Applying for the self-employment tax exemption is one of the best decisions you can make as a minister!
Tens of thousands of ministers across America do not know the facts about self-employment tax exemption. Any minister who properly opts out of Social Security will still receive Social Security benefits when he or she retires, so long as he or she has at least 40 credits applied to his/her account. Many sincere but misinformed CPA's and tax attorneys advise pastors and ministers not to opt out on the premise that if they do, they will not get Social Security benefits at retirement. Furthermore, they tell "older" ministers who are entering ministry in their late 40's and 50's that they are so close to retirement that it would not be worth applying for because the savings would not be worth the lost Social Security benefits. This is bad advice. You will not lose your Social Security benefits!
Let me explain...
When you opt out of Social Security, you are not opting out of the Social Security system altogether. You are simply making the earnings you receive while in ministry as a pastor, evangelist, or ordained minister exempt from self-employment tax. The IRS clearly tells us in Letter 287C EO that if you opt out of Social Security, it only pertains to income that you earn as a minister of the gospel. Below is a quote.
"If we allow your exemption (from self-employment tax), it will apply only to earnings from services as a minister, member, or practitioner, under Section 1402(e) of the Internal Revenue Code."
Any income you make outside of ministry is still subject to self-employment tax, and it must be paid. Let me give you an example:
Pastor Tom is 28 years old. He is the pastor of a young congregation that cannot afford to pay him a full salary. He works at the church and at a local insurance company to make ends meet. He has 36 credits applied to his Social Security account. Pastor Tom chooses to opt out of Social Security, and after getting approved, he does not pay any self-employment tax on his earnings from the church. However, he still pays Social Security tax on his earnings from his job at the local insurance company. He continues to earn up to four credits per year for his Social Security benefits. At the end of this year he will have 40 credits and will qualify to receive Social Security when he retires. The good news is that he can continue to work the part-time job and earn additional credits, or he can choose to work full-time in ministry, be exempt from the Social Security taxes, and still receive Social Security benefits when he retires.
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