One of the tax options given to a minister is the ability to opt out of social security. This is a step that should be taken after a great deal of deliberation, as the decision is irrevocable. In order to opt out, the minister must file Form 4361 and certify that he or she opposes, either conscientiously or because of religious principles, the acceptance of any public insurance (with respect to services performed as a minister), including social security and Medicare coverage. Note that the objection is to the use of ministerial earnings for public insurance. Economic considerations or other non-religious reasons are not valid factors for opting out. Unfortunately, many likely opt out for economic reasons. Some faith groups actively promote opting out for their ministers.
The minister opts out only in relation to ministerial earnings. If he or she is employed in a non-ministerial position, the minister pays into the social security and Medicare systems for those earnings. This does not represent an inconsistent position for the minister as the objection is to the use of ministerial earnings for public insurance. The minister would not be receiving benefits from those earnings, but would be eligible for social security and Medicare benefits based upon non-ministerial earnings.
In order to opt out, the minister must file Form 4361 no later than the due date (with extensions) for the tax return for the second year in which the minister had net ministerial income of $400 or more. Ministerial income is considered to begin upon ordination. Thus a non-ordained minister may work in a church for a number of years and be treated as a non-ministerial employee. Once ordained, the ministerial earnings begin.
For example, Pastor Joe is not ordained or otherwise credentialed but has been a minister in his church for a number of years, earning several thousand dollars a year. During this time, he is treated as a non-ministerial employee and pays into social security and Medicare, with a match from the church. On January 1, 2013, Joe is ordained and earns $25,000 in that year. In 2014, Joe continues to work as a minister and earns $30,000 during that year. Joe must file the Form 4361 no later than April 15, 2015 unless he has filed an extension as 2014 is the second year in which he had ministerial earnings of $400 or more. If the minister files to opt out, the exemption will be effective retroactive to the beginning of ministry. Any social security and Medicare taxes that have been paid from ministerial earnings will be refunded upon filing for the refund.
A second ordination with a second church does not provide an additional opportunity to opt out. Once the original window closes, there are no additional opportunities to opt out. Opting out is permanent. There are no provisions to allow the minister to revoke the Form 4361. A two-year window was given in 2000-2002 to revoke, but currently there appears to be no sentiment to allow another opportunity to do so.
When a Form 4361 is submitted, the Secretary of Health and Human Services will communicate with the minister to verify that he or she fully understands the grounds for exemption and the effects of opting out. The minister must respond to this letter, affirming that he or she understands that the grounds for opting out are a religious or conscientious objection the acceptance of social insurance programs from ministerial earnings. This response must be within 90 days of the date of the letter. Once approved, the IRS will send the minister a copy of the Form 4361, marked “Approved.” This approved copy should be kept, with copies given to the tax preparer. A replacement copy may be obtained, but it is not always a simple process. The IRS gives its agents three options to obtain one, these steps may also be available to the minister.
1. For ministers who filed the Form 4361 after 1988, order a transcript for the year under audit. Included on this transcript should be an indicator that indicates the minister is exempt from Self Employment tax.
2. If the transcript is not an option, contact the Taxpayer Relations Branch at the IRS Service Center where the Form 4361 was filed and request a copy of the form.
3. The last option is to contact the Social Security Administration in Baltimore and ask them to provide confirmation of a minister’s exempt status.
Preparers should exercise due diligence in insisting upon receiving an approved copy of Form 4361 to verify that the minister has opted out. In completing the 1040 for the minister, Schedule SE, Section B, Part I, line A has a box to check if the minister has opted out but has other self-employment income in excess of $400.
Opting out is a decision that must be made by the minister, based upon his or her conscience. Since the objection is to the receiving of public insurance from ministerial earnings, it would not be appropriate to consider economic or political considerations in the decision.