At Wisdom, we often get asked if someone should opt out of Social Security. We never give guidance on “should,” since this is a very personal decision. But like many personal decisions, it is best made with all the facts and good counsel. Which in addition to discussions with other pastors and mentors, we hope to contribute to.
An election to opt out is not as simple as one would hope. There are a few requirements to make this election, and knowing if you meet these requirements is a good place to start.
The first requirement is that you personally need to certify the following:
You are conscientiously and/or religiously opposed to public insurance for your services provided as a minister.
You are ordained, licensed, or commissioned by a church.
You have elected and/or revoked an exemption on Form 2031, a prior ministerial social security exemption.
This means that the election cannot be selected only because opting out is appealing financially through saving on taxes. The exact language you will need to certify to is on line 7 in the Application. Read this thoroughly to make sure you can in good conscience, sign the statement.
The second requirement needed for the election is appropriate timing. The Form 4361 exemption can only be filed by the due date, including valid extension, of the second tax year after licensing, ordination, or commissioning in which you have net earnings from self-employment of $400 or more, any part of which comes from ministerial services.
If you certify those statements and the timing is right, then it is time to look at the pros and cons of electing to opt out to see if the decision is right for you.
Pros of Electing Out of Social Security:
Allows clergy to opt out of public insurance due to conviction.
There will be no self-employment tax assessed on ministry earnings.
Cons of Electing Out of Social Security:
No social security earnings at retirement from your pastoral earnings, both salary and housing allowance.
Ministerial earnings do not build SS retirement, disability, survivor protection, or Medicare coverage credits.
Once the election is selected, it cannot be revoked. (The Clergy Act is in Congress right now. This bill may offer a one-time reversal, but it is not law as of this publishing date.)
Need to set aside more funds to cover in retirement planning what would be provided for with social security.
If you have made the decision to opt out as a Pastor after certifying the statements, your timing is right, and you believe the pros outweigh the cons, you will be ready to file. Please consider a few tips as you are filing:
Make sure to file on time! Form 4361 is due on the filing deadline, including valid extensions, of the tax due date of the second year of net earnings from self-employment of $400 or more, any part of which comes from ministerial services.
File with the original and two copies, per instruction on the form. Wisdom recommends using USPS Certified Mail to ensure documented delivery, as this is a mail-in form.
Make sure you have all required attachments and information included with your filing.
The filing alone does not make this election active. After filing, you should expect mail from the IRS verifying this election. Be on the lookout for this letter, as once it is sent you must complete the response of the verification. Check your letter date for the deadline stated in the IRS correspondence, and send before this date. Wisdom recommends using USPS Certified Mail for the response to ensure on-time delivery. The election is still not complete until you receive an approval from the IRS.
If your application is approved, there will be a copy returned to you marked “Approved.” Keep this permanently in your records. Once you received the “Approved” copy of your application back, your election is completed.
This form filing is included for those who use Wisdom Tax Preparation at no extra charge. If you’d like a Christian tax preparer who is an expert in Pastoral taxes, we’d love to serve you this upcoming tax season. Contact us here.
Tax laws are subject to change at any point. This blog should not be taken as personal tax advice. If you have questions on this subject or want to confirm the points within this blog post, it is best to reach out to your CPA. If you don’t have a CPA you love, many pastors and Christian’s trust Wisdom Taxes. We’d love to serve you as you serve God!