Ministers or church leaders often ask our advice on how to figure the amount of the Social Security Allowance. The IRS does not require churches to pay a Social Security Allowance to its minister staff and provide no guidance on how to structure it. As a result, many churches have devised different ways to structure the Social Security Allowance. Often times churches make the calculation too complex and confusing.
First, we suggest that the amount be set at whatever the church would be paying in “Employer Social Security and Medicare Taxes” to a non-pastor staff member with that same level of pay. This would be paid to all ministers regardless of whether the minister has opted out of Social Security.
There is a compelling simplicity and a sense of fairness for a church to say: “For all of our workers, we will pay a Social Security (and Medicare) amount equal to 7.65% of their total pay (up to the Social Security ceiling of $110,100).” For non-pastors this comes in the form of the government-required employer contribution to Social Security and Medicare. For pastors, it comes in the form of a Social Security Allowance equal to 7.65% of salary and housing.
While the initial inclination to exclude pastors who are exempt from Social Security and to reduce the Social Security Allowance for ministers who are contributing to a 403(b) retirement account is understandable, it seems to be more ‘fair’ and appropriate to not exclude exempt ministers and not reduce the Social Security Allowance for ministers who contribute to a 403(b) retirement account.
In making this suggestion, we are proposing that the church base the Social Security Allowance only on the worker’s total pay and on the current Social Security and Medicare tax rate for employers, rather than basing the Allowance on the minister’s actual Social Security tax liability.
This is an important distinction. The minister’s actual Social Security tax liability can be impacted by various other factors including un-reimbursed ministry expenses and the existence of income from other sources which could conceivably push some minister’s work income beyond the $110,100 Social Security ceiling, thus reducing the amount of Social Security tax that they pay on their church income.
- paying a larger Social Security Allowance to ministers who do not contribute to their retirement account could appear to be a subtle bias toward having ministers not make 403(b) retirement contributions.
- Similarly, paying a Social Security Allowance to ministers to have not opted out, but withholding it from ministers who have opted out, could conceivable be seen as unfair by those who have opted out.
There is a practical reason for ignoring 403(b) retirement contributions when setting the amount of the Social Security Allowance: The IRS allows employees to change the amount of their elective contributions to 403(b) from time to time. Having to change the Social Security Allowance every time a minister changes their 403(b) contribution makes things unnecessarily complicated.
We realize that it sounds quite odd to suggest paying a Social Security Allowance to ministers who have opted out of Social Security! My additional rationale for proposing that is this:
Those ministers who have opted out of Social Security will need to invest in other programs (alternatives to Social Security) to make sure that they – and their families – are covered for retirement, survivor benefits, and disability benefits.
Generally, the decision to opt out of Social Security significantly reduces the future benefits that those ministers will receive from Social Security. As a result, we strongly advise ministers who have opted out of Social Security to set aside an amount comparable to what they would be paying in Social Security taxes, and use those comparable funds to pay for increased life insurance, dramatically increased retirement funding, and perhaps disability insurance