A minister's earnings from performing ministerial duties are considered "net earnings from self-employment" under IRC Section 1402(a)(8). Due to this legal definition, ministers are considered self-employed for purposes of Social Security and Medicare-even if they are considered common law employees for all other employment tax purposes.
While a minister's earnings are defined as self-employment income, ministers are given the ability to opt out of the system by filing Form 4361, Application for Exemption from Self Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners.
Who Qualifies for Exemption?
The exemption is available for ministers, members of religious orders, and Christian Science Practitioners. This article will focus on its application to ministers. The minister must be a licensed, commissioned, or ordained minister of a church. The church must meet the qualifications of an organization exempt from income tax under IRC Section 501(c)(3) [Rev. Rul. 76-415], as well as qualify as a church described in IRC Section 170(b)(1)(A)(i) [Rev. Rul. 80-59]. Therefore, the minister must receive credentials from a U.S. church, since churches organized outside of the United States do not qualify under IRC Section 170(b)(1)(A)(i).
While the exemption is allowed for licensed, commissioned, or ordained ministers, the IRS honors these terms as interchangeable between churches.
If there is a differentiation in duties between those who are commissioned and those who are ordained, the IRS may determine that a minister is not a "minister" for tax purposes. The IRS may request a copy of the church's bylaws to determine if it recognizes different levels of credentials with significant differences between the levels. It is advisable that a minister requesting an exemption obtain a copy of the church's bylaws in the event the IRS makes such a request.
Basis for Exemption
The exemption is not based on:
- Financial objections to the Social Security system;
- A belief that the system will not be viable at the point of one's expected retirement;
- A belief that one is a better money manager than the government.
Rather, the exemption is based on a minister's conscientious objection or religious opposition to the acceptance (with respect to services performed by him or her as a minister, member, or practitioner) of any public insurance paid in the event of death, disability, old age, or retirement, or payments toward the cost of, or provided services for, medical care (including the benefits of any insurance systems established by the Social Security Act). [IRC Sec. 1402(e)(1)].
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