Missionaries Special Tax & Social Security Issues
Most foreign missionaries do a good job calculating the foreign earned income exclusion and the housing allowance exclusion on their tax returns to some degree.
However, a big problem still remains: Social Security tax is often neglected including the deductions – and this can be a huge tax liability.
For example, let’s say that a total compensation package for a missionary is $80,000. The foreign earned income exclusion completely eliminates federal income tax and because of that the missionary will pay the full Social Security tax on the $80,000 – which is a lot of money, currently about 15%. So what missionaries can do to reduce social security tax are two things; one is a clergy-specific 403(b) plan and the other is a properly set up and implemented Accountable Plan for expenses. Both are very easy to set up and both are very effective in reducing Social Security tax among other benefits. Neither will cost the employer or participant anything extra. Actually, if implemented properly with a clergy tax planner they can be extraordinarily powerful.
We believe every foreign missionary should have a clergy-specific 403(b) retirement plan. The beauty of this type of plan is that it can allow your money to grow tax free and then if it’s structured properly, it can be withdrawn tax-free via the clergy housing allowance. This is the ideal way for a foreign missionary to build up equity in a retirement plan for financial independence, to purchase a retirement home and long-term care expenses with many other benefits while reducing social security tax.
The other way to reduce Social Security tax is with a properly set up and implemented expense account. Many foreign missionaries pay their expenses directly out of their pocket. If this is the case the expenses need to be deducted on the tax return. Deducting ministry expenses on a tax return will not only dramatically reduce the amount of the deductions allowed and put the minister at higher audit risk, but it doesn’t positively impact the amount of social security tax you pay.
Understanding how social security tax works when working in multiple countries is important for missionaries. What social security tax you pay is somewhat dependent upon which country you minister/work in. If you are employed by an American mission organization then you are generally required to pay social security tax to the US. If you are on a long term visa in another country that foreign country may also require you to pay their social security tax. Totalization agreements help you avoid paying social security tax to two countries. Sometimes you get to choose which country to pay social security tax to. The US social security will pay retirement payments anywhere you live in the world.
The best way to make sure that you’ve got the right plan in effect is to speak with an experienced clergy tax advisor to help you look at the total picture; your goals/needs for the future, your current finances and pay structure and all of the options available with specific plans to help you achieve your goals with the best tax savings.