Social Security issues for ministers and their ability to opt out of Social Security on their ministry income is so different than for secular employees. It’s very important to a minister’s financial future to understand Social Security and what the rules and consequences are for any action.
For that reason, we offer a comprehensive video on our website that is free to all. We encourage ministers to consult a Clergy tax or financial advisor before making any major financial decision, but planning cannot be overemphasized when considering the long-term effects of a minister “opting out” of Social Security. For now, we’ll try to clear up some common misconceptions.
Let’s start with the two qualifying factors to opting out to begin the conversation:
- A minister must be licensed, commissioned, or ordained.
- This decision MUST be for religious reasons and applied for within 2 years of your initial ordination.
If you qualify as a minister, you can opt not to pay Social Security tax on future ministry earnings. If you choose to “opt out” and already have your 40 quarters OR if your spouse has or will have 40 quarters, you ARE still eligible to receive social security benefits. You will still be eligible to receive whatever benefits you have already accrued. If your spouse has or will have 40 quarters, you are automatically eligible for HALF of their benefits, regardless of how much social security tax you have paid.
How Are “40 Quarters” Determined?
As an individual works and pays taxes, they earn Social Security “credits.” In 2021, you earn one credit for each $1,470 in earnings — up to a maximum of four credits per year. The amount of money needed to earn one credit usually goes up every year. Most people need 10 years of work to accrue 40 credits to qualify for benefits.
It’s important to realize that Social Security benefits only replace some of your earnings when you retire, become disabled, or die. Social Security can be very helpful for many but not critical if the minister plans carefully to compensate the loss of those benefits. The “Old” age pension, Medicare, life insurance and disability insurance are the major benefits of Social Security. So, planning to compensate for lost benefits in these areas is especially critical if one opts out.
It’s a Tax, Not a Retirement Account.
Another important take away here is that Social Security should not be considered an investment for retirement. It’s a tax (currently at 15.3% and incidentally, the largest tax many ministers pay). Some of that tax you pay is returned to you under specific circumstances like old age, but don’t confuse it with retirement planning. It’s rarely adequate for most individual’s retirement needs by itself and especially for ministers who have so many more retirement advantages available regardless of which option you choose. A clergy retirement specialist or tax advisor can help you reduce social security tax and even state and federal tax with a proper retirement plan.
Whether you decide for religious reasons to opt out or stay in, you need qualified clergy advisors to prepare adequately for the future. If you do opt out, you MUST plan to replace the lost benefits. Using all of your clergy tax advantages in a holistic plan to help build wealth or form a strategy to compensate for the loss of Social Security benefits will make a huge difference in your future and financial wellbeing.
View our free video, “The Minister and Social Security” for complete details on all facets of this issue as it affects ministers.