A minister’s earnings from performing 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.
While a minister’s earnings are defined as self-employment income, ministers are given the ability to opt out of the system by filing Form 4361, Application for Exemption from Self Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners.
The exemption is available for ministers, members of religious orders, and Christian Science Practitioners. This article will 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.
If there is a differentiation in duties between those who are commissioned and those who are ordained, the IRS may determine that a minister is not a “minister” for tax purposes. The IRS may request a copy of the church’s bylaws to determine if it recognizes different levels of credentials with significant differences between the levels. It is advisable that a minister requesting an exemption obtain a copy of the church’s bylaws in the event the IRS makes such a request.
Basis for Exemption
The exemption is not based on:
- Financial objections to the Social Security system;
- A belief that the system will not be viable at the point of one’s expected retirement;
- A belief that one is a better money manager than the government.
Rather, the exemption is based on a minister’s conscientious objection or religious opposition to the acceptance (with respect to services performed by him or her as a minister, member, or practitioner) of any public insurance paid in the event of death, disability, old age, or retirement, or payments toward the cost of, or provided services for, medical care (including the benefits of any insurance systems established by the Social Security Act). [IRC Sec. 1402(e)(1)].
In other words, a minister must have a conscientious objection or a theological objection to public insurance programs.
While Social Security is specifically mentioned, the objection is not limited to the Social Security system.
Before approving a Form 4361, the IRS contacts the minister to confirm that he or she understands the basis for the exemption and remains willing to sign, under penalty of perjury, that such beliefs are sincerely held. Additionally, the minister must inform his or her ordaining body that he or she is filing Form 4361.
The Due Date for Filing Form 4361
The due date for filing Form 4361 is the due date of the minister’s tax return (including extensions) for the second year after he or she received proper credentials by a church and has self employment earnings of $400 or more for performing ministerial services.
The minister is required to submit the Form 4361 to the IRS in triplicate to the address listed on the form’s instructions, along with photocopies of documents that prove the minister’s credentials, and prove that the qualifying church is a credentialing body. The Form 4361 is not filed as a part of a minister’s individual tax return. If the form is attached to a Form 1040, it has not been filed with the IRS.
Missing the date for filing the Form 4361 is lethal to the exemption. There is no forgiveness granted to late filers, so ministers should use certified mail to obtain a certified receipt to prove timely filing of the form. While there is no forgiveness for late filing, the courts have allowed the exemption when a minister can prove a timely filing. In Eade v. U.S. 69 AFTR2d 92-446, it was determined that the form was mailed, it should have been received, and, had it been received, it would have been approved by the IRS.
Many ministers, and some practitioners, try to redeem a late exemption by having the minister be reordained by either the same church or a different church. Such action will not automatically restart the time limit for filing. Where a minister has not significantly changed his beliefs and his church, obtaining new credentials will not restart the time limit for filing Form 4361. [Ballinger v. Commissioner, 728 F.2d 1287 (10th Cir. 1984)]
When it can be proved that there has been a significant change in a minister’s beliefs accompanied by a significant change in churches with a change in beliefs, the time limit for filing may be restarted. [Hall v. Commission, 30 F.3d 1304 (10th Cir. 1994)]
If the minister is not willing to testify that his or her beliefs have undergone such a transformation that the old ones are invalid, then he or she should not attempt to use new credentials as a method to obtain the exemption.
Effective Date of the Form 4361
While the effective date, in most instances, is the date the minister receives credentials, a minister may not claim the exemption prior to receiving approval from the IRS. Self-employment tax is due until the exemption is approved. A minister may file an amended return and request a refund (in some instances, the IRS has sent refunds automatically).
Upon receipt of the approved Form 4361, the minister should keep the approved form in a secure location. It is very difficult to obtain a copy of the approved form from the IRS later. Without a copy of the approved form in the future, a minister may be charged self-employment tax by the IRS.
Permanency of the Exemption
The exemption, once granted, cannot be revoked at the option of the minister. The exemption can only be revoked if the minister agrees that the approval was based on incorrect information (for instance, the dates were incorrect, or the minister filed based on financial considerations or erroneous advice). If this occurs, then the exemption is nullified.
With a valid exemption, the minister may only opt back into the system at the grace of Congress. In the past, Congress has allowed brief opportunities for ministers to opt back into the system for future years. However, Congress has provided such opportunities only three times, the last one occurring in 1999.
Filing the Form 4361 is a serious decision for any minister. Too often, young ministers are encouraged to file the form because it is a “good deal” and they file without understanding the requirements and the consequences of filing the exemption. To opt out, a minister must review and adhere to the strict rules for achieving the exemption, as well as be prepared to support his or her religious beliefs that form the basis for the exemption to any authority questioning the exemption.
Furthermore, as I note in Church Compensation, Second Edition, any minister who seeks exemption
must be prepared to take specific steps to replace any benefits that may be forfeited or significantly reduced by the exemption. Ministers claiming the exemption need to make plans to replace retirement income, disability income, and survivor benefits. Waiting until a minister turns 60 or older is too late to consider the long-term consequences of the exemption.