Do You Know How to Properly Enact Religious Exemptions?
Many of us have heard that politics and religion don’t mix. Perhaps this saying originated in 1955 when the mixing of the two was put to the test.
Originally enacted by Congress in 1935, the Social Security Act, or the Old Age, Survivors and Disability Insurance (OASDI), was extended in 1955 to include farm operators. Taking the position that Social Security was just another tax, the U.S. government looked to the agriculture community to contribute their fair share to the collective purse. However, this stance did not go over well among those who, for religious reasons, were opposed to the government’s welfare system and ultimately viewed Social Security as another form of public assistance.
The extension of the Social Security Act divided some farmers, particularly those within the Plain community, with regard to how they should address the new government-mandated responsibility. Some voluntarily paid the tax. Others, regardless of their candid disapproval of the tax obligation, opened bank accounts from which the IRS could draw to pay the liens against individuals in an effort to maintain compliance with the governmental regulations. Still another group of farmers, those who wished to explicitly obey the direction of their church, outright refused to pay or provide the means by which the tax could be collected.
To raise awareness of the position the Social Security Act had put them in, a petition containing the signatures of 14,000 Plain community farmers was presented to Congress. In it, taxpayers respectfully inquired whether any harm would be done if they stopped paying into Social Security (and opted out of any benefits) due to their religious beliefs.
In 1961, the IRS responded with a statement that recognized the Plain community’s stance that “Social Security payments, in their opinion, are insurance premiums and not taxes. They, therefore, will not pay the ‘premium’ nor accept any of the benefits.” However, it wasn’t until the Medicare bill was enacted in 1965 that certain religious groups were formally allowed to become exempt from paying Social Security and Medicare taxes.
Are You Exempt?
For an individual to be considered exempt from Social Security and Medicare taxes, they must complete a one-time application (Form 4029) with the IRS to request the exemption. After receiving the application, the IRS will either approve or deny the request.
But if you’re an employer, it’s not enough for your employee to complete Form 4029. For your employee’s wages to actually be considered exempt from Social Security and Medicare taxes (and for you not to be required to withhold these taxes), you have to have an approved Form 4029 exemption on file as well.
We are currently aware of situations in which an individual has received the exemption, but the employer has not. As a result, Social Security and Medicare taxes are still required to be withheld from the exempt employee’s pay. When this happens, you are also required to pay the matching portion of these taxes. Additionally, even if you have the exemption, but you employ an individual who does not, you are still responsible for withholding (and matching) the Social Security and Medicare taxes for that nonexempt employee.
Note: The Form 4029 exemption can be rescinded at any time by sending a letter to the IRS that states you are no longer a member of, or that you no longer follow the teachings of, the religious group under which you initially claimed the exemption. Keep in mind that if you had Social Security and Medicare taxes withheld while a Form 4029 exemption was in effect, rescinding the exemption will not grant you the benefits that would have accumulated from the time the exemption was first put in place until the date the exemption was rescinded.
If you or your employees are claiming exemption under Form 4029, but as the employer you are not, consider employment arrangements, such as working with an exempt employee leasing company. This way, Social Security and Medicare taxes are not paid unnecessarily. I am happy to work with you to examine your options and obligations. Contact Rea’s retirement plan audit services team or give me a call directly at 330.308.6867 to learn more.
By Darlene Finzer, CPA, QKA, CSA (New Philadelphia office)