At tax time, the Benefits Board gets a lot of questions about the IRS Form 1099-Rs that are sent to participants in January showing the amount of the participant’s distributions for the previous year. The most common question regards whether or not the distributions are taxable for self-employment tax purposes – or in other words, is a ministerial participant required to pay Social Security on such distributions. The answer, according to Internal Revenue Code section 1402 (a) (8), is NO! In part, the Internal Revenue Code states that the self-employment tax (Social Security) does not apply to “any retirement benefit received by such an individual from a church plan… after the individual retires.” This exemption applies whether or not the retired minister is able to claim the distributions as housing allowance.
Taking a step back, look at some basic tax information regarding contributions made to the Ministers’ Retirement Plan:
- Participants (both ministers and non-ministers) should remember that contributions made to their MRP account by the “employer” (or Church) are not considered wages for income tax or Social Security purposes.
- However, contributions made by salary reduction by non-ministers are considered wages for the Social Security and Medicare tax – although not for income tax purposes.
- Contributions made by salary reduction by ministers do not necessarily constitute self-employment earnings for purposes of determining self-employment tax liability. See Revenue Ruling 68-395 and Revenue Ruling 78-6. However, the Benefits Board does encourage ministers to pay Social Security on their salary reduced contributions simply so their Social Security wage base will be increased for future benefit purposes.
Back to the original question, all distributions from the MRP are not taxable for Social Security purposes, regardless of whether the participant is a minister or non-minister. While the authority for ministers is cited above, in the case of non-ministers they have already paid Social Security taxes on the income that was deferred.
** Please refer to the Tax Information Manual on our website for more information concerning these topics.