Application for Social Security Exemption

Late applications will not be accepted.

Church Law and Tax 1994-01-01 Recent Developments

Social Security

Key point: Ministers may exempt themselves from self-employment taxes with respect to their ministerial services if several conditions are met. One condition is that they file a timely exemption application with the IRS prior to the due date for filing their federal tax return for the second year in which they have net earnings from self-employment of $400 or more. The time period for filing the exemption application is not renewed when a minister has a change in beliefs or is ordained by another church.

The Tax Court ruled that a minister who left the ministry, worked in secular employment for five years, and then was re-ordained with another church, did not have a new opportunity to file an application for exemption from self-employment (social security) coverage. In 1979, the minister was ordained as a deacon in the United Methodist Church. From 1980 until 1983, he served as a pastor in two different Methodist churches where he gave sermons and performed other religious services such as baptisms, communions, weddings, and funerals. Additionally, he served on various committees and helped to coordinate the activities of both churches. The minister earned more than $400 per year from his ministry in the Methodist Church and paid self-employment tax. He did not file an application for exemption from self-employment taxes (Form 4361) even though he was aware of the time limit for filing such application, because he was not opposed on the basis of religious convictions to the acceptance of public insurance benefits (including social security). As a deacon of the Methodist Church, the minister was authorized to render his religious services only within the local church. However, after a 2-year probationary period, he was eligible to be elevated to elder status which, if granted, would have enabled him to render religious services worldwide. After serving the required 2-year probationary period, the minister applied for elder status, but his application was denied. Thereafter, he decided to leave the ministry, and he obtained employment as an engineer. He worked as an engineer for 5 years. In 1988, the minister again was ordained, this time by another church. In 1989 he filed a Form 4361, electing to be exempt from self-employment tax. The IRS denied the application for exemption on the grounds that it was not timely filed. The Tax Court agreed with the IRS. It began its opinion by noting that “there is no doubt” that the minister actually performed services as “a duly ordained, commissioned, or licensed minister” during 1980 through 1983. It noted that

during those years, he was an ordained deacon of the Methodist Church and a pastor in two churches of that denomination, in which he performed baptisms, communions, weddings, and funerals, conducted religious services, and served on several church boards. These are the traditional duties and functions of a minister …. Consequently, we find that [the minister] performed services as a “duly ordained minister” … starting in 1980, and earned more than $400 from his ministry in each of the years 1980 through 1983.

The court continued:

If a minister wishes to be exempt from self-employment tax, he is required to file an application for exemption from self-employment tax by the due date of the return for the second taxable year for which he had earnings of $400 or more from his ministry. Since [the minister] earned more than $400 from his ministerial duties, first in 1980 and again in 1981, the last day on which he could file a timely application would have been April 15, 1982. Since [he] did not file a Form 4361 until February 9, 1989, his application was untimely.

The minister argued that his exemption application was not late, and he relied on a prior ruling of a federal appeals court that suggested that the time period for filing an exemption application may begin again if a minister changes his faith and adopts a new belief in opposition to public insurance. Ballinger v. Commissioner, 728 F.2d 1287 (10th Cir. 1984). The Tax Court noted that, in light of this 1984 ruling, “we must decide whether [the minister’s] reentry into the ministry, coupled with his joining a different church and his acceptance of a new belief opposing public insurance, starts anew the time for electing out of the social security system.” It concluded that it did not. The Court conceded that the minister in fact first acquired an opposition to public insurance upon being reordained in 1988 and that while he was a Methodist minister (from 1980 through 1983) “he harbored no objection to public insurance and, in fact, paid self-employment taxes on his ministerial income. Later, he joined a new church with different beliefs and, as a result, became opposed to public insurance.” The minister testified that he “would simply like to live by faith” and let the Lord supply his needs. The Court acknowledged that the federal appeals court in the Ballinger case had observed that “nor can we hold that an individual who has a change of belief accompanied by a change to another faith is not entitled to the exemption.” However, the Tax Court stressed that this aspect of the Ballinger case was not binding since the court was not required to rule on this issue (the minister in the Ballinger case filed his application late even when measured from the time he changed churches and his views on social security). The Tax Court concluded:

Section 1402(e)(3) [of the Internal Revenue Code] specifically and unambiguously provides guidelines for filing an application for exemption from self-employment taxes on [a minister’s] ministerial earnings. We have repeatedly held that these time limitations are mandatory and strict compliance is necessary to obtain the exemption. In considering [the minister’s] argument, we have reviewed the language of the statute and the regulations thereunder and cannot find any indication that a change in faith would give rise to a second opportunity to file an application for exemption. Both simply provide that, when a minister wishes to elect out of the social security system, he must do so by filing an application before the due date of the return for the second taxable year for which he has net earnings from his ministerial duties of $400 or more. Moreover, once an application has been approved, it may not be revoked. These stringent requirements prevent ministers from electing into and out of the social security system.

[The minister] performed duties as a minister and earned more than $400 from his ministry during 1980 and 1981. Therefore, he had until April 15, 1982, to file his application for exemption. His application was not filed within that allotted time. Although [he] became opposed to public insurance and changed churches during 1988, the Code does not provide for a new application period under such circumstances. Accordingly, we hold that [the minister] did not file a timely application and, hence, is subject to self-employment tax on his ministerial earnings for 1988. Hall v. Commissioner, T.C. Memo. 1993-360.

See Also: Exemption of Ministers from Social Security Coverage

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