Important Changes for 2002

Members of recognized religious sects.   Beginning in 2002, self-employed members of recognized religious sects who are exempt from self-employment tax may be eligible to participate in SEP, SIMPLE, or Keogh retirement plans. For more information, see Publication 560, Retirement Plans for Small Business.

Earned income credit.   Beginning in 2002, the following changes take effect.

• Earned income no longer includes employee compensation that is nontaxable.
• Your earned income credit is figured using your adjusted gross income, not your modified adjusted gross income.

For other changes to the earned income credit, see Publication 596.

Increased contribution limits for traditional IRAs and Roth IRAs.   For 2002, allowable contributions to a traditional IRA and a Roth IRA will be increased to $3,000 ($3,500 if age 50 or over). In prior years, contributions were limited to $2,000. For more information, see Retirement Savings Arrangements, later.

Increased self-employed health insurance deduction.   In 2002, the self-employed health insurance deduction increases from 60% (in 2001) to 70% of the cost of the insurance. For more information, see Health Insurance Costs of Self-Employed Ministers, later under Income Tax: Income and Expenses.

Retirement savings contributions.   Beginning in 2002, you may be able to take a tax credit for certain contributions you make to a retirement plan or an individual retirement arrangement. For more information, see Retirement savings contributions credit, later, under Retirement Savings Arrangements.

Important Change for 2003

Increased self-employed health insurance deduction.   In 2003, the self-employed health insurance deduction will increase to 100% of the cost of the insurance.

Important Reminder

Photographs of missing children.   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843- 5678) if you recognize a child.

Introduction

Social security and Medicare taxes are collected under two systems. Under the Self-Employment Contributions Act (SECA), the self-employed person pays all the taxes. Under the Federal Insurance Contributions Act (FICA), the employee and the employer each pay half of the taxes. No earnings are subject to both systems.

(Find your occupation in the left column and read across the table to find if you are covered under FICA or SECA. Do not rely on this table alone. Also read the discussion for your occupation in the following pages.)

Table 1. Are You Covered Under FICA or SECA?

Occupation	Covered under FICA?	Covered under SECA?
Christian Science practitioner or reader	NO. You are exempt.*	YES, if you do not have an approved exemption from the IRS. NO, if you have this exemption.*
Member of a recognized religious sect	YES, if you are an employee and do not have an approved exemption from the IRS. NO, if you have this exemption.	YES, if you are self-employed and do not have an approved exemption from the IRS. NO, if you have this exemption.
Member of a religious order who has taken a vow of poverty	YES, if - Your order elected FICA coverage for its members, OR You worked outside the order and the work was not required by, or done on behalf of, the order. NO, if neither of the above applies.*	NO. You are exempt.*
Member of a religious order who has not taken a vow of poverty	NO. You are exempt.*	YES, if you do not have an approved exemption from the IRS. NO, if you have this exemption.*
Minister	NO. You are exempt.*	YES, if you do not have an approved exemption from the IRS. NO, if you have this exemption.*
Religious worker (church employee)	NO, if your employer elected not to have you covered.	YES, if your employer elected not to have you covered under FICA. NO, if you are covered under FICA.

* The exemption applies only to qualified services as defined later under Qualified Services.

Table 1. Are you covered under FICA or SECA?

This publication covers the following topics about the collection of social security and Medicare taxes from members of the clergy and religious workers.

• Which earnings are taxed under SECA and which under FICA. (See Table 1 to determine whether FICA or SECA applies.)

• How a member of the clergy (minister, member of a religious order, or Christian Science practitioner) can apply for an exemption from self-employment tax.
• How to figure net earnings from self-employment.

This publication also covers certain income tax rules of interest to the clergy.

A comprehensive example shows filled-in forms for a minister who has income taxed under SECA, other income taxed under FICA, and income tax reporting of items specific to the clergy.

Note.   In this publication, the term church is generally used in its generic sense and not in reference to any particular religion.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

You can e-mail us while visiting our web site at www.irs.gov.

You can write to us at the following address:

Internal Revenue Service
Tax Forms and Publications
W:CAR:MP:FP
1111 Constitution Ave. NW
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

Useful Items You may want to see:

Publication

• 54   Tax Guide for U.S. Citizens and Resident Aliens Abroad
• 525   Taxable and Nontaxable Income
• 529   Miscellaneous Deductions
• 533   Self-Employment Tax
• 535   Business Expenses
• 590   Individual Retirement Arrangements (IRAs)
• 596   Earned Income Credit

Form (and Instructions)

• SS-8   Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
• SS-16   Certificate of Election of Coverage Under the Federal Insurance Contributions Act
• Schedule SE (Form 1040)   Self-Employment Tax
• 1040-ES   Estimated Tax for Individuals
• 1040X   Amended U.S. Individual Income Tax Return
• 4029   Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits
• 4361   Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners

Ordering publications and forms.   See How To Get Tax Help, near the end of this publication, for information about getting these publications and forms.

Social Security Coverage

The services you perform in the exercise of your ministry are covered by social security and Medicare under SECA. Your earnings for these services are subject to self-employment tax (SE tax) unless one of the following applies.

• You are a member of a religious order who has taken a vow of poverty.
• You ask the Internal Revenue Service (IRS) for an exemption from SE tax for your services and the IRS approves your request. See Exemption From Self-Employment (SE) Tax, later.
• You are subject only to the social security laws of a foreign country under the provisions of a social security agreement between the United States and that country. For more information, see Binational Social Security (Totalization) Agreements in Publication 54.

Your earnings that are not from the exercise of your ministry may be subject to social security tax under FICA or SECA according to the rules that apply to taxpayers in general. See Qualified Services, later.

Ministers

If you are a minister of a church, your earnings for the services you perform in your capacity as a minister are subject to SE tax unless you have requested and received an exemption. See Exemption From Self-Employment (SE) Tax, later. These earnings are subject to SE tax whether you are an employee of your church or a self-employed person under the common law rules. For the specific services covered, see Qualified Services, later.

Ministers Defined

Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. They are given the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination.

If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes.

Employment Status for Other Tax Purposes

Even though you are considered a self-employed individual in performing your ministerial services for social security tax purposes, you may be considered an employee for income tax or retirement plan purposes. For income tax or retirement plan purposes, some of your income may be considered self-employment income and other income may be considered wages.

Common-law employee.   Under common law rules, you are considered either an employee or a self-employed person depending on all the facts and circumstances. Generally, you are an employee if your employer has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. For more information about the common-law rules, get Publication 15-A, Employer's Supplemental Tax Guide.

If you are employed by a congregation for a salary, you are generally a common-law employee and income from the exercise of your ministry is considered wages for income tax purposes. However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are considered self-employment income.

Example.   A church hires and pays you a salary to perform ministerial services subject to its control. Under the common-law rules, you are an employee of the church while performing those services.

Form SS-8.   If you are not certain whether you are an employee or a self-employed person, you can get a determination from the IRS by filing Form SS-8.

Members of Religious Orders

If you are a member of a religious order who has not taken a vow of poverty, your earnings for qualified services you performed as a member of the order are subject to SE tax. See Qualified Services, later. This does not apply if you have requested and received an exemption as discussed under Exemption From Self-Employment (SE) Tax, later.

Vow of poverty.   If you are a member of a religious order who has taken a vow of poverty, you are exempt from paying SE tax on your earnings for qualified services (defined later) you perform as an agent of your church or its agencies. For income tax purposes, the earnings are tax free to you. Your earnings are considered the income of the religious order.

Services covered under FICA at the election of the order.   Even if you have taken a vow of poverty, the services you perform for your church or its agencies may be covered under social security. Your services are covered if your order, or an autonomous subdivision of the order, elects social security coverage for its current and future vow-of-poverty members.

The order or subdivision elects coverage by filing Form SS-16. It can elect coverage for certain vow-of-poverty members for a retroactive period of up to 20 calendar quarters before the quarter in which it files the certificate. If the election is made, the order or subdivision pays both the employer's and employee's share of the tax. You do not pay.

Services performed outside the order.   Even if you are a member of a religious order who has taken a vow of poverty and are required to turn over to the order amounts you earn, your earnings are subject to federal income tax withholding and employment (FICA) tax if you:

• Work for an organization outside your religious community, and
• Perform work that is not required by, or done on behalf of, the order.

In this case, you are considered an employee of that outside organization. You may, however, be able to take a charitable deduction for the amount you turn over to the order. See Publication 526, Charitable Contributions.

Lay employees.   Lay employees generally are covered by social security. However, see Election To Exclude Church Employees From FICA Coverage, later, under Religious Workers.

Rulings.   Organizations and individuals may request rulings from the IRS on whether they are religious orders, or members of a religious order, respectively, for FICA tax, SE tax, and federal income tax withholding purposes. To request a ruling, follow the procedures in Revenue Procedure 2002-1, which is published in Internal Revenue Bulletin 2002-1.

You can read this Revenue Procedure at most IRS offices or, if you have a personal computer, visit the IRS on the Internet at www.irs.gov/ind_info/bullet.html.

To subscribe to the Bulletin, you can order it on the Internet at http://bookstore.gpo.
gov/irs. You also can write to:

Superintendent of Documents
P.O. Box 371954
Pittsburgh, PA 15250-7954.

Christian Science Practitioners and Readers

Your earnings from services you performed in your profession as a Christian Science practitioner or reader are generally subject to SE tax. However, you can request an exemption as discussed under Exemption From Self-Employment (SE) Tax, later.

Practitioners.   Christian Science practitioners are members in good standing of the Mother Church, The First Church of Christ Scientist, in Boston, Massachusetts, who practice healing according to the teachings of Christian Science. Christian Science practitioners are specifically exempted from licensing by state laws.

Some Christian Science practitioners also are Christian Science teachers or lecturers. Income from teaching or lecturing is considered the same as income from their work as practitioners.

Readers.   Christian Science readers are considered the same as ordained, commissioned, or licensed ministers.

Religious Workers (Church Employees)

If you are a religious worker (a church employee) and are not in one of the classes already discussed, your wages are generally subject to social security and Medicare tax (FICA) and not to SE tax. Some exceptions are discussed next.

Election To Exclude Church Employees From FICA Coverage

Churches and qualified church-controlled organizations (church organizations) that are opposed for religious reasons to the payment of social security and Medicare taxes can elect to exclude their employees from FICA coverage. If you are an employee of a church or church organization that makes this election and pays you $108.28 or more in wages, you must pay SE tax on those wages.

Churches and church organizations make this election by filing two copies of Form 8274, Certification by Churches and Qualified Church-Controlled Organizations Electing Exemption From Employer Social Security and Medicare Taxes. For more information about making this election, get Form 8274.

Table 2. The Self-Employment Tax Exemption Application and Approval Process

Who Can Apply	Ministers, Members of Religious Orders, and Christian Science Practitioners	Member of Recognized Religious Sect
How	File Form 4361	File Form 4029
When	File by the due date (plus extensions) of your income tax return for the second tax year in which you had at least $400 of net earnings from self-employment (at least part from qualified services)	File anytime
Approval	If approved, you will receive an approved copy of Form 4361	If approved, you will receive an approved copy of Form 4029
Effective Date	For all tax years after 1967 in which you have at least $400 of net earnings from self-employment	First day of first quarter after the quarter in which Form 4029 was filed

Table 2. The Self-Employment Tax Exemption Application and Approval Process

Election by Church Employees Who Are Opposed to Social Security and Medicare

You may be able to choose to be exempt from social security and Medicare taxes, including the SE tax, if you work for a church (or church-controlled non-profit division) that does not pay the employer's part of the social security tax on wages. You can make the choice if you are a member of a religious sect or division opposed to social security and Medicare. This exemption does not apply to your service, if any, as a minister of a church or as a member of a religious order.

You can make this choice by filing Form 4029. See Requesting exemption - Form 4029, later, under Members of Recognized Religious Sects.

First | Next

Publication Index | 2002 Tax Help Archives | Tax Help Archives | Home