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# Social Security

Clergy earning more than \$51,300 annually will pay significantly higher social security taxes in 1990 than in prior years. Here's why. The self-employment tax rate increased from 13.02% in 1989 to 15.3% in 1990 (i.e., self-employed persons now pay the combined FICA tax), but clergy and other persons deemed self-employed for social security purposes are permitted a deduction in computing their self-employment and income taxes. In computing their self-employment tax liability (on Schedule SE), clergy are now allowed a "deduction" in the amount of half the self-employment tax rate (7.65%) multiplied times their net earnings from self-employment. In addition, they may claim half of their actual self-employment tax as a deduction in computing their income taxes (whether or not they itemize). These deductions were designed to achieve "parity" between employees and self-employed persons for social security purposes. The idea is this—employees do not pay income tax or FICA tax on the employer's share of FICA taxes (7.65% in 1990), and accordingly self-employed persons are allowed a deduction of half their self-employment tax in computing their income taxes and self-employment taxes. However, since the maximum compensation that is taxable for social security purposes in 1990 is \$51,300, clergy earning more than this amount will receive only a partial deduction if they earn more than \$51,300, and no deduction at all in computing self-employment taxes if they earn more than \$55,550. Let's illustrate this with a few examples. Assume that Rev. Green has net self-employment earnings of \$50,000 in 1990. His self-employment tax deduction of \$3,825 (\$50,000 x 7.65%) reduces his taxable self-employment income to \$46,175. He has received the full benefit of the self-employment tax deduction. Now, assume that Rev. Green earned \$53,000. His self-employment deduction in this case is \$4,055 (\$53,000 x 7.65%). But, since no income over \$51,300 is taxable for self-employment tax purposes in 1990, the first \$1,700 (\$53,000 - \$51,300) of the deduction is useless since it is reducing nontaxable income. Rev. Green ends up with a real deduction of only \$2,355—the amount by which his computed deduction of \$4,055 reduces his income below the maximum taxable earnings of \$51,300. Finally, let's assume that Rev. Green earns \$55,550 in 1990. His self-employment deduction in this case is \$4,250 (\$55,550 x 7.65%). However, since this deduction reduces Rev. Green's income to \$51,300 (the maximum taxable amount), he receives no benefit whatever from the "deduction." The same will be true for any minister earning more than \$55,550—they will receive no deduction in computing their self-employment tax liability. They are still eligible for the income tax deduction, however. In summary, those earning \$51,300 or less in 1990 will receive the full benefit of both the self-employment tax and income tax deductions; those earning more than \$51,300 but less than \$55,550 will receive a "partial" deduction for self-employment tax purposes and a full income tax deduction; and those earning \$55,550 or more will receive no self-employment tax deduction but will receive the full income tax deduction. The "parity" that is supposed to exist between self-employed persons and employees begins to fade when self-employed persons earn more then \$51,300 (in 1990).

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Posted:
• May 1, 1990

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