Form 4361 SE exemption for Ministers

[jritchie]

Background: A retired, single client of mine felt called to be a minister.  She was Ordained by her church body in the current tax year.  She has been receiving Social Security benefits (including Medicare coverage) for many years given her advanced age and prior career.  She also has had investment income, SS, interest income for the last couple of years and a W-2 as a church employee (not clergy/minister).  That W-2 income has been taxable for SE purposes since her church/employer is exempt from withholding SS & Medicare tax on employee earnings.  But for the upcoming return she will be classed as Clergy/Minister and could apply for exemption from SE tax on her wage income as such, using IRS Form 4361.  As I understand it, the Exemption has to be approved by the IRS before it can be used on a tax return and it would only apply to the earnings from her Clergy position. 

QUESTION: Is there any effect on her existing SS / Medicare benefits she earned while in an earlier career, pre-retirement if the Request for SE Exemption (Form 4361) gets approved?  Or do those previously earned benefits continue as they have always been once the SE Exemption on Ministerial earnings is approved by the IRS? 

[BobKamman]

She is clearly struggling with the moral and ethical implications of claiming she is opposed to Social Security and Medicare, while accepting their benefits on a daily and monthly basis.  But having paid the taxes, she has earned them and they can't be taken away.  As with a lot of religion, she just has to pay lip service to the required assertion of opposition, in order to benefit from the clergy loophole.  

[qbteachmt]

Whew.

Medicare is not a Social Security benefit.

If she pays into SS from working while also collecting, her benefit might increase. Has she considered that scenario?

[TaxGuyBill]

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@jritchie wrote:

W-2 as a church employee (not clergy/minister) ... That W-2 income has been taxable for SE purposes since her church/employer is exempt from withholding SS & Medicare tax on employee earnings

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This isn't your question, but unless I'm missing something, no, the church/employer is not exempt from withholding Social Security and Medicare taxes for a non-minister.  If the church as been doing that, they are doing it wrong.

[qbteachmt]

Form 8274:

https://www.irs.gov/charities-non-profits/churches-religious-organizations/elective-fica-exemption-c...

It shifts the burden.

[TaxGuyBill]

Thanks, I wasn't aware of that option and have never heard of it.

[jritchie]

Yes, church has filed Form 8274 - they do not withhold FICA on church employees.  Which means the burden is shifted to the EE through SE tax. Unless the EE is exempted.  

[jritchie]

Agreed - I should have said on her SS Statement for the year she is paying Medicare premiums.  

[jritchie]

 She has not.  Tell me more...

[qbteachmt]

"on her SS Statement for the year she is paying Medicare premiums."

Yes, from 65, if you are eligible, you can get Medicare. But your Social Security isn't available for deduction if you choose to delay filing to age 70, so you pay for Medicare separately, such as out of your HSA (B, D and Advantage). The deduction is a banking convenience, not a Benefit.

"Tell me more..."

That's not much more to tell. It's a benefit based on earnings, so if you don't pay, you don't get to play. If you keep working and paying in, it is used in the computation for your benefit (and a spousal/survivor benefit).

It's very confusing that she did submit SE, and contributed in the past, and is collecting, and now doesn't want to contribute, but will still keep collecting while also still working but with earnings she doesn't want considered for collecting against.

[BobKamman · Accepted solution]

Medicare Part A, of course, is the cost-free benefit (as well as the rest of the actual cost of Part B, which is far more than the part that premiums pay).  And yes, Parts B and D can be paid from an HSA, but contributions to HSA must stop when the taxpayer signs up for Part A.

[qbteachmt]

The point was, no matter how it's paid for, Medicare is not a Social Security benefit.