Six Things to Consider When Exempting a Minister from Self-Employment Tax
A minister's earnings from (directly from 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.
Although a minister's earnings are defined as self-employment income, ministers are given the ability to opt out of the system. To do this, they must file a 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?
This option is available to ministers, members of religious orders, and Christian Science Practitioners. We'll 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. However, if your church differentiates between the duties of those who are "commissioned" and those who are "ordained," the IRS may determine that a minister is not a "minister" for tax purposes. In this case, the IRS may request a copy of the church's bylaws to determine if that church recognizes significant differences between levels of credentials. A minister requesting the exemption should obtain a copy of the church's bylaws. It's good to be prepared, in the event that the IRS requests to see them.
- What's the Basis for Exemption?
This exemption is not based on:
- Financial objections to the Social Security system;
- A belief that Social Security won't be viable at the point of expected retirement; or
- A belief that the minister is a better money manager than the government.
Instead, the exemption is based on a minister's conscientious objection or religious opposition to the acceptance of public insurance that:
· Pays in the event of death, disability, old age, or retirement