Q&A: Opting Out of Social Security

Should ministers opt out of Social Security?

I heard a prominent financial advisor interviewed recently on a national radio broadcast. A caller asked if ministers should opt out of Social Security. The advisor responded, “Absolutely! Anyone who can get out of Social Security should do so.” Do you agree?

The financial advisor’s response was irresponsible and uninformed because it is based on the common misconception that financial considerations are a legitimate basis for opting out of Social Security. They are not. Ministers may exempt themselves from self-employment taxes with respect to services performed in the exercise of ministry only if several requirements are met. Among other things, the exemption must be filed within a limited time period, and it is available only to ministers who are opposed on the basis of religious considerations to the acceptance of public insurance benefits that make payments “in the event of death, disability, old age, or retirement, or that make payments toward the cost of, or provides services for, medical care.” Public insurance includes Social Security and Medicare.

Ministers who exempt themselves from Social Security for invalid reasons may have their exemption questioned in an IRS audit. To illustrate, in 1995 the Tax Court upheld the revocation of a minister’s exemption from Social Security on the ground that he did not qualify. The Court noted that the minister’s exemption application had been filed on time, but it concluded that the minister was not eligible for exemption because of comments he made during his trial. Among other things, the minister gave the following response when asked whether he was opposed to accepting Social Security benefits on the basis of religious principles (as required by law to qualify for the exemption): “No. I am not opposed to the—to that, as a religious issue, no. We were advised to—by our accountant, to file for an exemption with the state, providing the state would allow it. And we asked the state to allow it, which they did.”

This is an extraordinary ruling that is significant for ministers who are trying to decide whether to file an application for exemption from self-employment taxes (Form 4361). The ruling indicates that filing a timely Form 4361—which contains a certification by the applicant that he or she meets all of the eligibility requirements—may not be enough. The IRS or the courts may later question whether the minister was eligible for the exemption when the Form 4361 was filed.

The court acknowledged that the minister “signed an exemption application stating that he was opposed to public insurance because of his religious principles.” However, it found the minister’s “trial testimony to be more compelling.” Hairston v. Commissioner, T.C. Memo. Dec. 51,025(M) (1995).

In summary, opposition to Social Security based entirely on financial considerations is not a basis for exemption. In fact, ministers who heed this “expert’s” advice are exposing themselves to substantial penalties, plus back taxes and interest, for doing so. These could easily amount to tens of thousands of dollars.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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