4 Reasons Why Ministers Should Opt-Out of Social Security
By Raul Rivera
Over the years, I have had the pleasure to speak with hundreds of pastors who have considered opting-out of Social Security. In most cases, the pastors I spoke with heard from a pastor who had heard from another pastor what it meant; but in the end, many of them expressed uncertainty as to what it means to opt-out of Social Security.
Because of this, I realize that many pastors make their decision on whether or not to opt-out based upon bad advice.
With that being said, I want to take some time to dispel some of the bad advice that is floating around out there. After that I’ll give you some information that will allow you to make an informed decision about opting-out.
I firmly believe that when someone knows all of the facts, he or she is able to make better, informed decisions.
What is the self-employment tax exemption?
Section 1402 of the Internal Revenue Code allows a properly ordained minister of the gospel to apply for self-employment tax exemption. Oftentimes, I hear ministers, CPAs, and tax professionals improperly refer to it as "opting-out of Social Security". Rather, it should be referred to simply as self-employment tax exemption. The term “opting-out" makes it sound like one is leaving the Social Security system, which is not totally true.
(Because the term "opting-out" is recognized amongst pastors and church leaders, it will be used throughout this post.)
When you know all of the facts about the social security tax, you are able to make a better, informed decision.
A minister can apply to become exempt from paying the 15.3% self-employment tax and still receive the Social Security benefits, including disability and medical care if they follow certain steps.
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But before we begin to consider these steps, let us take a look at some of the “bad advice” that I believe ministers all too often receive.
Bad advice surrounding self-employment tax exemption
Bad advice #1
When I speak with ministers about Social Security, I repeatedly hear them tell me what their accountant or peers have told them about Social Security and opting-out. The most common piece of bad advice is,
"If you opt-out then you won't get any benefits when you retire”.
There are too many people who believe that when someone chooses to apply for self-employment tax exemption, then he is choosing to leave the entire Social Security system and will never be able to receive any retirement benefits.
Bad advice 1: If you opt-out of social security taxes then you won't get any benefits when you retire.
That is not accurate.
In actuality, the self-employment tax exemption only applies to income earned as a minister.
When you apply for the self-employment tax exemption, the law clearly states that it applies only to income earned in ministry. Any other income earned outside of ministry is still subject to Social Security tax and qualifies to earn that person retirement benefits.
The fact is: the majority of ministers entering the ministry today are people who have worked more than 10 years in a secular job.
So, when they enter the ministry, they are already vested in the system by having earned the required 40 credits. This means that they will qualify to receive Social Security retirement benefits.
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Bad advice #2
The second piece of bad advice is, "Most ministers are not conscientiously opposed to Social Security.”
Out of context, that may sound true, but is it?
Bad advice 2: Most ministers are not conscientiously opposed to Social Security.
For example, if someone were to ask me, "Raul, when you reach retirement age, will you be opposed to receiving Social Security checks?" My answer would be, "Of course not."
If I need Social Security when I reach retirement age, assuming it is still solvent, I will have no problem going to the Social Security office to request my benefits. After all, I have paid into the system the time and money required to be vested.
I think the problem is that many advisors ask the wrong question.
Instead of asking if (as a minister) you are opposed to Social Security, why not ask if you have any opposition to receiving public insurance for the work you perform in ministry? The actual law in section 1402(e)(1) and in IRS Form 4361 uses the term public insurance.
The 4 reasons to opt-out
Now, when I say “four reasons to opt-out”, what I really mean is that there are four facts that will help you to make an informed decision with a clear conscience to opt-out. This is a topic that pastors often ask us about at our conferences. If you have not yet done so, then I encourage you to register to attend one of our conferences today!
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Below are the four reasons you should consider opting-out of social security today.
The first and most important thing you need to have is knowledge of exactly what Social Security means. For the purposes of ministers applying to become exempt from self-employment tax, the definition of Social Security according to IRS Form 4361 is as follows:
- Public insurance that makes payments to you in the event of death, disability, old age, or retirement;
- Payments toward the cost of, or to provide services for, medical care.
In reality, the self-employment tax you pay covers retirement benefits, Medicare, and Medicaid. Many folks do not know that Social Security and Medicaid are all part of one program. Remember this fact as I reveal the other three reasons to opt-out.
Part of applying to opt-out with Form 4361 requires you to sign a somewhat confusing statement. If you break it down, however, you will likely realize that you qualify to opt-out. Below is the statement from the form:
“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.)”
This statement can be broken down by looking at the words in bold. For clarification purposes, I have strung them together:
“I certify that I am conscientiously opposed to the acceptance of any public insurance that makes payments toward the cost of medical care.”
The reason why I chose to make those words bold is because when I said "yes" to the call of God on my life and entered full-time ministry, I did not have any health insurance. In fact, I was not even guaranteed that the church could afford to pay me every week. On top of that, my wife was expecting our second child.
Some very well-intentioned members of the church encouraged me to apply for Medicaid (Title XIX of the Social Security Act of 1965). While I was grateful for their concern, in good conscience, I could not accept Medicaid so that I could remain in ministry. I felt it conflicted with my preaching and teaching that we "would be blessed in the city, and blessed in the fields . . . blessed when you come in, and blessed when you go out.”
For me it was not retirement benefits, it was public medical insurance for services I performed in ministry.
3. Religious principles
A rarely noticed provision in the statement from Form 4361 is that you are opposed for religious principals. A common religious principal is simply the fact that some believe putting money into the Social Security system is bad stewardship (parable of the talent) of what God has entrusted to them.
Others say that since Social Security benefits are not inheritable, it runs against Proverbs 13:22, which says, "A good person leaves an inheritance for his children's children.”
4. Two-year window
Finally, section 1402 says that a minister, once ordained, faces a timing issue. The law states that your 4361 application must be signed and submitted to the IRS on or before the due date of your 2nd personal tax return where you earned at least $400.00 in ministry as a minister.
Sound tricky? It is. (I explain it in detail within our conference manual.)
Three things I recommend after you apply for the exemption
When ministers apply for the self-employment tax exemption, they are now able to keep the 15.3% of the income they make in ministry that is usually paid to the IRS. The question becomes, "What will you do with that money?"
There are two conditions that exist that will dictate how you ought to use that money. They are as follows:
1. Part-time minister: The majority of ministers that start churches today do so after having worked more than 10 years in the secular world. Additionally, most start their churches while still working a secular job, until the time comes that the church can pay them a part-time salary. If you find yourself in this category, you do not need to do anything special with the money that you do not have to pay in taxes.
2. Full-time minister: If you are now at the point that you are full-time in ministry, you will need to make some slight adjustments to ensure that you stay in good shape should negative events occur in your life.
- Make sure you reach 40 credits: If you are like most ministers entering ministry, you probably have your 40 credits. You can check your credits by going to www.ssa.gov. When I went full-time in ministry, I only had 32 credits. At 26 years of age, I knew I had over 30 years to get my 8 remaining credits. I looked for other income opportunities outside of ministry that allowed me the chance to earn income that I reported on my tax return. That gave me the 40 credits I needed.
- Purchase long-term disability insurance: After I reached my 40 credits, I no longer needed to seek outside income opportunities. However, when I stopped earning income outside of ministry, Social Security disability coverage ceased. This meant that if I got injured or passed away, my dependent children would not have received any coverage. Therefore, I had to do one of two things: keep earning outside income, or purchase long-term disability insurance. You can use some of the money you save in taxes to do that.
3. Invest in a tax-free Roth IRA: The Roth IRA is the best small investment a minister can make. The minister takes tax-free money and puts it into a tax-free investment. If you are exempt from paying self-employment tax, you have the opportunity to receive Social Security benefits and also tax-free Roth IRA income at retirement. Why not do it?
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Get good advice
The reality is that there are times in our lives when we may be given some bad advice. The question is, “When we’re given bad advice, what are we going to do with it?”
If this happens to be a subject that you still just aren’t sure about, we can help!
Through our self-employment tax exemption service for ministers, we have helped hundreds of ministers across the country to make a better, informed decision. If you’d like to do the same, just give us a call at 877-494-4655. I also encourage you to join us at one of our conferences in a city near you.
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