I didn’t do it… and I’m glad. My negligence was not because I knew the advice was wrong and wanted to avoid a catastrophe, but because I didn’t have a clue about what he told me. Since he was all talk and no action, he didn’t offer to walk me through the steps he proposed. For once, I’m grateful for inaction.
This person counseled me to opt out of Social Security. “It won’t be there when you need it,” he opined. “Whatever you put together for yourself will be better than what the government will provide,” he continued. Being a respectful 20-something, I listened politely. Being a naïve 20-something, I didn’t know how to do such a thing; so I ignored the advice.
Recently, however, it seems that this erroneous opinion is circulating again. Misguided church treasurers or college professors urge young pastors to “escape” the tax. That advice, unfortunately, is absolutely wrong for a pastor in the Church of the Nazarene. The polity and practice of the Church of the Nazarene does not support an exemption from Social Security. The detailed federal process may allow some pastors in some denominations to do so, but that is not true in the Church of the Nazarene. All licensed and ordained ministers in the Church of the Nazarene (USA) are to participate in the Social Security system.
I recently talked with a pastor friend who told me that the best thing he did was to learn the “ins and outs” of clergy tax issues in the first month of ministry at his first assignment. Since the clergy tax situation has features not shared by persons in other vocations, and since many tax professionals have never prepared a clergy tax return, a pastor must become familiar with both self-employment and income tax issues. This article will focus on the self-employment portion.
The U.S. tax code treats a pastor as self-employed for Social Security calculations. The contributions into Social Security for most employees are divided between the employee and the employer, but the pastor is responsible for the entire amount. Because of this, if a congregation reimburses a pastor for his or her self-employment tax, that reimbursement is considered taxable income. There is no such thing as an employer’s portion for a pastor; it is all the responsibility of the pastor.
Except for pre-tax benefits provided to the pastor, all compensation is subject to the Self-Employment Contributions Act (SECA) tax. This includes provided housing and/or housing allowance, as well as cash compensation. Some persons get confused at this point because qualified housing expenses may be excluded from income tax, so the taxable amount for pastoral income usually will be lower than the taxable amount in the self-employment tax calculation. Because of the difference in the taxable amount, and because of the tax rates, over a lifetime a pastor will likely pay more in SECA tax than income tax.
I’ve heard numerous stories of pastors who failed to make timely payments throughout the year and faced a tax liability of several thousand dollars as April 15th crept closer. The government wants to receive payments four times a year. Individuals can use Form 1040-ES to learn about and calculate the taxes due each quarter. Failure to make quarterly payments will force a person to complete Form 2210, Underpayment of Estimated Tax, and Schedule AI, Annualized Income Installment Method, with the annual tax return. I can tell you from experience this is a tedious task.
The self-employment tax uses Schedule SE for the annual accounting. In addition to using Schedule SE for compensation from the congregation, a pastor will also use this form to report income from other sources, such as speaking at a retreat or conducting a wedding or writing lessons for Sunday School curriculum.
My father was a pastor. I’m not sure when he started participating in the Social Security system, since in the early years of this program clergy were not automatically included the way they are now. But I do know Social Security became an essential element of his financial security in retirement. Dad had three sources of income in retirement: two retirement plans (one from the church and one from secular employment), his own savings (much of which was equity in his house), and Social Security. My mother never worked outside the home, but she was eligible for a Social Security benefit which was 50 percent of my father’s. All of these sources combined provided my parents a solid economic foundation in their later years. Things would have been financially bleak for them without the Social Security benefits.
I hear pundits go on and on about entitlement programs, especially in an election year and during the federal budget cycle. I, too, worry about a government that lives beyond its means; but I also realize how fruitless it is for me to try to wage a one-man strike against the Social Security system. Instead, I need to know enough about how the SECA tax works to recognize bogus information when it circulates. I need to develop a system to deal with personal tax issues throughout the year, and faithfully work the plan. My family’s financial stability—both now and in the future—depends on it.
Keith Schwanz serves as assistant dean at Nazarene Theological Seminary in Kansas City.
Editor’s Note: For more information, read Memo #10 – Can Ministers Opt Out of Social Security?