Author: twatermann

Image: Sarah Köster/EyeEm | Gettu

The Fraud Triangle and How Internal Controls Protect Churches

Discover five ways strong internal controls protect your church from fraud, errors, and reputational damage while fostering financial accountability.

Vonna Laue, CPA
Bio

Last Reviewed: January 26, 2025

Church leaders should be familiar with the “fraud triangle”—the factors that typically contribute to a fraudulent activity: incentive, rationalization, opportunity.

The first two—incentive and rationalization—really can’t be controlled by church leaders. An incentive, such as debt or unexpected medical bills, and the corresponding rationalization (“I’ll just take a loan and repay it,” or “I deserve to get paid more so this money should be mine”) are on the individual.

But what church leaders can control is the third corner of that fraud triangle—opportunity. By focusing our efforts here, we can do a lot to prevent fraud.

The best way to address the opportunity for fraud is to establish strong internal controls. I often hear church leaders say that they trust their leaders and staff. Of course they do. If they didn’t, they wouldn’t be on staff! I tell them two things other church leaders have told me: “Trust isn’t an internal control” and: “Fear of getting caught is an internal control.” By establishing strong internal controls, we can deter someone contemplating committing an act of fraud—either because of incentive or rationalization—from acting at all.

Five ways to safeguard your church

While internal controls sound intimidating, they can safeguard your church in the following five ways.

1. Internal controls protect employees

With supervisors approving staff expense reports, and a board or finance committee member approving your pastor’s expense reports, your church can provide an oversight that eliminates a lot of questions.

2. Internal controls protect the assets and reputation of your church

You want to pass the “front page” test. When there’s good news about a church, it usually ends up in the lifestyle section of the local newspaper. But if there’s bad news? It’s usually on the front page. Or these days, it’s an easy target for widespread social media. With strong internal controls, a church can more easily refute erroneous claims brought by any form of media. Or better, avoid bad press altogether.

3. Internal controls provide reliable financial information

The better a church’s information, the better the decisions the church’s leaders can make.

4. Internal controls detect dishonest actions

If someone does act, out of incentive or rationalization, then it won’t take long for the internal controls to reveal it.

5. Internal controls detect honest errors

People make mistakes. The internal controls can also weed these out sooner rather than later.
Vonna Laue has worked with ministries and churches for more than 20 years. Vonna was a partner with a national CPA firm serving not-for-profit entities through audit, review, tax, and advisory services. Most recently, she held the role of executive vice president for a Christian ministry that works to enhance trust in the church and ministry community.
Image: getty/valianstin suprunovich

5 Key Ratios for Effective Church Cash Flow Management

Discover 5 essential ratios for church cash flow management to monitor reserves, plan for expenses, and improve financial health.

Vonna Laue, CPA
Bio

Last Reviewed: January 27, 2025

If your church goes through several months of low giving, will you be able to keep your doors open?

A church without necessary reserves will be scrambling to operate in the short term, no matter what the other balances are. Positive net income and net asset balances won’t make up for inadequate cash reserves or help in months when giving is down.

Fortunately, there are five cash flow ratios and measurements you can use to monitor your church’s reserves and identify any necessary adjustments. These represent important indicators every church should understand.

1. Days of Expendable Net Asset Reserves

Unrestricted Undesignated Net Assets + Board-designated Net Assets for Operations
_____________________________________________________
Cash Expenses (Total Expenses – Depreciation)

There are three cash flow ratios you can use to calculate how many “days” of cash reserves your church has, using different perspectives from the financial statements. To calculate how many day of reserves you have, multiply the ratio above by 365.

The first ratio tells how many days of operating expenses are available in net asset reserves. It takes into account the accrual of current assets and current liabilities. Keep in mind that the term “expendable net assets” represents the total resources available to spend on operations, excluding future gifts made or revenues generated by the church. It’s similar to a savings account.

Expendable net assets consist of unrestricted, undesignated net assets, which are net assets that result from achieving positive net income from all sources of revenues (excluding restricted revenues). It also includes amounts designated by the board for operating purposes other than capital expenditures. You divide this total by the amount of cash expenses to find your net asset reserves. Since all of these ratios measure cash flow, we use the term “cash expenses.” These are total expenses less deprecation, the most significant non-cash expense recorded.

This ratio can be temporarily high if the church has large unrestricted gifts on record that have not been spent by year’s end. Conversely, it can also appear low if the church incurs a large one-time expenditure that won’t be repeated in the future.

2. Days Operating Cash and Investments on Hand to Fund Annual Cash Expenses

Operating Cash and Investments
______________________________
Cash Expenses + Capitalized Interest

This ratio calculates the days of operating cash and investments on hand to fund annual cash expenses specifically related to very liquid assets. That means it only considers operating cash and investments, not other current assets and liabilities. This number is divided by the sum of cash expenses plus capitalized interest (interest paid in cash but not expensed by the church). Once again, to find the amount of days this allows, multiply the ratio by 365.

This ratio will calculate a result that is slightly different (typically higher) than the first ratio (net asset reserves) because it does not include the impact of other current assets and liabilities.

We believe an appropriate benchmark, or goal, for this ratio, is to have 40 to 80 days of cash expenses on hand. Furthermore, a result of less than 20 days could be interpreted as a “red flag”—an indicator that your church should take action quickly to improve this ratio.

3. Available Days of Cash Flow Coverage

The last “days of cash” ratio represents the number of days of operations (including making scheduled debt payments) available when calculated from the sum of operating cash flow. This number comes from the statement of cash flows, operating cash and investments on hand at the beginning of the year, and the amount available from the operating line of credit. In other words, if your church used all of the cash generated from operations, all available cash and investments on hand at the beginning of the year, and your available line of credit, how many days will you be able to operate on these sources of cash? This ratio represents your maximum level of reserves, and should always be the highest of the three “days” ratios.

4. Liquidity Ratio

Operating Cash and Investments
_________________________________________
Current Liabilities – Building Fund Current Liabilities –
Deferred Revenue – Short-Term Construction Line of Credit

The liquidity ratio measures how operating cash and investments are able to cover current operating liabilities, which exclude current building fund liabilities. (These typically have a separate source of cash from restricted revenues or budgets.) This ratio will tell the reader how many times actual operating liabilities can be funded from operating reserves.

A low result may indicate that the church is keeping fewer liquid reserves and is less likely to be able to handle unexpected operating expenses, events, or new opportunities that may come along.

5. Net Cash Availability

Total Cash and Investments – Adjusted Current Liabilities (Current Liabilities Excluding
_____________________________________________________
Amounts Borrowed on a Construction Line of Credit) – Temporarily Restricted Net Assets

The fifth and final cash flow ratio is actually a measure, because it is the sum of total cash and investments less certain amounts the church may owe or be required to spend for specific purposes due to donor restrictions. This measurement calculates the amount of cash available for other uses after the church has satisfied its adjusted current liabilities and set aside appropriate funds for temporarily restricted projects resulting from gifts given by donors who have restricted their use. Amounts borrowed on a construction line of credit are also excluded, as they will ultimately be refinanced with the debt and paid over time.

The statement of financial position answers the question, “How much cash do we have?” but it doesn’t answer the question, “Whose cash is it and how much of it can we spend?” The answers to those questions are typically very different. Therefore, this is one of the most important measures provided to your church leadership.

We believe the minimum benchmark for this number is at least one month’s worth of cash expenses. Any positive amount less than this is in the warning range. Any negative amount indicates that the church is borrowing from temporarily restricted funds and could be interpreted as a red flag, a warning that corrective action is needed.

Monitoring Your Church’s Financial Health

Measuring and monitoring cash flow and other key financial data will help your leadership team assess your church’s financial health, identify areas for improvement, and be good stewards of your resources. The five ratios and measures outlined above provide a good start for monitoring cash flow and reserves.

CapinCrouse also offers the Church Financial Health Index™ for churches that do not have the time or capability to develop key financial metrics and indicators. More information about this online dashboard is available at www.capincrouse.com/churchhealth.
Vonna Laue has worked with ministries and churches for more than 20 years. Vonna was a partner with a national CPA firm serving not-for-profit entities through audit, review, tax, and advisory services. Most recently, she held the role of executive vice president for a Christian ministry that works to enhance trust in the church and ministry community.
Related Topics: Posted: Last Reviewed:
Church and buildings in a Christmas scene.
Image: getty/Jay's photo

May All Your Church Christmas Services Be Merry … and Legal

Songs you can sing without the Grinch showing up with his team of lawyers.

The Editors

Could your church be sued for belting out “Angels We Have Heard on High” this Christmas season? No—unless the specific arrangement you’re singing is copyrighted.

You’ll be pleased as Christmas punch to know that many of your favorite Christmas songs are in the “public domain”—meaning that no one holds the copyright to them.

The Christian Copyright Solutions site explains: “If a song is in the public domain, you can make any changes you want to it, including changing lyrics, or adding a verse or chorus. You can also set new music to existing public domain lyrics.”
More on Copyright Law

To make sure your worship complies with copyright law, see “Understanding Worship Music Copyright Law” and “Q&A: Did My Church Infringe on Copyright When Using YouTube Videos in a Livestream Service?” And then dig deep into all your copyright questions and concerns with our book Essential Guide to Copyright Law for Churches.

Along with “Angels We Have Heard on High,” Christian Copyright Solutions also lists around three dozen other public domain Christmas songs, including:
  • Come All Ye Faithful
  • Away in a Manger
  • Come O Come Emmanuel
  • Little Town of Bethlehem
  • Go Tell It on the Mountain
  • Silent Night
  • Hark the Herald Angels Sing
  • The First Noel
  • Joy to the World
  • We Wish You a Merry Christmas

Related Topics: Posted:
Image: AdobeStock/Aliaksandr Dobysh

Why Church Employees Should Review Their W-4 Forms Annually

December is a great time for church employees to review their W-4 forms to ensure proper tax withholding. Changes in income, dependents, or expenses can impact tax liability, making updates essential.

Richard R. Hammar, Attorney, CPA
Bio

Last Reviewed: January 29, 2025

December is a good time to check with all nonminister church employees to see if they need to file a new W-4 form with the church.

The W-4 form is used by employees to report withholding allowances. This information will determine how much income tax the church withholds. The important point is this:W-4 forms often become obsolete because of changes in an employee’s circumstances, but the employee fails to submit a new form to the church. This can result in withholding that is significantly above or below the actual tax liability.

Here are some reasons why an employee’s W-4 may need to be updated:

the birth of a child
a pay raise
a divorce
significant medical expenses. voluntary withholding of their taxes.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Related Topics: | Posted: Last Reviewed:
Image: AdobeStock/tutye

Treating Ministers as Non-Ministers for Social Security

How to handle it when a church staffers asks to begin contributing into Social Security.

Richard R. Hammar, Attorney, CPA
Bio

Last Reviewed: February 4, 2025

Q: We have a ministerial staff member who opted out of self-employment taxes many years ago, and now wants to begin contributing to Social Security so that he will have retirement and Medicare benefits. His idea is that if we treat him as a nonministerial employee, he and the church will begin paying Social Security and Medicare taxes on his salary. Is this possible?

No. Section 3121(b)(8)(A) of the tax code specifies that for Social Security, a duly ordained, commissioned, or licensed minister is treated as self-employed with respect to services performed in the exercise of ministry (with the exception of some chaplains). This is true even if a minister is an employee for income tax purposes. As a result, a minister reports and pays Social Security taxes as a self-employed person (and not as an employee) with respect to services performed in the exercise of ministry. Some churches withhold the employee’s share of Social Security and Medicare taxes from ministers’ compensation and then pay the employer’s share. This may be due to unfamiliarity with the law, or for ulterior purposes such as padding an exempt minister’s Social Security contributions. In either case, this is incorrect reporting.

A minister’s status for Social Security is not a matter of election or choice. It is a matter of federal law. As noted, the tax code specifies that ministers are self-employed for Social Security with regard to compensation received for performing ministerial services.

FacebookTwitterLinkedInEmailPrintShare
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Image: Dilok Klaisataporn | Getty

7 Common Financial Control Problems

Address these common issues before trouble surfaces.

Vonna Laue, CPA
Bio

When it comes to maintaining financial integrity, churches of all sizes and settings often run into similar control issues. By addressing seven common problem areas now, leaders have a far greater chance of thwarting significant problems later:

1. Duties aren’t separated

Every church must make certain that at least two of the following three specific duties are split between at least two unrelated persons:
  • Authorizing transactions
  • Recording transactions
  • The custody of assets

Without separation, you’ve provided someone with access to the funds and access to the information systems. That person can manipulate information and cover up changes with little fear of detection.

2. Dated job descriptions and unmonitored workload

To keep job descriptions from becoming dated, review everyone’s duties and responsibilities regularly. Without this review, staff members may take on additional work that should be separated to unrelated persons, or they may take on more work than they can handle and properly oversee.

Also, a review of work-related duties can help make certain that someone isn’t overloaded to the point of potentially trying to justify or rationalize an act of embezzlement.

On a related note, churches often turn to volunteers. Make certain these volunteers are fully supervised and aren’t offended by close supervision and probing questions. Explain to them the importance of verifying their work to protect them and the church.

3. Unqualified personnel

Churches must steer clear of hiring or keeping unqualified individuals in finance-related roles. Sometimes a church hires out of pity because someone has been out of work a while; or a church might realize the person isn’t the right fit but doesn’t have the heart to let that person go. Neither scenario leads to good outcomes.

It’s also important to note the unique rules and laws that apply to church finances. It’s not the business world. It’s critical for churches to hire people familiar with church-specific rules and laws. You could also hire solid people not from a church finance background, but it’s essential to provide specific training that gets them up to speed about the ins and outs of church finance.

Speaking of training, churches may feel they simply don’t have the budget for such training. Thanks to the resources available online, many organizations offer free or low-cost webinars that can provide valuable training.*

Lastly, make certain to review the compensation of the personnel handling church finances. Low pay can serve as a trigger for rationalizing a fraudulent act, so it makes sense to periodically make certain the compensation for these leaders appears fair.

4. Accounting procedures manual

This should be comprehensive and regularly updated. If someone can’t come in and do the job after reading this manual, a problem exists. If only one person understands how everything works, that’s a potential vulnerability.

5. Limited time and staff

When a church staff feels overworked, there’s a temptation to cut corners on processes and procedures. When your church finds itself in this type of situation, it’s critical to emphasize to the staff the importance of maintaining the processes and procedures for the good of the ministry and their reputations.

6. Lack of monitoring

This is simply making certain your church has internal controls in place and follows them. It’s smart to periodically test the system to make sure it works like it should.

7. Trust

Church leaders often express their desire to extend “trust” on financial matters because it’s a church environment. As a ministry leader once expressed to me, trust isn’t an internal control. Of the three points that make up the “fraud triangle”—incentive, rationalization, and opportunity—churches can most control opportunity. That means leaders must trust, but verify.

This post is adapted from a presentation Laue gave to the Mile High Chapter of The Church Network (NACBA).
Vonna Laue has worked with ministries and churches for more than 20 years. Vonna was a partner with a national CPA firm serving not-for-profit entities through audit, review, tax, and advisory services. Most recently, she held the role of executive vice president for a Christian ministry that works to enhance trust in the church and ministry community.
Image: AdobeStock/ BillionPhotos.com

Church Violence Statistics: 3 Steps to Keep Criminals from Targeting Your Church

Discover key church violence statistics and three essential steps to keep your church safe from crime.

Matthew Branaugh, Attorney and Editor
Bio

Last Reviewed: February 10, 2025

When it comes to crime prevention, law enforcement professionals often say, “If a property looks like a target for criminals, it is.” Church violence statistics highlight the growing need for churches to implement crime prevention measures that ensure their properties remain safe.

According to FBI crime data, religious institutions are not immune to threats, with incidents of vandalism, theft, and violent attacks occurring nationwide. Carl Chinn’s report on violence against churches and faith-based organizations reinforces the importance of proactive security planning.

Church leaders must devote time, energy, and resources to crime prevention efforts. While budget and volunteer constraints may pose challenges, implementing these three key steps can significantly enhance security.

1. Appearances Matter: Crime Prevention Through Environmental Design

One of the most effective ways to deter criminals is through Crime Prevention Through Environmental Design (CPTED). These strategies focus on making church properties less appealing to criminals.

Key Areas to Address:
  • Maintain landscaping by mowing lawns, trimming trees and bushes, and pulling weeds.
  • Repair cracked sidewalks, broken windows, and faded or peeling paint.
  • Ensure the parking lot is well-lit and free of obstructions.
  • Install motion sensor lights around entrances and secluded areas.

Carl Chinn, a church security expert, recalls visiting a church with a high rate of robberies. “From a block away, I saw the problem—overgrown grass, cracked pavement, and dimly lit entrances,” Chinn says. “A neglected property signals to criminals that no one is watching.”

By making simple upgrades, churches can improve security without incurring major costs.

2. Relationships Matter: Strengthen Community and Law Enforcement Connections

Establishing strong relationships with community members and law enforcement can play a crucial role in crime prevention. Churches should regularly communicate with:

Church Members and Volunteers:
  • Encourage staff and members to report suspicious activities.
  • Hold security meetings to discuss recent incidents and prevention strategies.

Other Churches in the Community:
  • Collaborate with neighboring churches to share crime reports and security tips.
  • Establish a network to notify each other about potential threats.

Local Law Enforcement:
  • Provide police with church schedules to improve patrol coordination.
  • Request increased patrols during off-hours and high-traffic events.
  • Invite officers to use the church parking lot for observation posts.

According to Tina Lewis Rowe, a former U.S. Marshal and law enforcement instructor, direct engagement with police is key. “Random calls to the station are ineffective. Instead, reach out to the ranking officer for your area and request regular safety check-ins,” Rowe advises.

3. Common Sense Matters: Control Access to Church Facilities

Balancing an open, welcoming environment with security measures is a challenge for many churches. However, basic access control strategies can prevent criminal activity.

Best Practices for Securing Church Buildings:
  • Limit entry points to a single main entrance during services and office hours.
  • Keep side and back doors locked except during emergencies.
  • Regularly inspect doors and windows to ensure they remain secured.
  • Encourage congregants to report unlocked or propped-open doors.

For individuals with accessibility needs, designated parking spots near the main entrance can reduce the necessity of using side doors. Regular patrols by staff and volunteers during services and throughout the week can further enhance security.

Understanding Church Violence Statistics

Violence in churches has been a growing concern in recent years. Reports show that incidents of church-related violence have risen, with factors such as domestic disputes, robbery attempts, and ideological conflicts contributing to the numbers.

Key Statistics on Church Violence:
  • Between 1999 and 2023, over 2,000 violent incidents occurred at faith-based organizations in the U.S. (Faith-Based Security Network).
  • 40% of church violence incidents involve personal disputes that escalate on church property.
  • 27% of church attacks are robbery-related.
  • Fewer than 10% of churches have formal security plans in place to respond to violent threats.

Given these statistics, churches must take proactive steps to protect their congregations and staff.

Frequently Asked Questions (FAQs)

How common is violence in churches?

While churches are generally safe places, statistics show an increase in violent incidents, often related to domestic disputes, robberies, or ideological motives.

What are the best ways to prevent crime at church?

Maintaining a well-kept property, strengthening relationships with law enforcement, and limiting access points are some of the most effective crime prevention strategies.

How can churches improve their security without a large budget?

Simple changes such as installing motion sensor lights, securing entrances, and increasing community awareness can enhance security with minimal costs.

Should churches have armed security?

Each church must assess its unique risks. Some churches choose armed security, while others focus on non-armed security teams and emergency response planning.

For additional security resources, visit Department of Homeland Security’s Hometown Security Initiative.
Matthew Branaugh is an attorney and editor for Church Law & Tax.
Image: AdobeStock/Vitalii Vodolazskyi

4 Ingredients for an Effective Accounting System

Don’t let sloppy or poor accounting practices compromise your church’s finances.

Vonna Laue, CPA
Bio

Churches that don’t have effective accounting systems may compromise their church’s finances. Don’t let that happen at your church. Here are four essential ingredients that make up any solid system:

1. Accuracy. Decisions are only as effective as the information used to make them. Oftentimes, I hear leaders say they don’t have the time to review and double-check information. That’s not a good excuse. In order to avoid mistakes, and sometimes costly mistakes, you need build in time to reconcile accounts, create reports, and double-check reports.

2. Timeliness. Late information is the same as no information. Without information in hand, how can leaders in your church make good decisions? Plus: The more time that passes, the easier it is for someone to make an error or lose an important piece of information. Even worse, auditors of your church’s finances would consider consistently late reports a red flag. Why? It signals potential efforts to cover up financial malfeasance.

3. Efficiency. Because church staffs often are stretched, their time needs to be used well. This means the accounting system needs to be understandable and accessible. Create easy-to-understand department labels (or “classes” or “funds,” depending on the software), and a simple format for the chart of account numbers.

4. Support. The more your administrative role is seen as a support to the ministry roles, the better information and cooperation you will receive. Build rapport by offering your help whenever members of your finance team have questions or concerns about how to use the church’s accounting system. One church CFO I know does this regularly, and it opens up communication that later leads to questions ahead of potential problems, rather than after something has occurred.

For more help with managing your church’s finances, see the downloadable resource Internal Controls for Church Finances.
Vonna Laue has worked with ministries and churches for more than 20 years. Vonna was a partner with a national CPA firm serving not-for-profit entities through audit, review, tax, and advisory services. Most recently, she held the role of executive vice president for a Christian ministry that works to enhance trust in the church and ministry community.
Image: AdobeStock/ AS Photo Family

Four Fiduciary Duties of Church Boards

Officers and directors must provide careful financial oversight—or else face consequences.

Richard R. Hammar, Attorney, CPA
Bio

Fiduciary Duties in Church Leadership: What They Are and Why They Matter

Why It Matters

Many church officers and directors—often board or finance committee members—don’t fully understand the concept of fiduciary duty. This misunderstanding can lead to legal exposure and financial loss for both the church and its leaders.

What’s at Stake

Failing to meet fiduciary obligations can result in:
  • Significant financial damage to the church
  • Personal legal liability for board members
  • Erosion of trust within the congregation

The Purpose of This Guide

This article explains:
  • What fiduciary duties are and where they come from
  • How they apply to church leaders
  • Best practices based on nonprofit law
  • Legal cases that show real-world consequences
  • How federal tax laws shape fiduciary responsibility

Understanding Fiduciary Duties

The term fiduciary comes from the Latin fiduciarius, meaning something held in trust. Legally, a fiduciary is someone entrusted with managing another’s money, property, or affairs with honesty and care.

“A fiduciary is someone who acts in a role of trust for the benefit of another, implying great confidence and requiring good faith.”
— In re Benites, 2012 WL 4793469 (N.D. Tex. 2012)

Courts have affirmed that nonprofit board members are fiduciaries. They are expected to exercise good judgment and act in the best interest of the organization they serve.

“Officers and directors are bound to the exercise of the utmost good faith, loyalty, and honesty.”
— Summers v. Cherokee Children & Family Services, Inc., 112 S.W.3d 486 (Tenn. App. 2002)

The U.S. Supreme Court emphasized:

“To say that a man is a fiduciary only begins analysis.”
— SEC v. Chenery Corp., 318 U.S. 80 (1942)

The Four Fiduciary Duties

Nonprofit board members typically have four main fiduciary duties:
  1. Due Care
  2. Prudent Investing
  3. Loyalty
  4. Obedience

Each will be examined in detail.

Duty of Due Care

What It Means

Church officers and directors must act with care, diligence, and attention. They are expected to:
  • Stay informed about the church’s operations
  • Regularly attend meetings
  • Evaluate financial and legal decisions thoughtfully

“Total abdication of [a director’s] supervisory role is improper.”
— Stern v. Lucy Webb Hayes National Training School, 381 F. Supp. 1003 (D.D.C. 1974)

Stern v. Lucy Webb Hayes: A board failed to meet for over a decade. The court ruled this was a breach of due care.

PTL Bankruptcy Case: Jim Bakker was found to have breached his duty by:
  • Failing to inform the board of financial issues
  • Failing to supervise spending
  • Engaging in self-dealing

“Bakker exercised a great deal of control over his board … this was gross mismanagement.”

Best Practices for Church Boards
  • Read and understand financial reports
  • Ask questions and demand transparency
  • Attend board meetings consistently
  • Supervise delegated tasks
  • Prevent conflicts of interest

Learn from For-Profit Boards

Many corporate cases offer valuable guidance:
  • Jurista v. Amerinox: Boards must have systems to monitor decisions.
  • Francis v. United Jersey Bank: Directors can’t claim ignorance.
  • Barr v. Wackman: A board is not a symbolic entity—it must function.

Practical Safeguards

To meet the duty of due care:
  1. Check your state nonprofit laws.
  2. Follow any investment restrictions in bylaws or meeting minutes.
  3. Use an investment committee with financial experts.
  4. Create and follow a formal investment policy.
  5. Avoid risky or speculative investments.
  6. Ensure regular review of church investments.
  7. Avoid conflicts of interest.
  8. Be cautious of scams, particularly online.
  9. Diversify investments.
  10. Treat donated funds with added moral and legal care.

Prudent Investor Rule

How It Applies

The duty of due care includes managing investments wisely. Courts understand that not every investment will succeed. The key question is: Did the board act as a prudent person would?

“Absent abuse of discretion, business judgment will be respected.”

Key Guidelines
  • Document investment decisions
  • Seek expert advice when necessary
  • Diversify to reduce risk
  • Avoid conflicts of interest
  • Reassess investments regularly

Common Scams to Avoid (per SEC)
  • Pyramid schemes
  • Ponzi schemes
  • Nigerian investment scams
  • Prime bank scams

Warning signs include:
  • Unrealistic returns
  • Secretive or exclusive opportunities
  • Confusing jargon
  • Guaranteed results

Key point: Do not rely on “experts” associated with the investment. Use independent, trusted advisors.

Duty of Loyalty

What It Means

This duty requires acting in the church’s best interest, not personal interest.

Examples of Loyalty Violations:
  • Self-dealing in church contracts
  • Usurping opportunities intended for the church
  • Failing to disclose conflicts of interest

“The rule demands undivided and unselfish loyalty to the corporation.”
— Guth v. Loft, Inc., 5 A.2d 503 (Del. 1939)

Real-World Example: Jack’s Secret Church
  • Jack, a church officer, secretly formed a new church
  • He transferred church property without disclosure
  • The court ruled he breached his fiduciary duty of loyalty

Lessons for Church Boards
  • Disclose conflicts of interest fully
  • Recuse yourself from votes where you have a personal stake
  • Don’t personally benefit from church opportunities

Business Case Examples
  • Jurista v. Amerinox: Conflicts of interest void business judgment protection
  • MF Global Holdings: Loyalty includes avoiding even the appearance of personal gain

Duty of Obedience

What It Means

Board members must ensure the church operates within:
  • Its mission and purpose
  • Its governing documents (e.g., bylaws, articles)
  • State and federal laws

“The duty of obedience requires fidelity to the mission.”
— Manhattan Eye, Ear & Throat Hosp. v. Spitzer, 715 N.Y.S.2d 575 (N.Y. Sup. 1999)

Example

A Texas court ruled directors must not act outside the powers granted by law or the church’s charter.
— Batey v. Droluk, 2014 WL 1408115 (Tex. App. 2014)

Federal Tax Law Impacts

Excess Benefit Transactions

Section 4958 of the tax code allows the IRS to impose excise taxes for:
  • Unreasonable compensation
  • Improper benefits to insiders (e.g., board members, relatives)

Key Definitions
  • Disqualified person: Typically, someone with substantial influence over the organization
  • Excess benefit: Anything given in excess of fair market value for services

Consequences
  • 25% excise tax (plus 200% if not corrected)
  • 10% tax on managers who approve such benefits
  • Risk to tax-exempt status

Compensation is presumed reasonable if approved by an independent body using comparability data.

Additional Tax Triggers
  • Failure to report payroll taxes (IRC § 6672)
  • Providing personal benefits to board members or staff

Key point: Tax law is increasingly used to enforce fiduciary standards.

The Uniform Prudent Management of Institutional Funds Act (UPMIFA)

UPMIFA, adopted in 47 states, sets standards for:
  • Prudent investing
  • Risk diversification
  • Minimizing costs
  • Acting in good faith

It applies to nearly all church funds, not just trusts or endowments.

Key Responsibilities Under UPMIFA
  • Align investment decisions with the church’s mission
  • Diversify unless special circumstances warrant otherwise
  • Monitor and evaluate assets regularly
  • Use advisors when appropriate
  • Disclose material information to other board members

Protecting Your Leaders—and Your Church

Church officers and directors are often volunteers. Still, they shoulder serious responsibilities. A failure to understand or fulfill fiduciary duties can:
  • Jeopardize the church’s legal standing
  • Invite lawsuits or IRS scrutiny
  • Damage morale and trust

Best Practices
  • Provide regular training on fiduciary responsibilities
  • Use experts (legal, financial) to advise on high-risk matters
  • Review and update policies regularly
  • Document decisions and rationales clearly
  • Audit financials and conflicts of interest

“A director is not an ornament. The law has no place for dummy directors.”
— Francis v. United Jersey Bank, 432 A.2d 814 (N.J. 1981)

Final Word: Invest in Education

Educating board members about fiduciary duties isn’t optional—it’s essential. Every church deserves leaders who understand:
  • The weight of their responsibilities
  • The real risks of inaction or oversight
  • The legal and moral expectations tied to their role

By investing in your leaders, you’re investing in the church’s future.

“No one is compelled to be a director, but once the office is assumed, it carries with it the light burden of active, diligent, and single-eyed service.”
— People v. Marcus, 261 N.Y. 268 (1933)

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Image: AdobeStock/Vitalii Vodolazskyi

Internal Audit Tips for Churches: A Simple Guide

Key tips to simplify internal audits for churches and ensure a smooth process.

Marian V. Liautaud
Bio

Last Reviewed: January 26, 2025

Internal audits can help churches maintain financial integrity and transparency. Here are some key tips to make the process smoother and more effective.

1. Determine If an Audit Is the Right Fit

Before committing to an audit, assess if it is the best service for your church. In some cases, funds may be better allocated toward a financial review or consulting arrangement.

2. Build a Strong Relationship with Your Auditor

Your auditor should be a strategic partner with expertise in nonprofits and ministries. Establish a good working relationship to maximize the benefits of their services.

3. Be Involved in Major Decisions

Stay engaged with major decisions within the church and consider their accounting implications. Proactive involvement ensures accurate records and smoother audits.

4. Implement a Monthly Closing Process

A regular monthly closing process improves accounting accuracy and ensures you are well-prepared for audits throughout the year.

5. Communicate Audit Timing and Requirements

Discuss the audit timeline, potential issues, and requirements with your staff. Keeping everyone informed helps prevent misunderstandings and delays.

6. Set Clear Expectations with Your Auditor

Be upfront about timelines and expectations. Clear communication helps your auditor understand your needs and ensures an efficient process.

7. Prepare Thoroughly for Fieldwork

Allow ample time for preparation and have all necessary materials ready at the start of the fieldwork. Avoid preparing items during the audit, as this can cause delays.

8. Ask Questions Throughout the Process

If anything is unclear, ask your auditor for clarification. Open communication ensures you stay informed and reduces errors.

9. Be Available During the Audit

Availability is crucial during fieldwork and follow-up. Schedule time to address the auditor’s questions promptly, as unavailability can significantly slow the process.

10. Remember the Auditor’s Role

Keep in mind that you hired the auditor to help. They are there to support your church and ensure financial processes are in order.

FAQs
  • What is the difference between an audit and a financial review? An audit provides a comprehensive evaluation of financial records, while a financial review is less detailed and focuses on limited assurance.
  • How can I prepare for an internal audit? Implement a monthly closing process, communicate timelines with your staff, and ensure all records are organized before fieldwork begins.
  • Why is open communication with the auditor important? Clear communication ensures misunderstandings are avoided and the process runs smoothly.
  • How can I ensure the audit process is efficient? Prepare thoroughly, set clear expectations, and be available to address questions promptly during and after fieldwork.

For more information on financial management in churches, visit IRS Guidelines for Churches and Government Accountability Office.
Related Topics: Posted: Last Reviewed:
Image: AdobeStock/Who is Danny

Shifting Someone From Volunteer to Staff Person

Knowing when it’s time to turn someone from volunteer into church staff employee.

Wayne Pohl
Bio

Last Reviewed: January 28, 2025

We’re relying more on certain volunteers. How do we know when it’s time to hire someone for their ministry work?

At our church, we follow the following two guidelines:

First, we determine the level of expertise needed to do the job. I went from a small mission congregation to a congregation of 2,000 people. I discovered there was a great difference in the time and ability needed to manage a Sunday school of 50 children versus 500 students. As the complexity of the situation grows, so does the need for a paid staff member.

Second, we ask if the quality of the program will diminish without a paid staff position. We operate a vacation Bible school in the summer on three separate campuses. A program of that size takes exceptional management skills simply to handle logistical matters. Coordinating volunteers, transportation, and curriculum for a large VBS demands attention to maintain quality. If a paid staff member was not overseeing our operation on these three campuses, the ministry would collapse under its own weight.

That, however, is the beauty of moving volunteers into staff positions. As ministries grow, our staff grows. We enjoy hiring from within the congregation. It’s been wonderful to watch qualified lay people be trained for ministry and then join our staff.

There are several advantages to growing your own team. They blend well with the existing staff; they understand the ministry; and they are trusted by the congregation. By promoting from within we often save up to seven years in the time needed to make someone truly effective.
Related Topics: | Posted: Last Reviewed:
Image: AdobeStock/littlewolf1989

Handling Illegal Items in Church

Handling guns, drugs, and other materials given to clergy.

Richard R. Hammar, Attorney, CPA
Bio

Q: I’m concerned about items where mere “possession” is potentially criminal, such as illegal firearms or narcotic drugs. If a pastor comes into possession of an item in a counseling setting (even if not in the course of confession, where the privilege would apply), how should they dispose of the item or turn it over?

Clergy-Penitent Privilege

A key issue is the application of the clergy-penitent privilege, which applies to communications with clergy in confidence and in the course of spiritual counsel. Such communications are “privileged,” meaning the minister cannot be compelled to divulge them in court. Note that the privilege extends only to actual communications between an individual and a minister. Communications obviously include verbal statements, but they also can include nonverbal forms of communication.

Illustration

To illustrate, one court ruled that the delivery of a gun to a minister constituted a “privileged communication” that was not admissible in court. A New York City police officer who also served as assistant pastor of a church was approached one evening (while in civilian clothes on the church grounds) by an elderly man who addressed the minister by name and stated that he had something at home that he wanted to give him. A few minutes later, the individual returned, and was escorted into an office where he handed the minister a plastic bag containing a .38 caliber revolver.

Not wanting to the leave the gun on church premises overnight, the minister flagged a patrol car that was passing by the church, and handed the gun to the officer driving the vehicle. A few months later, the minister was accused of violating several police department regulations in the proper disposition of the gun. The minister claimed that the incident could not give rise to any disciplinary action since it was a “privileged communication” under New York law and therefore could not be used in any legal proceeding. A state appeals court reversed this ruling, and dismissed the charges. The court concluded that the gun had been delivered to the minister in his capacity as a minister, and that the manner in which the gun was delivered constituted a “confidential” nonverbal communication. Lewis v. New York City Housing Authority, 542 N.Y.Y.2d 165 (1989).

Another illustration

Another court ruled that the act of a murder suspect in displaying a gun to a minister was a “communication.” The court reasoned that the word communication is not limited to conversation but includes “any act by which ideas are transmitted from one person to another.” Commonwealth v. Zezima, 310 N.E.2d 590 (Mass. 1974).

According to this sparse precedent, it is possible that the act of transferring guns, narcotics, contraband, or child pornography to a minister would constitute a “communication” protected by the clergy-penitent privilege, depending on the circumstances surrounding the transfer. This means that the minister could not be compelled to testify about the transfer in a later criminal prosecution.

However, if a minister voluntarily turns over such items to the police or other civil authority, then this could be viewed as a waiver of the privilege, meaning that the minister could be compelled to testify about the transfer.

So, how should ministers respond in such cases? Consider the following points:

First, if the item is turned over to a minister in the presence of other persons, the privilege may or may not apply. The presence of third persons negates the requirement of confidentiality in some states; in others, the presence of third persons does not negate the privilege if their presence is in furtherance of the purpose of the privilege.

Second, if the person transferring possession of the item to a minister is not doing so in the course of seeking spiritual counsel, then the transfer will not be privileged and the issue of waiving the privilege does not arise.

Third, if the privilege clearly does not apply, then the minister can dispose of non-criminal items, such as alcohol.

Fourth, legal counsel should be consulted to ensure compliance with applicable local, state, and federal laws, and to assess the status of the clergy-penitent privilege. For example, the mere possession of child pornography is a serious felony under state and federal law.

Fifth, criminal defense attorneys face a similar problem when a client transfers contraband to them. Very few courts have addressed this issue. Some have ruled that an attorney’s duty to turn over contraband to the police outweighs the attorney-client privilege, and that the attorney can be subject to sanctions, including disbarment, for withholding the items.

In summary, courts have not adequately addressed this question. The safest and recommended course of action for ministers is to consult legal counsel for guidance. Because each case will be different, formulating a policy to cover all possible scenarios will be difficult.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Image: AdobeStock/MohamadFaizal

Understanding Employment Contracts and Policies in Churches: Case Studies

Employment policies in churches often face legal challenges, from the enforceability of non-compete clauses to the requirement of consideration for policy changes. Learn how to navigate these issues effectively while maintaining fairness and compliance.

Richard R. Hammar, Attorney, CPA
Bio

Last Reviewed: May 23, 2025

Most churches have adopted employment policies, either in a policy manual or as individual policies. Examples include:
  • Employee standards
  • Social media use
  • Cell phone usage
  • Expense reimbursements
  • Overtime
  • Privacy
  • Personnel files
  • Safety and security
  • Insurance
  • Compensation and benefits
  • Discipline and dismissal
  • Evaluations
  • Intellectual property
  • Conflicts of interest
  • Leaves of absence

Changing Policies and Contract Law

For many churches, policies change over time. Additions and modifications are common. However, church leaders often assume that these changes automatically apply to both current and future employees.

This assumption can be incorrect due to a key principle in contract law: consideration.
  • Consideration means each party to a contract must receive something of value in exchange for their commitment.
  • Without consideration, a contract is generally not enforceable.

Example:
If X and Y enter a contract for the sale of X’s home:
  • X’s consideration is the purchase price paid by Y.
  • Y’s consideration is the home itself.

This requirement distinguishes a contract from a gift, where no value is exchanged by the recipient.

Consideration in Employment Agreements

When employees are hired, their employment itself can serve as valid consideration for their agreement to be bound by the employer’s policies—especially when documented properly.

However, for existing employees, courts often require additional consideration beyond continued employment to enforce new or amended policies.

Case Study: Lack of Consideration in a Non-Compete Agreement

Overview

A Pennsylvania case highlights this issue:
  • Employer hired a salesman (plaintiff) in 2007.
  • In 2010, the plaintiff was asked to sign a new employment contract with a two-year non-compete clause.
  • In 2012, the plaintiff resigned and joined a competitor.

The employer tried to enforce the non-compete agreement, but the plaintiff sued, arguing it lacked consideration.

Court Rulings

Both the trial and appeals courts ruled:
  • Because the plaintiff received no additional benefit when signing the new agreement, there was no valid consideration.
  • Continued employment alone was not sufficient.
  • Language like “intending to be legally bound” did not substitute for consideration.

Key Point:
For a restrictive covenant to be enforceable after employment begins, the employee must receive a corresponding benefit or change in status.

Case Reference:
Socko v. Mid-Atlantic Systems, 2014 WL 1898584 (Pa. Super. 2014)

Relevance for Church Leaders

(1) The Importance of Consideration

This case serves as a warning:
  • Unfamiliarity with the requirement of consideration can make parts of a church’s policy manual unenforceable.
  • Continued employment usually isn’t enough to bind employees to new policies.
  • Some employers have employees sign agreements when they’re hired that say they agree to current and future policy changes. However, results for this approach vary by state, and legal counsel should be consulted before using it.

Common situations where consideration issues arise:
  • New employment policies
  • Non-compete clauses
  • Promises of post-employment benefits

Real-Life Examples

Case Study 1: Widow’s Agreement for Continued Payments

A Tennessee court ruled that a church’s agreement to make payments to Darla, the widow of a former pastor, was unenforceable:
  • Why? The widow provided no consideration in return.
  • Promises like being the “first lady,” losing fringe benefits, or refraining from remarriage were not sufficient consideration.

Case Reference:
Cochran v. Robinwood Lane Baptist Church, 2005 WL 3527627 (Tenn. App. 2005)

Case Study 2: Distribution of Church Sale Proceeds

A Pennsylvania court addressed a church dissolving and selling its property:
  • Proceeds were proposed to be given to the pastor for past services.
  • Court ruled that past services are not valid consideration for current payments.
  • Payments beyond the pastor’s salary were treated as gifts, which were not permitted.

Case Reference:
In re First Church, 2011 WL 2302540 (Pa. Common. 2011)

Case Study 3: Counseling Fees for Abuse Victim

An Indiana court ruled that an Archdiocese was not liable for reducing therapy payments to an abuse victim:
  • The Archdiocese’s support was based on a moral obligation, not a legally enforceable contract.
  • Its written policy explicitly stated it was not a contractual commitment.

Case Reference:
Doe v. Roman Catholic Archdiocese of Indianapolis, 958 N.E.2d 472 (Ind. App. 2011)

Exceptions to Consideration

Case Study 4: Detrimental Reliance

Courts sometimes enforce promises under the doctrine of promissory estoppel or detrimental reliance:
  • If a party reasonably relies on a promise to their detriment, a court may enforce it.
  • Example: A synagogue successfully enforced a member’s dues based on detrimental reliance.

Case Reference:
Temple Beth Am v. Tanenbaum, 789 N.Y.S.2d 658 (Dist. Ct. 2004)

Case Study 5: Widow’s Promissory Estoppel Claim

Darla, from Case Study 1, also argued promissory estoppel:
  • She claimed her reliance (not remarrying) made the church’s promises enforceable.
  • The court rejected this, because restraints on marriage are void as a matter of public policy.

(2) Non-Compete Clauses in Church Employment Contracts

Some churches have used non-compete clauses to prevent pastors or employees from starting a competing church after leaving.

However, non-compete clauses have generated immense controversy in employment law. Caution must be exercised before contemplating their use.

For instance, in August of 2024, the Federal Trade Commission (FTC) issued a final rule banning the use of non-compete clauses by employers. But a federal district court blocked the rule before it took effect and the FTC appealed. The situation remains unresolved, underscoring the importance of monitoring developments on this topic.

Important legal considerations:
  • Non-compete clauses are disfavored and scrutinized closely by courts. They may even become prohibited at some point.
  • For those that are used, note that—at a minimum—they must be reasonable in:
    • Duration
    • Geographic area
    • Scope of restricted activities

Case Reference:
Central Indiana Podiatry, P.C. v. Krueger, 882 N.E.2d 723 (Ind. 2008)

Best Practice:
Churches should consult legal counsel before adopting non-compete clauses.

Final Note

While this article offers general legal principles for churches, it is always wise to seek professional legal counsel before making decisions regarding employment policies, contracts, or agreements.

We’ve used a combination of AI and human review to make this content easier to read and understand.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Related Topics: | Posted: Last Reviewed:
Image: AdobeStock/ Rido

Can Churches Use Restricted Funds for Adoption Assistance?

Learn the legal guidelines for handling restricted funds for adoption assistance in churches, ensuring donations remain tax-deductible.

Dan Busby
Bio

Last Reviewed: January 23, 2025

Q: There are families in our church who are trying to adopt. Can people who give money to specific families through our adoption funding ministry still receive a tax deduction on the money given?

Understanding Restricted Funds and Tax-Deductible Donations

Adoption funding is a significant area of concern when it comes to restricted giving. While it is natural to want to support families adopting children, there are strict rules regarding how donations are handled. Donations made to benefit a specific individual or family are typically considered personal gifts—not tax-deductible charitable contributions.

When donors give to a church or charity to provide general adoption funds, these gifts are tax-deductible because the church or charity retains control over how the funds are distributed. Conversely, if the donation specifies a particular family, it is classified as a personal gift, not a charitable one.

The Crowdfunding Challenge

Crowdfunding has complicated the landscape of charitable giving. Many well-meaning donors want to support specific families, raising funds on an individual basis. However, such campaigns often fail to meet the IRS criteria for tax-deductibility. For donations to remain tax-deductible, churches and charities must ensure that funds are raised for the cause of adoption in general, rather than for individual families.

Guidelines for Church Adoption Funding Programs

To comply with IRS regulations, churches must ensure that all fundraising efforts are tied to projects, not individuals. Here are some key points:
  • Donations should be made to the church or charity with the intent to support adoption as a cause.
  • Donors may express a preference for which family should benefit, but the organization must retain control over how funds are allocated.
  • If donations are specifically restricted to one family, they are considered personal gifts and not eligible for a tax deduction.

Churches must carefully manage adoption funding programs to ensure legal and ethical compliance. This involves adhering to IRS regulations and maintaining transparency about how donations are used. By focusing on general adoption projects rather than individual families, churches can help ensure that funds remain tax-deductible while supporting the broader cause of adoption.

Additional Resources

For more information on managing restricted funds and ensuring compliance, refer to the IRS guidelines for charities and non-profits. Churches can also consult Church Law & Tax resources for expert insights on fundraising and donations.

FAQs About Restricted Funds for Adoption Assistance
  • Can a donor suggest a family to receive funds? Yes, but the church or charity must retain ultimate control over the allocation of funds to maintain tax-deductibility.
  • What happens if a donation is restricted to one family? Such donations are considered personal gifts and are not tax-deductible.
  • How can churches ensure compliance? By establishing clear policies that tie donations to general adoption projects rather than specific families.
  • Are crowdfunding campaigns tax-deductible? Only if the funds are raised for a charitable cause or organization, not for a specific individual.

By following these guidelines, churches can create adoption funding programs that align with IRS regulations and support families in a compliant and ethical manner.
Image: AdobeStock/Guddah

Building a Strong Church Cash Reserves Strategy for Financial Health

Explore strategies to build and manage church cash reserves and debt service reserves for long-term financial health and stability.

Michael E. Batts, CPA
Bio

Last Reviewed: May 8, 2025

Philosophy of Cash Reserves

Some churches choose not to maintain cash reserves—a respectable position. This article, however, is intended to help churches that do wish to build and maintain reasonable, healthy cash reserves and a strong financial position.

Why Reserves Matter

Unexpected situations can impact a church’s finances. Examples include:
  • A respected leader leaving or facing misconduct allegations;
  • Sudden drops in attendance and giving; and,
  • Economic downturns caused by war, market crashes, or other unpredictable events.

Without reserves, such events can strain cash flow and distract leadership from ministry objectives.

Note: “Cash reserves” refers to both bank account balances and liquid marketable securities that can be quickly converted to cash.

Philosophy of Debt

Churches vary in their beliefs about taking on debt—often based on biblical interpretation.
  • Some churches avoid debt entirely;
  • Others allow for debt, provided it’s carefully planned and responsibly managed.

This article is written for churches that permit and manage debt.

Reserves and Debt Go Hand in Hand

Churches with significant outstanding debt should maintain strong cash reserves. A church that chooses not to keep reserves should also avoid incurring significant debt.

The Role of Cash Flow

To maintain a healthy financial position, a church must consistently generate cash flow surpluses.

Some leaders say they want cash reserves but spend all available revenue annually. This makes it impossible to build liquidity—regardless of intentions.

What It Takes to Build Reserves

Building reserves requires intentional planning during budgeting:
  • Plan to spend less than you receive in cash revenue.
  • If your revenue is growing, slow or stop spending increases.
  • If revenue is flat, consider increasing giving or finding new revenue sources or cutting expenses.

Reaching a Desired Financial Position

Having cash flow surpluses is important—but not enough. Churches should set specific financial goals with clear timelines.

Steps to Take
  1. Agree on the philosophy: Commit to maintaining healthy reserves.
  2. Define what “healthy” means: Set clear targets for reserves and financial health.
  3. Establish a timeline: Know when you want to reach those targets.
  4. Break it into milestones: Use annual benchmarks to track progress.

Example Goal
  • Current Reserve: 1 month of operating expenses
  • Target Reserve: 6 months of operating expenses
  • Timeframe: 5 years
  • Annual Milestones:
    • End of Year 1: 2 months’ reserves
    • End of Year 2: 3 months
    • …and so on until 6 months by Year 5

Recommended Objectives for Cash Reserves

Each church’s goals should be tailored to its situation and these goals should be discussed with an experienced financial adviser. Still, general guidelines exist:

Note: The recommended levels below are based on the assumption that the church already maintains cash, including liquid marketable securities, adequate to cover all donor-restricted and designated net assets. Recommended reserves and balances are levels in excess of the amounts required to cover such items.

Operating Cash Reserves
  • Baseline:
    • 3 months of operating expenses plus current liabilities
  • Strong:
    • At least 6 months of operating expenses plus current liabilities

Debt Service Reserves (for churches with mortgages or other long-term debt)
  • Baseline:
    • 6 months of debt service (principal + interest)
  • Strong:
    • At least 1 year of debt service costs

Important: If your lender requires a minimum reserve, going below it can trigger a loan default. To use reserves freely, maintain more than the required minimum.

Why Cash Reserves Matter More Than Equity

When using debt to build or buy property, churches often invest significant cash equity to reduce debt.

However, maintaining an adequate debt service reserve may be more beneficial than maximizing equity.
  • Equity can’t be used to make loan payments during financial hardship.
  • A debt service reserve offers flexibility and protection in uncertain times.

Final Thoughts

Healthy cash reserves and debt service reserves are key components of responsible church financial stewardship.

Church leaders should:
  • Set realistic targets for liquidity and financial health;
  • Develop and follow a multi-year plan to meet those goals; and,
  • Use annual milestones to monitor progress.

The path may be long—but the destination is a financially stronger, more resilient church.

We’ve used a combination of AI and human review to make this content easier to read and understand.

Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.
Related Topics: Posted: Last Reviewed:
Image: AdobeStock/auremar

OSHA Rules: Is Your Church Facility Safe?

Ensure your church follows OSHA rules to maintain a safe and compliant facility.

Stephen Chawaga
Bio

Last Reviewed: February 10, 2025

OSHA Rules: Is Your Church Facility Safe?

The Occupational Safety and Health Act (OSHA) establishes standards to protect employees from workplace hazards. While churches may not always be subject to OSHA regulations, certain activities and operations could bring them under OSHA’s jurisdiction. Understanding how OSHA rules apply to your church is essential for maintaining a safe environment.

When Do OSHA Rules Apply to Churches?

OSHA regulations apply to businesses that engage in interstate commerce. While purely religious activities are exempt, churches that operate beyond traditional religious functions may be affected. For example:
  • Churches that run schools or daycare centers must comply with OSHA safety standards.
  • Employees working in church bookstores, administrative offices, or food service areas may be covered under OSHA rules.
  • Hiring a contractor for renovations could expose the church to OSHA-related liabilities if workplace safety standards are violated.

For instance, if a church hires a contractor for remodeling and an employee is injured due to non-compliance with OSHA regulations, the church could face legal challenges.

Fire Safety and OSHA Compliance

OSHA has strict fire safety regulations that churches should consider implementing, even if not legally required. Compliance with these standards can prevent hazardous situations and ensure a safe environment.

Key Fire Safety Requirements:
  • Maintain clear and accessible exit routes at all times.
  • Ensure fire extinguishers are in good working condition and that employees are trained to use them.
  • Develop a written fire evacuation plan and train staff members on emergency procedures.
  • Implement a fire-prevention plan, including safe disposal of flammable materials and controlling ignition sources.

For example, if your church choir plans a candlelight procession, take precautions to prevent fire hazards by checking for flammable materials along the route. Consider using battery-operated candles as a safer alternative.

OSHA Standards for Church Kitchens

Churches with kitchens must be aware of OSHA regulations concerning fire hazards and food safety. To comply with OSHA guidelines:
  • Regularly clean stoves and cooking surfaces to reduce fire risks.
  • Ensure smoke alarms and fire suppression systems are functional.
  • Train staff and volunteers on safe food handling and emergency procedures.

How Churches Can Voluntarily Comply with OSHA Standards

Even if OSHA rules do not legally apply, churches should consider voluntary compliance to improve safety. Here are three steps to help maintain a safe facility:

1. Commit to a Safety Program
  • Church leaders and property committees should prioritize safety initiatives.
  • Communicate safety goals with the congregation to foster awareness and support.

2. Conduct Regular Safety Inspections
  • Inspect church grounds, buildings, and maintenance equipment.
  • Address hazards such as loose railings, unstable ladders, or exposed wiring.

3. Train Staff and Volunteers
  • Educate employees and volunteers on identifying and reporting safety risks.
  • Ensure proper training for individuals handling hazardous materials or operating machinery.

Frequently Asked Questions (FAQs)

Does OSHA apply to churches?

OSHA generally does not apply to churches engaged in purely religious activities. However, churches operating schools, daycare centers, bookstores, or administrative offices may be subject to OSHA regulations.

What OSHA rules should churches follow for fire safety?

Churches should implement clear exit routes, maintain functional fire extinguishers, and train staff on emergency procedures. A written fire prevention plan is also recommended.

Are church volunteers covered under OSHA regulations?

OSHA rules typically apply to employees rather than volunteers. However, churches should still follow best practices to ensure a safe environment for all individuals.

How can a church improve workplace safety?

Churches can improve safety by conducting regular inspections, addressing hazards promptly, and training staff on OSHA-recommended safety practices.

For more information on OSHA compliance, visit OSHA.gov.
Image: AdobeStock/ Igor Link

Creative Ways to Fund New Church Ministry Ideas

Learn how a ministry R&D fund can help your church fund new ideas, pilot projects, and community outreach, even mid-budget year.

Joy Skjegstad
Bio

Last Reviewed: January 27, 2025

Q: What are some ways our church can fund innovative ideas, even when the current budget doesn’t account for it?

The best ideas for new ministry often come in the middle of a budget year. A new outreach ministry idea, for example, suddenly energizes lay leaders, who approach the staff for funding. But in the middle of the year, how can you respond? One option is to say “It’s not in the budget, wait until next year.” But that may throw a “wet blanket” on the energy leaders have for a new ministry, or allow the budget calendar to block the moving of the Holy Spirit.

Here’s another way to respond: develop a ministry research and development (R&D) fund. Funds either are set aside in the annual budget as a line item, or through a separate fund established with funds that carry over from year to year.

Your church might use a ministry R&D fund for the following:
  • Purchasing equipment needed to start a ministry.
  • Sending leaders to training. Piloting a new ministry idea.
  • Assessing needs in your community.
  • Hiring a consultant to help design a ministry.

Joy Skjegstad serves as a trainer and consultant to nonprofits and churches.
Related Topics: | Posted: Last Reviewed:
Image: AdobeStock/ariya j

Effective Strategies for Navigating Difficult Conversations with Your Church Team

Navigating tough conversations with your church team doesn’t have to be daunting. Pastor Karl Vaters shares eight practical tips, from leading with positivity to correcting with grace, to help you address challenges without losing trust or morale.

Karl Vaters
Bio

Last Reviewed: January 28, 2025


Editor’s Note: Sometimes we need to have difficult conversations with those we lead. What’s the best way to do it? Or more specifically, what’s the best way to do it and not lose quality team members and volunteers? Pastor Karl Vaters offers these eight tips:

1. Lead with the good news.

No one in my church, staff, board, or volunteer teams ever dreads my arrival. Why? Because I always walk in with a “hello” and a chance to catch up on the good news of the last day or week.

Yes, we deal with the problems. But, unless it’s an immediate emergency, it can wait.

2. Never address a problem when you’re angry.

Do I really need to explain this one? Nah, I didn’t think so.

3. Don’t treat mistakes like sins.

Volunteers work hard, do a great job, but leave something petty undone. What happens? They’re treated as though they’ve committed a sin that requires prayer, tears, and repentance.

A full garbage can left after a youth event is an oversight, not a sin. Treat it accordingly.

4. Recognize the difference between laziness and risk-taking innovation.

No one in my church ever got in trouble for trying something new that didn’t work. That’s something I want to encourage.

“Innovate,” I say. “Take risks. Dream big. Fall down, then get back up.” I never criticize that, I praise it. But if someone is chronically late, unprepared, leaving early, or any other signs that they’re lazy and not giving it their best, we’ll have a talk.

5. Designate a good time and place to deal with problems.

We do this at our weekly staff meeting. We start with prayer. We have a designated time to share positive ministry stories. And we have a permanent agenda item I call “Oops! Notices.” If anyone noticed anything since the last meeting that was an Oops!, we bring it up then.

For example: “I came in and one of the back doors was unlocked” or “I had to vacuum the fellowship room after the Kids’ Night event.”

We report the issues, recognize how the Oops! happened, offer apologies if needed, then move on.

Using a word like Oops! may seem silly, even childish to you, but that’s the point. It allows us to recognize the issues, address them for what they are (mistakes, not sins), and deal with them without anger or shame attached.

After all, how mad or embarrassed can anyone get over an Oops!?

6. Deal with private issues in private.

If the issue is bigger than an Oops!, I deal with people one-on-one. It reduces potential embarrassment and allows for a deeper look at real problems.

7. Approach correction as a learning experience, not a punishment.

Our church is always in process of training young, new ministers. So they make a lot of mistakes. But they come to our church because they know they can make mistakes, get them corrected, and learn to do better next time without anyone getting mad at them.

Punishment is reserved for sins. And that’s God’s job anyway. Mistakes are something we can always learn from.

8. Recognize and correct your own faults first.

Many of the issues we think are staff/volunteer problems are actually pastoral leadership problems. We haven’t communicated well. We don’t have proper systems in place. Or we’re chronic complainers over petty issues.

This post first appeared on NewSmallChurch.com and is adapted with permission.

Karl Vaters runs the New Small Church blog, serves as lead pastor of Cornerstone Christian Fellowship in Fountain Valley, California, and is the author of The Grasshopper Myth.
Image: getty/Adshooter

Are Mission Trips Tax Deductible? Key Guidelines for Churches

Discover when mission trip expenses are tax-deductible and how churches can manage contributions effectively.

Richard R. Hammar, Attorney, CPA
Bio

Last Reviewed: January 24, 2025

Q: For my church’s short-term mission trips, participants give the church money for a special fund that’s used to pay their trip expenses (airfare, lodging, and so on). Some participants believe the money they spend for a trip is tax deductible and should be listed on their contribution statements. A mission organization I contacted agrees with this thinking. My understanding, though, is that only funds for a ministry and not for an individual are deductible. Who is correct?

Determining whether mission trip expenses are tax-deductible depends on specific conditions. I will defer to the guidance provided in chapter 8 of the Church & Clergy Tax Guide. Based on your description, here’s a scenario that aligns closely with your situation:

Key Scenario: Tax-Deductible Mission Trips
  • Participants: Adults
  • Who pays travel expenses (transportation, lodging, meals): The church
  • Does the church receive designated contributions from participants or others? Yes, from participants, in the amount of their travel expenses paid by the church.

Tax Consequences

Assuming the trip was preauthorized by the church board or membership and furthers the church’s exempt purpose:
  • Payments by participants to their church are deductible as charitable contributions if the trip involves “no significant element of personal pleasure, recreation, or vacation.”
  • Participants’ payments can be reported by the church treasurer on giving statements. If expenses are $250 or more, the church’s receipt must comply with substantiation requirements.

For more details on how trips should be organized and how the IRS defines “personal pleasure, recreation, or vacation,” refer to chapter 8 of the Church & Clergy Tax Guide.

Frequently Asked Questions

1. What qualifies a mission trip as tax-deductible?

A mission trip qualifies as tax-deductible if it is preauthorized by the church and primarily furthers the church’s exempt purpose. It must lack a significant element of personal pleasure or recreation.

2. Can participants deduct the cost of travel expenses?

Yes, participants can deduct the cost of their travel expenses paid to the church if the church directly pays for the trip’s costs and the trip aligns with the church’s purpose.

3. What must be included in the church’s contribution statement?

The contribution statement must include the participant’s name, the amount contributed, and a statement confirming that no goods or services (beyond intangible religious benefits) were received in exchange for the donation.

4. What happens if a trip includes personal recreation?

If a mission trip includes significant personal recreation or vacation elements, participants may not deduct the associated expenses as charitable contributions.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Image: AdobeStock/Halfpoint

How Churches Can Avoid Financial Trouble: Expert Insights

Expert tips for churches on managing financial trouble and avoiding bankruptcy through strategic turnaround plans.

Ashley Moore
Bio

Last Reviewed: January 26, 2025

Ken Philip, a financial crisis management consultant at Ark Builders, specializes in the turnaround of troubled churches and religious organizations. We asked him how churches get themselves into financial trouble, and how they can get out of it.

How do churches get themselves in financial trouble?

They get into trouble in two ways. First, they don’t have an operational or financial plan. And the second way is by not creating good management reporting systems to monitor their operational and financial plans.

Should churches in trouble ever file bankruptcy?

They should almost never file–there could be a compelling reason that they need to. Maybe fraud. But bankruptcy doesn’t work well for a lot of organizations. It can become very litigious, and it often takes a lot of money to get through it. Even if you’re a $50 million or $100 million company, you might not be able to survive bankruptcy because it takes too much time and money.

What do you recommend instead of filing bankruptcy?

Out-of-court arrangements–a negotiated arrangement where when you get stakeholders together (lender(s), church governance/leaders, others with a “stake” in the outcome) and you get agreement to a turnaround plan. In order to make such an arrangement you have to know what the problem is. And then you craft a solution and you bring it to your members and everyone needs to get on board.

If you can’t do an out-of-court arrangement, you have a receivership option. A receivership is monitored by the court, but there aren’t the kinds of rules that apply in bankruptcy. It’s subject to a more commercially reasonable, common-sense solution, so you can get things done quickly and more efficiently. In my view, the ideal solution is to resolve any issue out of court. But if you can’t do that, use a receivership vehicle.

As a technical matter, most receiverships are state receiverships. Most states have a receivership statute. Those statutes are generally fairly simple. A receiver is responsible for developing a plan and putting that plan in front of a court and seeking the court’s approval. Such a plan is most often developed in concert with all stakeholders.

Let’s say a church believes its getting close to bankruptcy–it is one or two months out from being in huge trouble. What are the top things a church in trouble needs to do?

The very first thing you should do when you see a financial problem is to do something. The natural human tendency is to avoid things and think it’ll get better. People must face the facts.

Second, the church needs to engage an expert in these types of financial and operational situations. No matter how good its staff is, they aren’t experts in managing the issues related to turnaround and crisis situations. For the most part, the skills or abilities needed don’t exist in a church. This is especially true because financial problems are most often a symptom of a larger problem.

If a church came to me and said, “I think I’m in trouble,” I’d take these steps:

First, I would figure out how serious the problem is. Are you running out of money tomorrow? Or are you in an earlier stage?

I would then do an assessment of the organization. An operational and financial assessment figures out where exactly the problems are in the finances and in the ministries.

Finally, I’d provide a (written and oral) report. This report details the problems as determined in the financial and operational assessment and recommends a going-forward (turnaround) plan.

Since each church’s situation is unique, it really does need a consultant to come in and see where its revenue and ministries got imbalanced. You have to figure out the real problem.

For example, take this hypothetical scenario:

A church (2,000 attendees) has a big new building that it built, and it has a mortgage of $5 million or $10 million. But something happens where the church can’t make payments on that mortgage for whatever reason. You have to figure out the problem. Was the building too large? Did it start ministries that are costing too much money? And then develop a solution. Maybe the church needs to stop certain ministries. Maybe it needs to say to its mortgage company, “We need to lower our payment.”

If a church gets into trouble because it can’t pay its mortgage, there’s no advantage to the mortgage company to see the church go into bankruptcy or receivership. If you’re the church, you want to develop a plan that will be successful. So you go to the debt holder and you make an arrangement, an accommodation, to help work out this problem.

Are mortgage companies willing to work with a church in this way?

Most are, some aren’t. But if it is faced with a situation where your church is going to go dark and the mortgage company is going to have an empty building it can’t sell, or your church is threatening to file bankruptcy, and the money you would be paying the mortgage company is now going to legal fees and attorneys, the company would rather work with you.

ajax-loader-largecaret-downcloseHamburger Menuicon_amazonApple PodcastsBio Iconicon_cards_grid_caretChild Abuse Reporting Laws by State IconChurchSalary Iconicon_facebookGoogle Podcastsicon_instagramLegal Library IconLegal Library Iconicon_linkedinLock IconMegaphone IconOnline Learning IconPodcast IconRecent Legal Developments IconRecommended Reading IconRSS IconSubmiticon_select-arrowSpotify IconAlaska State MapAlabama State MapArkansas State MapArizona State MapCalifornia State MapColorado State MapConnecticut State MapWashington DC State MapDelaware State MapFederal MapFlorida State MapGeorgia State MapHawaii State MapIowa State MapIdaho State MapIllinois State MapIndiana State MapKansas State MapKentucky State MapLouisiana State MapMassachusetts State MapMaryland State MapMaine State MapMichigan State MapMinnesota State MapMissouri State MapMississippi State MapMontana State MapMulti State MapNorth Carolina State MapNorth Dakota State MapNebraska State MapNew Hampshire State MapNew Jersey State MapNew Mexico IconNevada State MapNew York State MapOhio State MapOklahoma State MapOregon State MapPennsylvania State MapRhode Island State MapSouth Carolina State MapSouth Dakota State MapTennessee State MapTexas State MapUtah State MapVirginia State MapVermont State MapWashington State MapWisconsin State MapWest Virginia State MapWyoming State IconShopping Cart IconTax Calendar Iconicon_twitteryoutubepauseplay
caret-downclosefacebook-squarehamburgerinstagram-squarelinkedin-squarepauseplaytwitter-square