Taxing Ministers of the Gospel
Marmon, Richard, The CPA Journal
The Good News
Those called to preach would also do well to read Internal Revenue Code (IRC) section 107 and review the potential benefits available through the tax code. The recent Tax Court holding in Driscoll v. Comm'r (135 TC 27 ), along with other court cases and tax code provisions, represents good news for ministers. This article offers guidance to CPAs who advise religious workers by outlining those tax provisions that affect pastors and other ministry workers.
Individuals interested in the ministry generally attend a college specializing in pastoral theology, where they obtain a degree and are then ordained by the institution's governing body or by their local church. Sometimes they pursue an alternate route by working in a ministry for a period of time before obtaining ordination through the church or religious order that employs them The numerous provisions in the tax code that apply to ministers who have been ordained in one of the many mainstream religions in the United States are not intuitive, and some require timely elections that, if missed, will have lifetime consequences for those in the ministry.
SECA: Must a Minister Be Covered?
Upon receiving ordination, the first major tax decision that a minister must make is whether to participate in the Social Security system and be subject to the Self-Employed Contributions Act (SECA) tax. Unlike workers in every other occupation, certain religious workers (e.g., old-order Amish individuals) may opt out of the Social Security system by filing a request on Form 4361, Application for Exemption from Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners. They must also provide a written statement declaring their opposition to the acceptance of public insurance for their work in the ministry (IRC section 1402[e][l]). Form 4361 also requires that a "duly ordained, commissioned, or licensed minister of a church or a member of a religious order," inform "the ordaining, commissioning, or licensing body of the church or order" that he opposes such insurance.
This application for exemption from self-employment tax must be filed by the due date of the return, including extensions, "for the second taxable year for which [the minister] has net earnings from self-employment ... of $400 or more, any part of which was derived from the performance of service" as a minister, Christian Science practitioner, or a member of a religious order (IRC section 1402[e]). Once the 1RS receives the application, it will mail a statement to the minister specifying the grounds upon which the exemption will be granted. The minister has 90 days from the date of the IRS's mailing to certify that he is requesting the exemption based upon those grounds by signing a copy of the statement under penalty of perjury and returning it to the 1RS (IRC section 1402[e]; Treasury Regulations section 1.1402[e]-5A[c]).
The exemption will be effective for the first taxable year in which the minister has net self-employment earnings from ministerial work, any part of which is equal to or greater than $400, and it will apply irrevocably thereafter to all subsequent returns (IRC section 1402[e]). Ministerial work is defined as the performance of sacerdotal functions, including the control, conduct, and maintenance of a religious organization and the conduct of religious worship, even if not performed for a religious organization (Treasury Regulations sections 1.1402[c]-5[b] and 5[c]). If the minister misses the two-year deadline, he is forever barred from opting out of Social Security. This election terminates on death and cannot be made by a taxpayer's spouse or estate.
Ministers are considered self-employed with respect to the religious organization where they work (IRC sections 1402[a]; and 1402[c]); thus, those who have not opted out of the Social Security system will be responsible for self-employment tax on their earnings. …