Q&A: Social Security Exemption

Does a Social Security exemption apply to past secular work?

Our pastor worked for several years in secular employment before going to seminary and becoming a pastor. Soon after he was ordained, he applied for exemption from self-employment taxes by filing a timely Form 4361 with the IRS. He is now concerned that by option out of Social Security he will not be eligible for any benefits based on all the years of secular employment. Is he right? Should he be concerned?
An approved exemption only exempts a minister from Social Security taxes and benefits with respect to services performed in the exercise of ministry. The exemption has no effect on benefits based on employment that is not in the exercise of ministry.
The income tax regulations specify that “a minister performing service in the exercise of his ministry may be eligible to file an application for exemption on Form 4361 even though he is not opposed to the acceptance of benefits under the Social Security Act with respect to service performed by him which is not in the exercise of his ministry.” Treas. Reg. 1.1402(e)-2A(a)(2).
As a result, a minister whose exemption application (Form 4361) has been approved by the IRS will be eligible to receive Social Security benefits based on earnings not covered by the exemption, assuming that such earnings are sufficient to entitle the minister to the benefits.
Also note that the longer a minister is exempt from Social Security coverage, the lower his or her Social Security retirement benefits will tend to be.
The Tax Court addressed this question several years ago. The case involved a pastor who not only was employed by a church but who also operated a private business as a handyman. The pastor, who had filed for exemption from self-employment taxes, assumed that the exemption applied to his handyman income. As a result, he did not pay self-employment tax on these earnings. The IRS audited his tax return and determined that the secular earnings were subject to the self-employment tax. The Tax Court agreed, noting that “although the income [the pastor] derived from his handyman business may have enabled him to sustain his ministry at [his church] and to fulfill the obligation of supporting his family, those reasons or motives do not cause the handyman business to be integral to the conduct of his ministry.” The court acknowledged that ministers can exempt themselves from self-employment taxes if they meet several conditions, but the exemption applies only to “services performed in the exercise of ministry.” Such services did not include the pastor’s work as a handyman. Williams v. Commissioner, T.C. Memo. 1999-105.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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