Do contributions to a church 403(b) reduce both my income tax and my SECA tax?

For most people a retirement plan saves one kind of tax. For a minister who has not opted out of Social Security, a church 403(b) can save two.

The first part is the same for everyone. When you move part of your pay into a 403(b) through a salary reduction agreement, that money is not included in your gross income, so you are not taxed on it as income this year.

The second part is specific to ministers. IRS Publication 517 lists the amounts you leave out when you figure net earnings from self-employment, and that list includes "contributions by your church to a tax-sheltered annuity plan set up for you, including any salary reduction contributions (elective deferrals) that aren't included in your gross income." Because ministers pay SECA on their ministerial earnings rather than having FICA withheld, those contributions come off the base your SECA is calculated on.

For everyone else it works the other way around. IRS Publication 571 says employees "must pay social security tax and Medicare tax on their contributions to a 403(b) plan, including those made under a salary reduction agreement." A public school teacher paying into a 403(b) still owes Social Security and Medicare on every dollar of it. A minister generally does not, and that difference is easy to miss because the plan looks identical from the outside.

Roughly what it is worth: SECA runs at 15.3% on 92.35% of net earnings, so about 14 cents of SECA on each dollar you defer, on top of whatever the income tax exclusion saves you. Past the Social Security wage base only the 2.9% Medicare portion applies, so the saving is smaller above that line.

Four things to watch:

• This is about pre-tax salary reduction contributions. Roth (after-tax) contributions are included in your gross income, so they do not reduce your SECA base. They may still be the right choice for other reasons.
• If your Form 4361 was approved, you owe no SECA on ministerial earnings, so there is nothing here to reduce. The income tax side still applies.
• Your housing allowance is already excluded from income tax, so it is not pay you can defer again. The contribution comes out of your taxable salary.
• Contribution limits, who is eligible, and how your church puts the salary reduction agreement in writing all matter. Your plan administrator and a tax professional who knows clergy returns can confirm what your plan actually allows.

There is one more reason pastors often keep retirement money in a church-sponsored plan rather than rolling it out: as covered in the question about retired ministers, distributions from a church plan can be designated as housing allowance in retirement, which an IRA or an ordinary secular 401(k) cannot do.

Disclosure: MHA Tracker's founder is a financial advisor who works with churches and pastors, and who advises a church 403(b) retirement plan. This answer is general education about how the tax rules work. It is not a recommendation to open, join, or contribute to any particular retirement plan, and no one here is compensated based on what you decide.