Pastor John* sat in my office on the verge of tears. This was a real role reversal for him—usually he is the bulwark of strength to whom others come with their problems. But though he is an honest man, John was in trouble with the IRS. During the 15 years of his ministry, thinking that pastors were exempt, he had paid no Social Security tax. An IRS audit found that he owed $30,000, more than he makes in a year.
John's case was my first brush with a unique part of the income tax laws. In general, ministers are treated as self—employed. Along with their regular in come tax, they pay self-employment tax currently 12.3 percent of their self-employment net income. (Self-employment net income is the minister's salary plus the parsonage exclusion minus employment-related expenses.)
The clergy and self-employment taxes
In 1951 the government decided to allow those who worked in not-for-profit organizations the option of entering the Social Security system, an option they had been denied up until that time. This decision engendered a debate over whether ministers were employees or self-employed.
The President argued for treating ministers as employees. But when several denominations actively lobbied the Congress, it chose to treat ministers as self-employed.
A few denominations waived this special provision, for Social Security purposes treating their ministers as employees. These churches pay the employer's share of the Social Security taxes (50 percent) , and their ministers pay the employee's share (the other 50 percent). From 1951 through 1954, only the ministers of these churches were allowed into the Social Security system.
In 1955 the government allowed those ministers classified as self-employed the option of entering the Social Security program. To do so, they had to pay the full self-employment tax themselves, the standard arrangement for self-employed workers.
Finally, in 1968, ministers were required to enter the Social Security pro gram. Several denominations raised legitimate opposition to the forced inclusion of their ministers, offering arguments based on conscientious objections to insurance, public insurance, and public benefit programs. They argued that God and His church are to take care of the members in need—not the government or insurance companies.
To meet these concerns, Congress allowed ministers opposed to public insurance on religious grounds to opt out within the first two years of their ministry. This exemption is a peculiar example of how government can distort things while trying to allow for religious freedom. First, it provides only for ministers.
Other members of the churches with these convictions including the nonministerial church employees do not have this option, even though several have clearly proved to the courts that they have religious grounds for their op position to insurance.1
Second, ministers must make the decision during the first two years of their ministry. If, after that two-year period, a minister receives a revelation that insurance is immoral, it's too late. He or she will be in trouble with either God or the government. 2
Of all the tax-related deadlines I have seen, none are as strictly enforced as this one. As far as the tax court is concerned, no excuse is sufficient and ministers have tried them all, including "I didn't know about this until it was too late" and "I accidentally filed the wrong form."
Currently the law requires ministers to pay self-employment tax. However, there are two exceptions. Section 1.1402(h)-1 of the Internal Revenue Code releases "members of certain religious groups opposed to insurance." According to tax reference guides, this section is included to provide for the religious principles of such groups as the Amish. 3 To qualify its ministers for this exemption, a denomination must prove (1) that it holds tenets that oppose insurance, (2) that it makes provision for its dependent members, and (3) that it has existed since 1950.
The ministers—and only the ministers—of denominations meeting these criteria may apply for exemption from self-employment tax under the section of the tax code identified above. They must state that they adhere to their church's beliefs concerning insurance. Those who do not belong to one of these groups may not apply for exemption under this section.
Perhaps Internal Revenue Code Section 1.1402(e) is more relevant to most ministers. It says any minister who is "conscientiously opposed to, or because of religious principles he is opposed to, the acceptance of any public insurance that makes payments in the event of death, disability, old age, or retirement" may apply for exemption from self-employment tax. This section of the code is hard to read and understand. The form ministers must submit to obtain exemption from self-employment tax, Form 4361, quotes this section and requires ministers, under penalty of perjury, to certify by their signature that they qualify for exemption on these grounds.
To qualify for exemption under this section of the tax code, ministers must file before the due date of the tax return for the second year of their ministry. The 1986 tax law requires ministers to inform their ordaining bodies of their morally based objections to receiving public insurance benefits. They are not exempt until an IRS director approves and re turns Form 4361.
In the past, once a person had obtained this exemption, he could not change his mind and enter the Social Security program. However, the so-called Tax Simplification Act of 1986 allows exempt ministers to come back in.4 Congress has voted to make this a one-time opportunity that it will not of fer again. For the minister who is not currently in the program, this determination makes the choice between remaining out and opting to enter it particularly momentous.
I hesitate to include a section on the economic aspects of opting out. This decision should be made solely on a religious, not on an economic, basis. But I am sure that the economic aspects of the decision are at least a matter of curiosity.
The self-employment tax is a person's way of buying into the Social Security system, a system that offers the following important benefits: monthly retirement checks, survivor benefits, disability checks, and Medicare.
The retirement checks currently amount to about $700 per month for those who were making $30,000 a year when they retired. To be eligible for these checks, one must have contributed to the system for 10 years.
This raises a troubling question for those with fewer than 10 years until retirement. Over the remaining few years of their careers they may not build adequate work credit to receive full benefits. That, however, does not mean that they should stay out of Social Security. The decision to opt out is a moral and not an economic decision. Ineligibility for full benefits simply means that the right decision will be harder to make.
Those joining the program become eligible for some benefits—such as disability and survivor's benefits—after a couple of years. Opting in now and paying for 1986 and 1987 will get a person two years of credit right away (see box accompanying article). Work credit built up in college or while moonlighting during one's ministry may contribute to meeting the eligibility requirement. And those who continue working past age 65 may become fully insured even though they have not been in the program a full 10 years. Since this situation is so complex, those who are facing it should discuss their needs with the appropriate person at a Social Security office.
Social Security also provides survivor benefits and disability checks. Survivor benefits are paid to a worker's family in the event he or she dies. A family of three or more can receive as much as $1,807 per month. Disability checks are paid to disabled workers. These checks run be tween $1,000 and $1,500 per month. The amount of the survivor or disability checks varies depending on how long the insured worked, his or her income, and the number of dependents.
The eligibility requirements for receiving these benefits depend on the age at which the worker dies or becomes disabled. For example, those who die or be come disabled at age 30 must have contributed to the system for two years to be eligible for the checks. Forty-two-year-olds need five years of payments, 54-year-olds need eight years, and 62-year-olds need ten.
The other major program Social Security encompasses is Medicare. There are two aspects to Medicare: medical insurance and hospital insurance. The medical insurance helps pay for the worker's doctor and for other medical services. Those who want this insurance must pay an extra monthly premium it is not covered by the self-employment tax. But, at least at this time, the medical insurance available through Medicare is a bargain compared with that available elsewhere. The church pays the Medicare medical insurance premiums for those retired Adventist ministers who participate in the Social Security pro gram. Those who have opted out must fund the costs this insurance would cover themselves.
The self-employment tax does pay for hospital insurance, about 20 percent of it going into the insurance pool. This insurance helps with the worker's hospital expenses after he or she reaches age 65, paying all but $520 of the hospital bills for the first 60 days. In addition, for the next 30 days (days 61 to 90), while the worker must pay the first $130 per day, this Medicare hospital insurance covers everything above that amount. So a per son with Social Security can spend 90 days in the hospital and pay only $4,500 a stark contrast to the $40,840 average cost for a 90-day hospital stay. 5
Many people worry about the financial stability of the Social Security system; they've heard that the system is nearly bankrupt. This is completely unfounded. Though all things pass away, the Social Security system is as strong as our government and its ability to raise taxes. It may not be eternal, but it is more secure than any bank or insurance company.
All of these benefits sound good but are they worth twelve percent of one's salary? Let's look at Tom. Fresh out of seminary, he has 30 years until retirement. On a salary of $30,000, his self-employment tax might average $3,690 a year. (I know that ministers fresh out of seminary don't make $30,000. This is a guess at an average for his entire career.) So, if he puts $3,690 in the bank every year until he retires; if he doesn't suffer a disability; if he doesn't die prematurely; if his money earns a 5 percent after-tax interest; and if he and his wife remain healthy until they die of sudden heart attacks, Tom would come out money ahead to seek the exemption from Social Security. Following this scenario, Tom would accumulate about $250,000 by retirement. (The older a person is, the smaller the pool that he or she can develop before retiring. So the older one is, the more attractive Social Security is.) For about $100,000 of that he could probably buy an annuity that would pay him an amount equivalent to what he would have received from Social Security. This would leave him about $150,000 for medical care.
But there are five ifs in this story. Should any one of them fail, Tom and his family are in a financial mess. First, he may not be disciplined enough to make the annual deposit into the bank. Frankly, I have never met anyone who is. A lot of people can be faithful about it for a few years. But when money problems come such as college bills or house buying—they end up rushing to the bank to withdraw their retirement savings to bail themselves out.
Another big if is the possibility of dis ability. Outside of the Social Security system, Tom would not receive disability checks. And, if he were disabled, he probably could not make the annual retirement payment to his savings account. But the biggest if has to do with Medicare. The $150,000 left over for medical expenses may seem like a great deal of money, but one of my clients spent at least that much on the medical bills he and his wife incurred during the last three years of their lives. As with all insurance, the Medicare that Social Security provides is a bad deal if one doesn't need to use it.
From an economic point of view, I am not sure whether I would choose to enter the Social Security system. But I don't have a choice. And neither do many of you.
Moral aspects of the decision
Any minister who is "conscientiously opposed to, or because of religious principles he is opposed to, the acceptance of any public insurance that makes payments in the event of death, disability, old age, or retirement" may apply to be exempt from self-employment tax. Whether or not to do so is a moral decision. In reality, the economic aspects of this problem are irrelevant; I have only discussed them to make the decision you must make more palatable. It is the moral aspects of opting out that you should consider with greatest care.
Are you opposed to any type of life or disability insurance? The moral argument offered against such insurance goes something like this: "God will take care of my family when I die or if I'm hurt, so it is better to use my money now for advancing God's cause than for paying insurance premiums."
There may be some truth to this, but do you believe it enough to preach it from your pulpit? Is the church ready to provide everything for widows and orphans? Is it ready to take care of the needs of the disabled and their families?
If you opt out of Social Security using this argument, moral consistency re quires you to avoid any life or disability insurance policies—including those provided by your employer.
Another moral argument against participating in Social Security runs: "I believe that the self-employment tax is government interfering with the free exercise of my religion." Religious freedom is important. We must fight any attempt by the government to infringe on our religious principles. However, government actions that affect churches indirectly are not always an infringement on the free practice of religion. For example, one could argue that in applying fire codes to churches the government is involving itself in religion. But its doing so usually doesn't interfere with the free exercise of religion. For participation in Social Security to be a religious freedom issue, you must believe that the self-employment tax is forcing you to violate your religious beliefs.
I don't believe the decision to opt out can be based on a simple opposition to taxes. Both Jesus and the apostle Paul exhort us to be good tax-paying citizens. They taught good citizenship even in the case of a totalitarian and unjust government as that of the Roman Empire was.
All moral decisions call for consistency in our lives and in our ministry. If you believe that Social Security is wrong, then you must live a life consistent with your belief. If the basis for your opposition is government involvement in religion, then you should oppose other aspects of government involvement in religion, such as government-insured loans to ministerial students and the parsonage exclusion.
A few weeks ago I discussed this subject with a minister. I asked him what he was planning to do if he got sick when he was old, not having Medicare. He said, "My wife is working, and I'll be covered through her."
Taking this tack may or may not involve a moral inconsistency, depending on the reason the minister opted out of Social Security in the first place. Those who object to participating because they view the benefits they would receive from the government (i.e., Social Security) as excessive government entanglement in religion or government support of religion may have grounds for considering their position consistent if their spouses worked for secular rather than religious employers.
But those who claim, on religious grounds, to be opposed to insurance as such or to government participation in insurance can hardly be consistent and still accept the benefits of insurance through their spouse. Doing so would clearly be inconsistent with their signing of the statement that says they are "op posed to the acceptance of any public insurance that makes payments in the event of death, disability, old age, or retirement."
Suppose you had opted out of Social Security and then were enmeshed in an other matter involving the government and religious freedom. Say, for instance, in a wartime situation you found yourself having to oppose a government regulation forcing citizens to work on the Sabbath. Your arguments would be weakened and might even harm your cause if it came out that you opted out of Social Security taxes based on religious convictions regarding insurance and then got Medicare through your spouse. You would appear as a slacker who was using religious arguments to your own advantage.
Our lives, our sermons, and our teachings must be in harmony with every one of our moral positions. Religious freedom is cherished as an important right in our country. Those who use arguments based on religious freedom casually to avoid responsibilities other citizens face only weaken religious freedom.
We often call on our church members to take the moral high ground. We advance the need for sacrificial giving. We witness that God takes care of His own. We teach that self-denial for the cause of God is an integral part of the Christian walk, and we are quick to encourage people to avoid sin, even if doing so means risking their financial security. Do we believe what we present strongly enough to follow it ourselves?
Your religious beliefs may lead you to decide to stay out of the Social Security system. But to do so consistently, you must ask yourself, "Would I choose to make this stand even if this article had proved that it was a good deal to be in the system?" Make sure your decision comes as a result of God's leading and not on economic grounds. Make sure that the rest of your life is consistent with your decision. If you honestly believe that you should be out, stand by your moral principles.
You may decide that you ought to be in the system. Fortunately, God promises to care for those who decide to do what is right whatever the consequences. "God is able to provide you with every blessing in abundance, so that you may always have enough of everything and may provide in abundance for every good work" (2 Cor. 9:8, RSV).
*The story is true, but the names have been changed.
1. W. E. Palmer, 52 TC 310, DEC. 29, 594.
2. Some may argue that this rule is needed to prevent the problem of people continually entering and leaving the system. But their doing so is not a problem. People regularly enter and leave the system as they find and lose jobs. The two-year rule is just an arbitrary deadline selected by Congress.
3. Commerce Clearinghouse Standard Federal Tax Reports, pp. 58, 105, par. 4870.09.
4. The IRS estimates that tax revenue will increase by about $5 million a year because of ministers reentenng the system. (U.S. Cong. Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986 (Chicago: Commerce Clearing House), p. 1340.
5. Statistical Abstract of the United States, 1985, 105th ed.