By: James Guinn
Because of well-meaning but misinformed fellow ministers and tax practitioners, many ministers have been ill-advised with regard to their self-employment taxes. Some ministers believe they have opted out of the Social Security program when, in fact, they have not.
Prior to 1968, services performed by a minister were exempt from Social Security, unless he requested Social Security coverage by filing Form 2031. The ministers who filed Form 2031 made an irrevocable election, and can never again be exempt from Social Security.
Beginning in 1968, a minister is automatically included under Social Security unless he files Form 4361, Application for Exemption from Self-Employment Tax, which is accepted and approved by the Internal Revenue Service. Therefore, ministers who did not opt into the Social Security program prior to 1968 and who did not file Form 4361 on a timely basis after 1968 should be paying the self-employment tax.
A minister who realizes he has been in error and should have been paying self-employment taxes should immediately file amended tax returns for the years on which the statute of limitations has not run out (three years from date of filing the return) and pay the self-employment tax. Of course, the Internal Revenue Service will assess substantial interest and penalties.
Hopefully the Internal Revenue Service will accept the amended returns and take no further action.
A minister requesting exemption from Social Security coverage must meet one of the following two tests:
*A religious principles test, which refers to the institutional principles and discipline of the particular religious denomination to which he belongs; or
*A conscientious opposition test, which refers to the opposition of the individual clergyman because of religious considerations (rather than opposition based upon the general conscience of the clergyman).
Under either alternative, the clergyman’s opposition must be based on religious grounds [Internal Revenue Regulations 1.1402(e) – (a)(2)].
When applying either test, the minister is stating that because he meets one of the tests, he is opposed to the acceptance (with respect to services performed as a minister) of any private or public insurance which makes payments in the event of death, disability, old age, or retirement; makes payments toward the cost of, or provides services for medical care (including benefits of any insurance system established by the Social Security system).
In test (1), Internal Revenue Code 1402(h) provides exemption based on the sect’s, group’s or denomination’s recognized religious concepts and theology that are opposed to the Social Security program. Test (1) primarily applies to Christian Science practitioners and members of religious sects who have taken a vow of poverty, such as Roman Catholic priests and nuns.
For most evangelical ministers the exemption would arise from applying test (2), the opposition of the individual clergyman because of religious conscience, not general conscience.
A minister wishing to obtain exemption must file Form 4361 in triplicate during the first two years he has performed services as a minister and has $400 of net earnings from self-employment, a part of which was from the ministry.
The ploy of becoming reordained is not valid. This was tested in tax court in 1978 and it was determined that reordination did not start a new period of eligibility with regard to the two-year time frame. Accordingly, only during the first two years after the first ordination can the election be made.
Form 4361 is signed under penalties of perjury so it is very important that careful consideration be given to filing for exemption. Also, keep in mind this election is irrevocable.
Keep in mind that just because the service has approved Form 4361, your exemption can still be questioned upon audit of your tax returns. The service may take somewhat of a “back-door” approach to invalidating the Form 4361.
For example, if the exempt minister is a member of a religious denomination which does not forbid its ministers to participate in the Social Security program, then the individual minister’s election could be suspect, that is, if he is a member of a denomination that allows participation in Social Security, how could he oppose it on religious grounds?
Another Internal Revenue Service approach may be in the area of retirement and insurance plans. If a minister has filed the form stating he is opposed to accepting insurance and retirement benefits on religious grounds as discussed above and then participates in any public or private plans, the service could take the position that the election is invalid.
The Internal Revenue’s position is stated in the following Revenue Rulings:
Rev. Rule 68-188. An individual may not qualify for the exemption from self-employment tax under section 1402(h) of the Self-Employment Contributions Act if he is a member of a religious group by reason of whose tenets or teachings he is conscientiously opposed to receiving the benefits of public, but not of private, insurance of the type described in section 1402(h)(1) of the Act.
Rev. Rule 77-88. A member of a religious group opposed to acceptance of benefits of any private or public insurance who purchases a retirement annuity from an insurance company is not eligible for exemption from self-employment tax under section 1402(g) of the Code.
Keep in mind that Revenue Rulings are IRS interpretations of the law, not the law. However, should IRS assert its self-employment tax during the audit of a minister’s tax return, litigation would probably be required to settle the issue.
If Form 4361 is completed properly, the IRS will probably approve the exemption as they do not initially check the information provided and because the minister has signed the form under penalties of perjury. However, the Internal Revenue Service cautions the minister on the form that it (the form) is not proof of the right to an exemption from Social Security Tax. What is proof is the religious belief of the minister and/or of his denomination’s belief and other pertinent facts which IRS could check out under audit conditions.
If the IRS were able to invalidate the Form 4361 election, the service would be within its legal rights to assess delinquent taxes plus interest and penalties for past years.
The minister who is a member of a religious denomination whose tenets of belief oppose participation in Social Security and who participates in no insurance or retirement plan has the greatest likelihood of sustaining his election.
If after careful consideration a minister believes he meets one of the religious opposition tests and chooses to file Form 4361, it is recommended that he attach either a statement out of his denomination’s creed that states their opposition to Social Security for religious reasons or a statement for himself supported by Bible references showing individual religious opposition on theological grounds.
This is not foolproof, however. If IRS approves the exemption with the statement attached, you have gone on record and they are at least aware of the grounds on which you base your opposition.
Many ministers have not elected out of Social Security coverage for various reasons; however, the primary reason seems to be the fear of having the election invalidated. In any event all is not lost for those participating in the Social Security programs as there are some death and disability benefits. The ratio of benefit to payments made would vary from person to person based on years in the Social Security system and other factors so no attempt is made here to evaluate the Social Security program.
The major complaints are the instability of the program, the belief that the same dollars invested wisely by the minister would reap far greater returns, and limited retirement benefits.
Numerous tax cases support the fact that economical reasons and personal non-religious opposition are invalid for purposes of filing Form 4361.
It is suggested that all the above factors be considered before application for exemption from self-employment (Social Security) tax be made.
James Guinn is a certified public accountant with the firm Guinn, Smith & Company in Irving, Texas, a firm that has provided C.P.A. service to over 250 religious organizations, helping more than 100 non-profit corporations receive tax-exempt status from the Internal Revenue Service.
Guinn earned a bachelor of business administration degree from Midwestern State University in Wichita Falls, Texas, and worked for Arthur Andersen & Company, one
of the largest international public accounting firms.
(The above material originally appeared in Ministries Magazine.)
Christian Information Network