First, it is not as simple as just checking a “Thanks, but no thanks” box.
In order to take advantage of the option you would need to complete form 4361.
Upon doing so, you will be able to avoid paying those particular taxes on your ministry salary, as well as any other additional income you may earn as a result of performing pastoral duties such as leading funerals or conducting weddings.
Any income that you receive from secular responsibilities, whether from an employer or as self-employment income, would still be subject to Social Security taxation.
The rules for opting out are highly specific. In order to qualify you must meet the following criteria:
- You must be, “conscientiously opposed to…the acceptance… 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 phrase “public insurance” means government insurance or programs.
You are not certifying that you wish to avoid paying Social Security tax but rather that you are morally opposed to government or public insurance programs like Social Security. Like most things that are morally wrong you should feel comfortable identifying public insurance as morally wrong.
- The church or denomination with which you are affiliated must have tax-exempt status as a religious organization
- You must complete and submit IRS Form 4361
- The form must be submitted to the IRS by the due tax of the federal tax return for the second year in which your self-employment earnings meet or exceed $400. These earnings must specifically have been earned as a result of performing ministerial duties.
- In addition to filing the form with the IRS, you must also inform the church or denomination of your opposition to Social Security coverage stemming from the services you have provided as part of your ministerial duties.
- After you have submitted form 4361 you will receive an IRS verification statement. You must sign and return this statement within 90 days of receipt, certifying that you have requested the exemption from payment of Social Security taxes, and the reasons that you have based your request upon. Without this verification form being signed, your exemption will not be approved.
Is it Right for Me?
Perhaps most importantly, it is essential that you understand the financial pros and cons of making the decision not to pay into the Social Security system, which go far beyond the religious justifications. There is no doubt that if you no longer have to pay Social Security payroll taxes to the government, it frees up a significant amount of money for you.
But you should not lose sight of the fact that should something happen to you, Social Security benefits will not be there for you, whether as a source of retirement income or as a disability benefit.
You would still remain eligible for social security from non-clergy wages if any. Generally, to qualify and to receive maximum benefits you need to have paid in to Social Security from 10-35 years. Social Security is actually several programs or benefits.
The two most well known are related to retirement, the monthly cash payment and covering hospitalization or Medicare. In the last decade a Medicare drug benefit has been added to the health benefit.
Social Security also includes disability income and cash payments to your widow and minor children if you die before reaching retirement age.
You may not receive any Medicare benefits either if you have insufficient social security earnings. This means that there are certain steps that you need to take in order to protect yourself, and certain financial instruments that you need to have in place.
- Retirement Savings: When you opt out of the Social Security system, you eliminate your ability to receive the benefit that pays for or supplements the retirement of most Americans. This means that you need to have another plan in place, and having a 403(b) and a Roth IRA are both wise choices.
Do not make the mistake of simply pocketing the additional income.
Find a savings plan with a fund that provides steady growth and put the money that you would have paid to the government into the fund on a regular basis.
- Term Life Insurance: When you make the decision to opt out of Social Security, your decision affects you and your family as well. If you take out a term life insurance policy that provides approximately ten times your income or more, you will have created a safety net for your family should something unexpected happen to you.
The amount of the death benefit should be determined not only by how much you can afford to pay, but also by the specifics of your situation: do you have children under the age of 18? Do you own your own home that has a mortgage that will need to be paid off? Having a life insurance policy in place makes sure that your family is protected.
- Long-term Disability Insurance: Just as you need to take care of your family in case of your death, you also need to make sure that your decision to opt out of Social Security will not prove to be a mistake if you become disabled. A long-term disability insurance policy will provide for you in case you are no longer able to work and provide an income for yourself and your dependents.
- Long-term Care Insurance: Long term care insurance is something that it is recommended that everybody has by the time that they are 50 years old.
About every 15-20 years or so Congress has allowed minister who previously opted out of Social Security to opt back into the system. The last time was in 2001.
We specialize in payroll service for clergy, non-profits and organizations with remote workers.
If you are a church or clergy member that needs payroll and tax advise, call us at 913-712-9336 to discuss your situation.