Should I “opt out” of the social security system?

The IRC exempts ministers from mandatory federal and state income tax and Medicare and Social Security tax withholding by their employers. However, if they do not elect to have income tax withholding, then ministers must file and pay federal and state estimated tax vouchers. In any case, employers of ministers are not permitted to withhold and match the 7.65 percent FICA tax payments (source: IRC 3121(b)(8)). Instead, the minister (unless he opts out of the social security system) is responsible to pay the entire 15.3 percent self-employment tax himself. Many ministers elect to have additional federal income tax withheld so that the excess can be applied to their self-employment tax obligation at the time they file their annual Form 1040. Whether you should opt out of the social security system depends greatly on your specific situation. However, the following information may be useful in determining your course of action.

  1. You may apply to opt out of the social security system only within the first two years of receiving at least $400 of self-employment earnings when any portion of which is related to your ministry as a licensed or ordained minister.
  2. Your social security tax-exempt status will apply only to ministerial income. FICA tax will continue to be withheld by your non-ministerial employers, if any.
  3. Your non-ministerial income both in the past and in the future will help you gain eligibility for Medicare and Social Security benefits (10 years required for eligibility) (source: www.ssa.gov). However, your Social Security benefits are based on your wage history and, accordingly, may be severely limited.
  4. If you choose to opt out, then you must provide for your own adequate retirement funds, long-term disability savings or insurance, life insurance or survivor savings, and retirement era health care.

Tax-saving opportunity: By opting out, you can save thousands of dollars each year in self-employment taxes, but you must have a plan to gain minimum eligibility for Medicare and Social Security benefits and to provide your own financial stewardship. Do not base your decision on rumors that the federal system might fail. In my opinion, if the economic woes of the US become so acute that the politicians are forced to deny benefits to millions of retirees, then your own investment accounts will likely be severely impacted as well.

This information is provided as a service of MinistryCPA.org to ministers and Christian ministries. Please contact us or your personal professional advisor to determine how this information may apply to your own situation.