Minister Who Failed to Pay Self-Employment Taxes Can't Collect Social Security or Medicare

(Parker Tax Publishing September 2020)

A district court dismissed a case brought by a minister in which he alleged that the church he worked for over 20 years should have withheld social security and Medicare taxes. The court found that the minister was responsible for paying self-employment taxes on his income over the years in order to be eligible to collect social security and Medicare after he retired. Kuma v. Greater New York Conference of Seventh-Day Adventist Church, 2020 PTC 265 (S.D. N.Y. 2020).

Background

Herman Kuma underwent extensive theological training in order to serve as a minister of the Seventh-day Adventist Church. The Greater New York Conference of Seventh-day Adventist Church (GNYC) is a religious entity based in New York City. It comes under the umbrella organization of the Seventh Day Adventist faith, and employs ministers to provide ministerial services to its followers. Kuma was a pastor with GNYC from October 1, 1996, to June 30, 2017. Throughout the term of his employment with GNYC, GNYC and its officers controlled all aspects of Kuma's employment. During Kuma's tenure at GNYC, it classified him as an employee, issuing him an employee identification card and Forms W-2, but not withholding any amounts under the Federal Insurance Contribution Act (FICA) (i.e., social security and Medicare taxes) on his behalf. In 2017, Kuma retired and applied for social security benefits. The Social Security Administration informed him that he was not eligible for social security benefits or Medicare because his employer, GNYC, failed to withhold FICA taxes.

Under Code Sec. 3111(a), all employers are subject to social security tax, with respect to individuals in their employ. Code Sec. 3121(b)(8)(A) excludes from the definition of employment "service performed by a . . . minister of a church in the exercise of his ministry." For FICA purposes, the term "minister" encompasses individuals who are duly ordained, commissioned, or licensed by a religious body and who have the authority to conduct religious worship.

Kuma sued GNYC in a New York district court, asserting breach of contract and negligence because GNYC did not withhold FICA amounts. GNYC moved to dismiss the case, arguing that it did not make any FICA contributions for Kuma because income for performing ministerial services is deemed to be self-employment income, rather than wages, which means that such income is outside the scope of FICA. A minister who receives income, GNYC noted, is required under Code Sec. 1401(a) and (b) to pay the self-employment tax on that income in order to be eligible for social security and Medicare.

Analysis

The district court granted GNYC's motion to dismiss after finding that Kuma failed to state a claim upon which relief could be granted. The court concluded that, under Code Sec. 3121(b)(8), Kuma was performing services for GNYC as a duly ordained minister and thus was exempt from FICA withholding. Instead, the court said, Kuma was required, under the Self-Employment Contributions Act (SECA), to pay self-employment taxes in order to be eligible for social security and Medicare upon retirement. The court also stated that Code Sec. 1401(a) and (b), relating to the self-employment tax, explicitly applies to an individual who is a duly ordained, commissioned, or licensed minister of a church and ministers are exempt from mandatory SECA contributions only if they have been granted an exemption.

The court also added that, even if GNYC had mischaracterized Kuma as an independent contractor, this mischaracterization would not alter the outcome because GNYC had no obligation to withhold FICA taxes on Kuma's behalf.

For a discussion of individuals subject to self-employment, see Parker Tax ¶13,105.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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