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Social Security and Medicare

Summary

The U.S. Social Security system is largely financed by taxes on earnings (currently totaling 15.3%) shared equally between employers and employees or paid in full by a self-employed person. Benefits for both Social Security and Medicare are generally available at age 65. Reduced Social Security Retirement Benefits can be received beginning at age 62, but the medical insurance begins at age 65.

Employee or Self-Employed?

The IRS considers most workers to be employees, and the combined Social Security and Medicare tax is assessed at 7.65% on both the employer and the employee. This applies to part-time employees of religious organizations and student interns. Employer/congregations must pay these taxes to the IRS quarterly using Form 941.

However, by law, ordained, licensed, or commissioned ministers are always treated as self-employed for Social Security purposes, and self-employed persons pay the full 15.3% tax quarterly using Form 1040-ES. This tax is paid quarterly on both salary and the clergy housing allowance.

Sharing in the Minister's Social Security Tax

As the cost of the self-employment tax has risen, congregations of many denominations have recognized the burden that self-employment status places on ministers, and some have begun to pay their clergy an extra amount equal to one-half of the tax to apply to the quarterly tax payments. This amount is called "in lieu of employer's FICA", and should be in addition to the Total Cost of Ministry, or "minister's package." This amount must be reported to the IRS on Form W-2 as taxable wages.

Retirement Benefits

Benefits are based on the highest 35 years of earnings, and usually replaces from 25 to 40 percent of pre-retirement income. Drawing benefits at age 62 instead of age 65 reduces benefits by approximately 20 percent for the rest of one's life. Conversely, delaying drawing benefits after age 65 results in an increase of about 5 percent per year. There is no advantage to delaying taking benefits after age 70.

The standard benefit for a non-working spouse is 50 percent of the worker's full benefit, unless the spouse qualifies for a higher benefit based on his or her own earnings. Social Security law currently provides for automatic cost-of-living increases. The Social Security Administration will prepare an Earnings and Benefits Estimate Statement upon request. Call (800) 772-1213 every few years to request IRS Form SSA-7004 and obtain an updated report, or see the Social Security Administration for the same information.

Up to 85% of Social Security benefits may be taxable as ordinary income depending upon one's annual individual or family income. As of 2000, the Social Security Retirement Benefits of workers age 65 and older are not diminished by earnings from employment, which may induce workers with inadequate retirement savings to continue to work beyond age 65.

Medicare

Medicare is a health insurance plan for people who are 65 or older, or who are disabled, or have kidney failure. Part A covers inpatient hospital care and is paid for by taxes; Part B (optional) pays for physician care, and the premiums are deducted from a recipient's monthly Social Security check. Persons should sign up for Medicare three months before their 65th birthday, even if they plan to continue working; there is a penalty for late enrollment. Supplementary "Medigap" insurance plans such as those offered by AARP are recommended; these pay for deductibles, prescriptions, and other costs Medicare doesn't cover. The U.S. Health Care Financing Administration publishes an annual Guide to Health Insurance for People with Medicare. Copies are available from (800) 638-6833 or the UUA Office of Church Staff Finances.

For more information contact ocsf @ uua.org.

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Last updated on Tuesday, April 16, 2013.

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