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Civil Law Considerations—Financial Law | D-7
a closer connection to a foreign country than to the
United States if the IRS determines he or she has
maintained more significant contacts with the for-
eign country than with the United States. An indi-
vidual who has personally applied or taken other
affirmative steps to change his or her status to that
of a permanent resident during the current year or
has an application pending for adjustment of status
during the current year is not eligible for the closer
connection exception.
35
Tax Obligations of
Resident Aliens
Generally, individuals who are classified as resident
aliens for tax purposes (under either the green card
test or substantial presence test described above in
the “Green Card Test” and “Substantial Presence
Test” sections) are liable for federal taxes on the same
basis as US citizens. They are taxed on their world-
wide income (not merely on US source income),
which must be reported on their US income tax
return, Form 1040 series. Resident aliens may claim
the same deductions and credits, are subject to the
same income tax withholding, and are taxed at the
same rates as US citizens.
Resident Alien Diocesan or Eparchial Priests.
Diocesan or eparchial priests are subject to income
taxation on compensation received from the dio-
cese, eparchy, or other church employer under the
general principles outlined above. Diocesan or epar-
chial priests are not subject to income tax withhold-
ing unless an affirmative election is made to have
income taxes withheld.
36
If a diocesan or eparchial
priest elects to have income taxes withheld, he
must complete and file Form W-4 with his diocese,
eparchy, or other church employer. Because dioce-
san or eparchial priests are treated as independent
contractors for social security purposes regardless
of how they are classified for income tax purposes,
no Federal Insurance Contributions Act (FICA)
taxes should be withheld. Instead, Self-Employment
Contributions Act (SECA) tax is imposed on the
compensation as well as on: (a) the amount of any
housing allowance or the rental value of in-kind
housing excluded from income under section 107
and (b) the fair market value of any meals excluded
35 Treas. Reg. § 301.7701(b)-2(f).
36 IRC § 3401(a)(9). Although not required, income tax withhold-
ing is encouraged; otherwise, the priest is responsible for making
quarterly estimated tax payments sufficient to cover his income tax
liability.
from income under section 119. It is the responsi-
bility of the diocesan or eparchial priest to compute
and pay his SECA tax liability on Schedule SE to
Form 1040.
37
Resident Alien Deacons.
38
Depending upon the
facts and circumstances of their employment, per-
manent deacons will be classified for tax purposes
either as lay employees or “ministers of the gospel.”
In order to be classified as a minister of the gospel,
a deacon must qualify as an “ordained, commis-
sioned, or licensed minister”
and
must perform the
duties that are normally those of a minister of the
gospel. While permanent deacons will meet the first
requirement, they do not automatically meet the
second requirement. The facts and circumstances
of each deacon’s church employment must be ana-
lyzed to determine whether he is performing duties
that are normally those of a minister of the gospel.
Dioceses or eparchies should use the same standards
in determining whether international deacons can
be classified as ministers of the gospel as they use in
making such determinations with respect to their
US deacons.
If a deacon is classified as a minister of the gospel
for tax purposes, he must be treated consistently as
a minister of the gospel for
all
tax purposes. Thus, a
deacon so classified would be eligible for the section
107 housing exclusion (assuming all other applica-
ble requirements are met) but must also be treated
as self-employed for social security purposes and is
responsible for SECA taxes. If a deacon does not
qualify as a minister of the gospel for tax purposes,
he should be treated in the same manner as diocesan
or eparchial lay employees.
37
See
IRS Publication 517,
Social Security and Other Information for
Members of the Clergy and Religious Workers
. A priest may claim con-
scientious or religious objection to the receipt of public insurance ben-
efits. IRC § 1402(e). This exception applies only to ministers of the
gospel, i.e., priests and deacons who are performing duties normally
performed by ministers of the gospel. Within two years of ordination,
a diocesan or eparchial priest or deacon may elect not to participate
in the social security system and thus not pay SECA tax. In order to
make this election, the priest or deacon would have to file IRS Form
4361, which includes a statement that the priest or deacon conscien-
tiously, or because of religious principles, opposes the acceptance of
public insurance and has informed his bishop. The IRS is responsi-
ble for verifying that the priest or deacon is aware of the grounds for
exemption from social security and wishes exemption on that basis.
As a practical matter, since the USCCB supports universal participa-
tion in social security, there is no
religious
basis on which a diocesan or
eparchial priest can file Form 4361. However, an individual priest may
claim
conscientious
opposition to receipt of social security benefits, if
permitted under diocesan or eparchial policy. Once filed, the election
not to participate in social security is
irrevocable.
A priest or deacon
who does not participate in social security is not eligible to receive
Medicare benefits.
38 This discussion applies to
permanent
deacons.