The huge chunk of cash you have to pay for social security at tax time—you might not need to pay it.
Can I opt out of Social Security as a minister?
A lot of pastors wonder if they can opt out of social security. I know I did. It’s not a simple decision, but here’s what you need to know.
When social security was originally established in 1936, those who worked for non-profit organizations were not allowed to participate in the program. In 1951 non-profit leaders were allowed to participate, but a debate arose as to whether ministers were considered employed or self-employed.
Eventually, Congress passed a law in 1968 that required all ministers to enter the program and pay the full self-employment tax.
Because of this requirement, Congress voted to allow only ministers (not non-profit leaders) who oppose public insurance for ministerial duties to opt-out of Social security if they choose to do so in the first two years of ministry.
So under the Internal Revenue Code Section 1.1402(e), any minister who is:
“conscientiously opposed to, or because of religious principles he is opposed to, the acceptance of any public insurance that makes payment in the event of death, disability, old age, or retirement” may apply for exemption from self-employment tax.
Pastors ask our Parable professionals whether or not they should opt out of social security all the time.
Our answer? Maybe! Because there are huge financial and long-term security implications for this decision, it’s important to get all the facts first.
Here’s the deal with Social Security and self-employment.
Today, the federal government collects taxes under two systems.
One is called The Federal Insurance Contribution Act (FICA), and the other is the Self-Employment Contributions Act (SECA). Outside of church employment, you are either taxed as an employee (FICA) or self-employed (SECA).
Basically, it’s how the IRS differentiates between whether or not you are an employee working for a company or self-employed working for yourself.
As an employee, you pay employee taxes and only half of your Social Security contributions which covers Social Security and Medicare (7.65%). Your employer pays the other half of the Social Security contributions (7.65%).
If you are self-employed, it means you own your own business or do contract work for pay. In this situation, your federal income taxes are based on your income, but you can have deductions based on business expenses.
However, you must now pay your own Social Security taxes in full (15.3%)!
Churches are the only category of employment considered to have a dual tax status. Pastors can file their federal income taxes as an employee of their church (FICA) but must file their Social Security tax as self-employed (SECA).
The church is not even allowed to pay the other half of Social Security taxes for the pastor because churches are tax-free.
Some churches will supplement the pastor’s income to help compensate, but this also has tax implications for the pastor.
The option to opt out means that a pastor only pays federal income tax but no longer has to pay the 15.3% social security tax. However, this means they will not receive benefits from federal survivors insurance that pays to widows and dependents if the pastor dies.
Disability insurance pays if they are unable to work. Hospital and supplementary medical insurance are self-explanatory.
The controversy around ministers opting out of Social Security
This provision by the government to opt out of social security isn’t without controversy.
First, what personal religious or conscience beliefs must one have in order to opt out? The provision says a minister can opt out if they are:
“…conscientiously opposed to acceptance of the benefits of any private or public insurance which makes payments in the event of death, disability, old age, or retirement or 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)…”
The provision seems to indicate the need for a conscientious or religious objection to accepting benefits or “making payments” towards the benefits.
Some would argue that this objection is limited to those ministers who are opposed only to receiving government help.
The Moral Consideration
This is the case for religious groups like the Amish, who believe the Bible commands a community to care for its elderly, not the government.
Others would argue this is saying a minister is opposed to receiving benefits for work rendered as a pastor, not a general belief there should be no government assistance.
This can be supported by the fact that when clergy opt out of social security, it is for compensation received as a pastor but does not opt them out of social security for any secular jobs or if they decide to go back into a secular job.
The Stewardship Consideration
Another point of view is that because the Social Security system is a financially unwise investment, simply believing in the principle of good stewardship qualifies one to opt out so you can invest your money more wisely.
Once a pastor decides to opt out, it can’t be revoked. So, although avoiding Social Security tax allows more money to be put into a much better retirement investment like a 401k or Roth IRA, ministers who do not prepare could find themselves in a financially disastrous situation once they hit retirement age.
Another thing to consider is the amount needed to save in order to replace social security benefits.
Crown Financial Ministries calculated that the amount retired ministers would have to pay annually to match the income replacement, survivors insurance, disability insurance, and medicare insurance that Social Security provides would be $30,000 to $40,000 annually.
What are the key takeaways?
Although opting out can provide some short-term financial benefits, there are three things to consider before making this decision.
1. You shouldn’t opt out just because you think Social Security is stupid.
Most of us know by now that Social Security is an imperfect system and has a chance of shutting down in the future. However, as discussed earlier under the Internal Revenue Code Section 1.1402(e), opting out is a conscientious objection.
The objection is not based on a belief in the financial integrity of the social security system or the opposition to paying social security payments. It is specific to receiving medical and retirement benefits from the government instead of receiving them from your church.
That being said, a person’s conscience can be based on several factors. This issue is not as black and white as some would say.
2. Opting out has no respawn.
When a person dies in a video game, they can often come back to life and try again. This isn’t true for opting out. Although there have been several times in which congress has allowed ministers to opt back in, these situations are rare and not guaranteed to happen again.
To be clear, opting out of social security only relates to the role of clergy. One common confusion is the belief that opting out of Social Security as a minister means opting out of Social Security altogether.
If a pastor does a secular job on the side or chooses to leave the ministry and go back into the workforce, they still receive benefits from the program depending on how many years of work history they have accrued.
3. Your best investing may still lead you to Broke-town.
The appeal to opting out is not just saving the 15.3% from each paycheck but investing this into a Roth IRA or other sound investments. When a pastor is young and healthy, this makes perfect sense.
However, when you calculate health care costs in retirement, you may be surprised how much out-of-pocket costs are involved.
Because of their life situation or lack of planning, many ministers can face a disastrous situation once they hit retirement age.
Opting out of social security may have its benefits, but since it is potentially permanent and has long-term implications, consider these three things and seek advice from a tax professional before making this decision.
What are the next steps?
The good news is that the IRS provides a choice for pastors wanting to opt out of social security and have their church provide their future financial security. However, the decision to opt out of social security is permanent and has potential long-term financial implications.
If you are considering opting out of Social Security as a minister, we suggest the following:
- Meet with a qualified tax agent to get all the facts before you decide.
- Be clear on your conscientious objections for wanting to opt out.
- Invest heavily in a retirement portfolio.
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