THE TAX COURT’S 5-FACTOR TEST

Who is a minister for federal tax purposes?  The Tax Court ruled in 1987 that a minister is one who

• administers sacraments

• conducts religious worship

• has management responsibility in a local church or religious denomination (control,
  conduct, or maintenance of a religious organization)

• is ordained, commissioned, or licensed, and

• is considered to be a religious leader by his or her church or denomination

In 1989, the Tax Court ruled that only the fourth factor is required (ordained, commissioned, or licensed) and that a balancing test should be applied with respect to the remaining four factors.  This, more flexible, test was adopted by the IRS in its 1995 audit guidelines for ministers.  The more factors that a person satisfies, the more likely that he or she will be deemed to be a minister for tax reporting purposes.                (p. 75*)

Services performed in the exercise of ministry include conducting religious worship, administering sacraments, and performing management functions for a church, a denomination, or an “integral agency” of a church or denomination (such as some religious colleges). Further, working for a secular organization can constitute the exercise of one’s ministry if the work is done pursuant to a valid assignment by one’s church or denomination (and the work furthers the purposes of the church or denomination).      (p. 71*)

The IRS recognized in a 1978 ruling that licensed or commissioned clergy need not perform all the religious functions of ordained clergy in order to qualify for a housing allowance (or any of the other special tax provisions), but rather need only perform “substantially all” of such functions.                 (p. 73*)

Any attempt to confer ministerial credentials upon persons solely to qualify them for “tax benefits,” without changing their duties or responsibilities in any way, probably will not be recognized by the IRS or the courts.           (p. 71*)

The IRS national office concluded that commissioned ministers are eligible for a housing allowance.  The IRS based its decision on a 1978 “revenue ruling” in which it stated that “if a church or denomination ordains some ministers of the gospel and licenses or commissions other ministers, the licensed or commissioned minister must perform substantially all the religious functions within the scope of the tenets and practices of his religious denomination to be treated as a minister of the gospel”          (p. 76*)

Social Security.  Is social security a good investment? Many ministers ask themselves this question, particularly when they are considering filing an exemption application with the government. Of course, the question is in one sense irrelevant, since ministers are automatically subject to social security taxes unless they are opposed to the acceptance of benefits on the basis of religious principles and they file a timely exemption application. (p 334*)

Social Security coverage provides several benefits—retirement, survivors, disability, hospitalization, and medical. While some ministers who have filed an exemption application conceivably could have duplicated the coverage social security provides this is highly unlikely. Most exempt ministers only think of duplicating the retirement benefits forgetting that social security coverage provides far more than these benefits. Social security benefits have the additional advantages of being inflation-indexed and nontaxable (for most persons).  (p. 334*)

NOTE:  The Evangelical Covenant Church is not opposed to Social Security benefits and strongly urges ministers not to seek exemption from Social Security.  Anyone seeking exemption from Social Security will be counseled by the Covenant not to do so. All applicants for exemption must inform their ordaining body. (p 319*)  The Covenant requires a signed, notarized statement from each applicant. This statement is placed in applicant's permanent file. The following is taken from that statement:

“I,  name, do certify that I have read very carefully the rules and forms regarding filing with the Internal Revenue Service for an exemption for self-employment tax.

I understand that this will mean a potential loss of retirement income, disability insurance coverage, survivor benefits insurance coverage, survivor benefits and post retirement medical insurance for those sixty-five (65) and over.

I understand that The Evangelical Covenant Church does not take any position against public insurance that makes payments in the event of death, disability, old-age, retirement, or provides services for medical care.  In fact the Pension Board and the Department of the Ordered Ministry strongly support such public insurance and encourages its ministers to participate in Social Security.

I understand that I am committing perjury if I am filing for exemption from self-employment tax for any other reason than: ‘that I am conscientiously opposed to the acceptance for services I performed as a minister of any public insurance that makes payments in the event of death, disability, old age, or retirement; or that makes payments toward the cost of, or provides services for, medical care’."

When a person reaches retirement age and qualifies for Medicare, Medicare becomes the primary health provider.  The Covenant policy becomes the secondary insurer.  Without Medicare, you then must be the primary provider.  Supplemental health insurance at this point becomes very expensive.

While Covenant Pension is paid on the first of the month for that month, Social Security benefits are paid in the following month, i.e. January’s payment comes in February and not on the first but following the numerical day of your birth.  Social Security benefits are paid on the highest 35 years of earnings.

*Church & Clergy Tax Guide, 2000 Edition