Key Tax Dates January 2021

Along with semiweekly and monthly requirements, note payroll tax rates for 2021 and review employee W-4s.

Richard R. Hammar, Attorney, CPA
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Semiweekly requirements

If your church or organization reported withheld taxes of more than $50,000 during the most recent lookback period (for 2021, the lookback period is July 1, 2019, through June 30, 2020), then the withheld payroll taxes are deposited semiweekly. This means that for paydays falling on Wednesday, Thursday, or Friday, the payroll taxes must be deposited on or by the following Wednesday. For all other paydays, the payroll taxes must be deposited on the Friday following the payday.

Note further that large employers having withheld taxes of $100,000 or more at the end of any day must deposit the taxes by the next banking day. The deposit days are based on the timing of the employer’s payroll. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes (7.65 percent of wages), and the employer’s share of Social Security and Medicare taxes (an additional 7.65 percent of employee wages).
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Monthly requirements

If your church or organization reported withheld taxes of $50,000 or less during the most recent lookback period (for 2021, the lookback period is July 1, 2019, through June 30, 2020), then withheld payroll taxes are deposited monthly. Monthly deposits are due by the 15th day of the following month.

Note, however, that if withheld taxes are less than $2,500 at the end of any calendar quarter (March 31, June 30, September 30, or December 31), the church need not deposit the taxes.

Instead, it can pay the total withheld taxes directly to the IRS with its quarterly Form 941. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes.

January 1, 2021: Payroll Taxes

Social Security and Medicare taxes

Employees and employers each pay Social Security and Medicare taxes equal to 7.65 percent of an employee’s wages. The tax rate does not change in 2021.

The 7.65 percent tax rate is comprised of two components: 1) Medicare hospital insurance tax of 1.45 percent, and 2) an “old age, survivor and disability” (Social Security) tax of 6.2 percent. There is no maximum amount of wages subject to the Medicare tax.

The tax is imposed on all wages regardless of amount. For 2021, the maximum wages subject to Social Security taxes (the 6.2 percent amount) is $142,800. Stated differently, employees who receive wages in excess of $142,800 in 2021 pay the full 7.65 percent tax rate for wages up to $142,800, and the Medicare tax rate of 1.45 percent on all earnings above $142,800. Employers pay an identical amount. The Medicare tax rate for certain high-income taxpayers increases by an additional 0.9 percent.

Self-employment taxes

The self-employment tax rate (15.3 percent) does not change in 2021. The 15.3 percent tax rate consists of two components: 1) a Medicare hospital insurance tax of 2.9 percent, and 2) an “old age, survivor and disability” (Social Security) tax of 12.4 percent. There is no maximum amount of self-employment earnings subject to the Medicare tax.

The tax is imposed on all net earnings regardless of amount. For 2021, the maximum earnings subject to the Social Security portion of self-employment taxes (the 12.4 percent amount) is $142,800. Stated differently, persons who receive compensation in excess of $142,800 in 2021 pay the combined 15.3 percent tax rate for net self-employment earnings up to $142,800, and only the Medicare tax rate of 2.9 percent on earnings above $142,800.

These rules directly impact ministers, who are considered self-employed for Social Security with respect to their ministerial services. Ministers should take these rules into account in computing their quarterly estimated tax payments. The Medicare tax rate for certain high-income taxpayers increases by an additional 0.9 percent.

Federal incomes taxes

Beginning on this date, churches having nonminister employees (or a minister who has elected voluntary withholding) should begin withholding federal income taxes from employee wages. To know how much federal income tax to withhold from employees’ wages, employers should have a Form W-4 on file for each employee. Employees should file an updated Form W-4 for 2021, especially if they owed taxes or received a large refund when filing their previous tax return. Employees should use the IRS Tax Withholding Estimator to determine accurate withholding.

January 15, 2021: Fourth quarter estimated taxes due

Ministers (who have not elected voluntary withholding) and self-employed workers must file their fourth quarterly estimated federal tax payment for 2020 by this date (a similar rule applies in many states to payments of estimated state taxes).

Employees of churches that filed a timely Form 8274 (waiving the church’s obligation to withhold and pay FICA taxes) are treated as self-employed for Social Security purposes, and accordingly are subject to the estimated tax deadlines with respect to their self-employment (Social Security) taxes unless they have entered into a voluntary withholding arrangement with their employing church or organization.

For complete information consult the 2021 Church & Clergy Tax Guide by Richard R. Hammar, JD, CPA.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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Tripping Points of Pastoral Compensation

On-Demand Webinar: 7 common mistakes churches make when planning and executing church compensation.

Elaine L. Sommerville, CPA
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Editor’s Note. This video is part of the Advantage Membership. Learn more on how to become an Advantage Member or upgrade your membership.

When it comes to handling pastoral compensation, the details can make all the difference.

From navigating the housing allowance and its tax effects to understanding the unique issues involved in planning for retirement, a minister’s classification seems to bring confusion in the world of compensation planning. Any failure to follow specific rules can change the taxation of various components in a compensation package—likewise, the use of various components may have unintended tax consequences.

CPA and Church Law & Tax senior editorial advisor Elaine Sommerville, provides church leaders with a valuable review of the details most essential to building a solid compensation package for ministerial team members.

Download the presentation slides here.
Elaine L. Sommerville is licensed as a certified public accountant by the State of Texas. She has worked in public accounting since 1985.
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On-Demand Webinar

Confronting Harassment in the Church

Insights on how church leaders can confront harassment and foster the type of healthy culture that honors Christ.

Featuring Theresa Sidebotham, Attorney
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Workplace sexual harassment has gained renewed attention after recent high-profile cases emerged in the realms of entertainment, media, sports, and politics. One result: the growing #MeToo movement, and legislative responses from a small-but-growing number of states that now mandate employers of certain sizes to conduct annual sexual harassment training.

Regrettably, churches aren’t immune from the problem of harassment, as a new Church Law & Tax survey report shows—and in the case of mandated training by states, churches are increasingly not exempt from legally required training. Now more than ever, church leaders must recognize this problem, the responsibilities that come with addressing it—and act.

In this, one-hour webinar, attorney Theresa Sidebotham—an advisor-at-large for Church Law & Tax—joined Church Law & Tax Content Editor Matthew Branaugh to discuss how church leaders confront harassment and explain the ways leaders can foster the type of healthy culture that honors Christ.

Highlights Include:
  • Defining sexual harassment
  • Policies and training
  • Helpful Resources

Download the presentation slides here.
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The High Cost of Fraud

ACFE study offers insights on why it happens, how it’s detected, and characteristics of both victims and perpetrators.

Richard R. Hammar, Attorney, CPA
Bio

Internal theft of church funds remains a pervasive and largely unaddressed problem in churches.

Whether due to embarrassment, fear of bad press, or desire to “forgive and forget,” it appears that most fraud in the community of faith goes unreported and unprosecuted. The result is a loss of millions of dollars that would otherwise help fuel church ministries, outreach, and other important projects.

The real tragedy, however, is that fraud is a gross misuse of God’s resources and a breach of fiduciary duty between the church and its givers.

Church leaders would be wise to pay attention to fraud studies conducted by the Association of Certified Fraud Examiners (ACFE). Known as “Report to the Nations,” ACFE has released 11 studies since 1993. Based on responses from thousands of organizations that have been victims of fraud (“victim organizations”), these studies address occupational or workplace fraud in the US and around the world.

While not church-specific (although there are data points regarding nonprofits included), these studies offer information that is relevant to congregations and should help church leaders better understand how fraud takes place, how it is detected, the characteristics of both victims and perpetrators, and more.

What follows, then, are a number of findings from the 2020 “Report to the Nations” that I feel are most relevant to church leaders, along with my observations regarding many of the findings and links to pertinent articles.

What fraud costs

The typical fraud case lasts 14 months before detection, and costs $8,300 per month. Certified fraud examiners (CFEs) estimate that organizations lose five percent of their revenue to fraud each year. Worldwide, fraud costs organizations close to $4 billion annually.

My observation

These findings not only underscore the high cost of fraud but also the absolute necessity of early fraud detection. Note that in this court case alone, a church trustee embezzled close to $300,000 from church funds.

How fraud is detected

Fraud is detected in a number of ways, including:
  • Tip or complaint: 43 percent
  • Internal audit: 15 percent
  • By accident: 5 percent
  • Confession: 1 percent

My observation

When considering all the victim organizations, the study found that only 1 percent of fraud cases are revealed through a confession. From my own observation and study, a confession often is triggered by the offender’s perception that he or she is about to be caught.

A sound and enforced whistleblower policy can help detect fraud in churches.

Lack of internal controls

A lack of internal controls contributed to one-third of all cases of fraud.

My observation

The most basic and effective internal controls should be implemented and enforced. This article shows how to identify poor internal controls and offers preventive measures to correct any weaknesses.

High risk areas for small employers

Some risks are more likely in small employers than larger businesses. Billing fraud and payroll fraud are twice as likely in a smaller business, and check and payment tampering is four times more likely.

Regarding preventing fraud in small businesses, the report said:

Our data shows that there are clear opportunities for small businesses to increase their protection against fraud. Adopting a code of conduct and an anti-fraud policy, having managers review the work of their subordinates, and conducting targeted anti-fraud training for employees and managers are all measures that are correlated with significant reductions in fraud losses . . . yet each was implemented by fewer than half of the small businesses in our study.

My observation

I believe data billing fraud and payroll fraud are relevant information for smaller churches. Further, small churches would be wise to follow the advice offered above.

Men commit fraud in greater numbers than women

Men committed 72 percent of all cases of occupational fraud. The median loss for male perpetrators was $150,000. For female employees it was $85,000.

My observation

Consider this quote from the report in the context of male authorities and leadership in the church:

We examined gender distribution and median loss data based on the perpetrator’s level of authority. . . . At all levels of authority (employee, manager, and owner/executive), males committed a much larger percentage of frauds than women did. Male owners/executives and managers also accounted for much larger losses than their female counterparts. This was particularly true at the owner/executive level, where the median loss caused by men (USD 795,000) was more than four times larger than the median loss caused by women (USD 172,000). At the employee level, however, losses caused by males and females were equal.

Red flag: Living beyond their means

Forty-two percent of offenders were living beyond their means. A fraudster living beyond his or her means is the most common red flag by a sizable margin. This has ranked as the #1 red flag in every study since 2008.

My observation

Church leaders should be alert to employees having access to church finances who are living beyond their means. Note this observation from my article “Embezzling Church Funds: A Case Study”:

[The church administrator used] the church’s credit card on over 300 occasions to purchase personal items for himself and his family, including several luxury items. He knew that he was not permitted to use the church’s credit card for these purchases but continued to do so anyway.

Other red flags

Twenty-six percent of offenders were experiencing financial difficulties. Other offender traits: unwillingness to share duties, divorce or other family issues, and complaints about inadequate pay.

My observation

Church leaders should be familiar with the clues mentioned above. The chances of these behaviors leading to embezzlement can be greatly reduced when churches implement strong internal controls. Unfortunately, too many leaders and employees believe that these measures demonstrate a lack of trust, but consider this key point in my article, “Embezzlement Prevention”:

Many churches refuse to implement basic principles of internal control out of a fear of “offending” persons who may feel that they are being suspected of misconduct. The issue here is not one of hurt feelings, but accountability. The church, more than any other institution in society, should set the standard for financial accountability. After all, its programs and activities are rooted in religion, and it is funded with donations from persons who rightfully assume that their contributions are being used for religious purposes. The church has a high responsibility to promote financial accountability.

How offenders hide fraud

The top four concealment methods used by offenders:
  • Created fraudulent physical documents: 40 percent
  • Altered physical documents: 36 percent
  • Altered electronic documents: 27 percent:
  • Created fraudulent electronic documents: 26 percent

My observation

All of these risks could be managed by having a CPA audit your financial statements each year. An audit accomplishes three important functions (as outlined in my article “Reducing the Risk of Embezzlement”):
  • An audit promotes an environment of accountability in which opportunities for embezzlement (and therefore the risk of embezzlement) are reduced.
  • The CPA (or CPAs) who conducts the audit will provide the church leadership with a “management letter” that points out weaknesses and inefficiencies in the church’s accounting and financial procedures. This information is invaluable to church leaders.
  • An audit contributes to the integrity and reputation of church leaders and staff members who handle funds.

Nonprofit offenders and amount of fraud

Perpetrators of fraud falls in three categories in nonprofits—with the percentage of fraudulent activity and amount stolen (averaged below) highest among executives:
  • Executive: 39 percent; amount taken: $250,000
  • Manager: 35 percent; amount taken: $95,000
  • Employees: 23 percent; amount taken: $21,000

My observation

Sometimes a church fails to properly monitor its leaders, leading to potentially costly consequences and even imprisonment of a leader who steals from the church.

Top weaknesses in nonprofits

Nonprofits have fewer anti-fraud controls in place, making them more vulnerable to fraud. The top three weaknesses in nonprofits—with highest percentage being the lack of internal controls—are:
  • Lack of internal controls: 35 percent
  • Lack of management review: 19 percent
  • Override of existing internal controls: 14 percent

My observation

Consider this quote from the report about nonprofits in the context of small churches:

Nonprofit organizations can be more susceptible to fraud due to having fewer resources available to help prevent and recover from a fraud loss. This sector is particularly vulnerable because of less oversight and lack of certain internal controls.

Doing nothing to address financial fraud exposes any church to embezzlement. Churches are at higher risk than other organizations because an atmosphere of trust makes financial controls seem unnecessary.

For common examples of poor internal controls in churches and ways to mitigate each one, see my article “How Embezzlement Occurs.”

What about background checks?

When asked if a background check performed on the offender prior to hiring, 52 percent said yes and 48 percent said no. Of those surveyed, 13 percent said that the background check uncovered a red flag but they chose to still hire the person anyway.

The victim organizations performed the following types of background checks:
  • Employment history: 81 percent
  • Criminal checks: 75 percent
  • Reference checks: 56 percent
  • Education verification: 50 percent
  • Credit checks: 38 percent
  • Drug screening: 28 percent

My observation

All employees having access to church finances, or to church offices after hours, should have a background check that includes references and a criminal records search. Also, investigate thoroughly any red flags that are uncovered.

Previous convictions or disciplinary actions

Four percent of offenders had been previously convicted of a fraud-related offense; 16 percent had a prior employment-related disciplinary action for fraud (termination or punishment).

My observation

Be wary of hiring someone guilty of past fraud or who has been disciplined by a former employer for a fraud-related crime. Again, background screening is key to properly vetting potential employees. Evaluate your screening program with this checklist.

When fraud is substantiated, punishment takes a variety of forms—with two-thirds of the victim organizations choosing to terminate the offender:
  • Termination: 66 percent
  • Settlement agreement: 11 percent
  • Mandatory or permitted resignation: 10 percent
  • Probation or suspension: 10 percent
  • No punishment: 5 percent

Churches that are tempted to avoid terminating or punishing an offender for fraud, should consider this quote from Shakespeare’s Timon of Athens: “Nothing emboldens sin as much as mercy.”

Editor’s note: Issues related to mercy, grace and forgiveness, along with other pertinent topics, are discussed in this interview with an executive pastor from a church where internal theft had taken place, the attorney called in to help the church navigate legal issues, and the certified fraud examiner who investigated the fraud.

Should fraud be reported to law enforcement?

Here are the top five reasons victim organizations gave for not reporting suspected fraud to law enforcement (with nearly half of those failing to report it because they felt internal discipline was sufficient):
  • Internal discipline sufficient: 46 percent
  • Didn’t want bad publicity: 32 percent
  • Decided on a private settlement: 27 percent
  • Too costly: 17 percent
  • Lack of evidence: 10 percent

Here are the results when cases were referred to law enforcement (more than half of suspected perpetrators pleading guilty):
  • Guilty plea: 56 percent
  • Conviction: 23 percent
  • Declined prosecution: 12 percent
  • Acquitted: 2 percent

My observation

Nearly 80 percent of cases that were referred to law enforcement led to guilty pleas or convictions. Only 2 percent resulted in acquittal. These statistics make a strong case for reporting suspected fraud to law enforcement.

It is common for church leaders to deal with cases of embezzlement internally, with no report to law enforcement or the IRS, so long as the embezzler is terminated from employment and agrees to pay back the amount stolen. Why is this? In some cases, it is to conceal the crime from the congregation and avoid scandal. In other cases, it is to protect the embezzler, who is often a long-term and valued employee, from disgrace. But this approach requires some knowledge of how much was stolen, and this can be a difficult task. You cannot take the word of the embezzler. The best approach is to enlist the assistance of an attorney, a CPA, and quite possibly a certified fraud examiner.

A potential felony charge is just one consequence of embezzlement. For more on this consequence and three others, see my article “The Consequences of Embezzlement.”

For my analyses of court cases related to fraud, with relevance to churches, see the “embezzlement” category in Legal Developments.

For more on this topic, see the embezzlement section in the Legal Library or my book Pastor, Church & Law.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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How a Church Responded When a Trusted Minister Embezzled Funds

Experts weigh in during a panel discussion on what happened.

Lee A. Dean

As the congregation and staff of Houston’s First Baptist Church were getting ready to celebrate Thanksgiving in 2017, a storm was brewing that threatened to shatter the holiday mood. Irregularities were noticed in the credit card statements of a popular associate missions minister, speaker, and Bible teacher. The investigation deepened and discovered that this individual had embezzled more than $830,000 in church funds since 2011.

The associate missions minister confessed to church officials, resigned, and was later convicted of embezzlement. He was sentenced to 10 years in prison but has been released on a special probation program for first-time nonviolent offenders.

Houston’s First Baptist is far from alone. Gordon-Conwell Theological Seminary’s Center for the Study of Global Christianity estimates fraud in churches worldwide will grow to $70 billion a year by 2025, according to a 2022 report.

At the 2019 Ultimate Financial & Legal Conference in Arlington, Texas, a panel discussed the theft from Houston’s First Baptist and the overall problem of fraud against churches. The panel included Houston’s First Baptist executive pastor David Self and two experts who assisted in the church’s case—nonprofit attorney Frank Sommerville and certified fraud examiner Charles “Chuck” Cummings.

The following interview is adapted from the panel discussion and from another presentation at the conference by Cummings.

What sparked suspicion that fraud was taking place at Houston’s First Baptist?

Self: One questionable credit card charge required some investigation. Then it was like pulling dirty laundry out of the laundry hamper. Each one led to another.

Sommerville: I was one of the first calls that were made once it was decided something was going on. I called Chuck into the case to assist in finding the fraud. It took three months to figure out some of the things that the associate missions minister was doing. This is not your ordinary case by any means. I’ve heard Chuck say that this person was extremely smart, and no matter what internal controls you had in place, they would not have prevented it. Here’s an example of how smart he was: By forging the supervisor’s initials, he circumvented the internal control that says supervisors approve expense reports

Self: This individual was perceived as a close friend of the senior pastor and of his supervisor. He purported to be everybody’s close friend. When Chuck interviewed the supervisor, he said, “I never authorized any expense he made.” That’s a major circumvention of internal controls. The supervisor was supposed to look over those credit card statements and those requests. But because of their close relationship, the supervisor looked at oversight as a signal that he didn’t trust his friend if he was looking over his friend’s shoulder, and the associate missions minister played upon that.

Our director of operations called me and said, “We have some potential problems with this employee’s credit card.” My first reaction was, “I’m sure there’s an answer because that’s not the person I know.” As it came to light, I had to confess I didn’t know that person. He was totally misrepresenting who he was. By about four or five days of looking into the matter, it was close to Thanksgiving. The senior pastor was away with his family. I did not want to interrupt him until we knew something. But by the Wednesday before Thanksgiving, it had gotten to the point where we had to tell him.

We called the senior pastor, and he said, “I don’t want to know the person. If they’re innocent, I don’t want their name smeared in my mind later on. But I want you to contact their supervisor.” The supervisor and our director of operations sat down and we looked over the credit cards. Then when they had agreed that there was, in fact, a problem, we notified the senior pastor, brought the accused in, and he resigned that day.

How do you feel about that way the church initially handled the situation?

Self: For the first three weeks, our whole emphasis was about restoration. He had a tremendous place of respect within the church. Our whole focus early on was, “You made a mistake, and we’re going to make it right.” What we didn’t understand is that you can’t sin unless you lie. That’s any sin, but especially fraud. There has to be a tremendous amount of deceit and we totally underestimated that early on.

During an interview with a church official, he confessed and resigned. But he only confessed to a small amount. Then he went to other members of the congregation and evidently, according to their testimony, gave them a totally different story: that we had misled him, that he didn’t understand our controls process, that it was less than $10,000, that he was going to write a check, that he was going to pay it back.

We should have never interviewed the suspect. We should have never done anything without legal counsel, but we did.

Before we called Frank, it was a matter of, “Can we handle this internally?” But we found out that there’s a difference between an internal problem and a legal problem. If you had somebody shoot someone in the corridor of your church on Sunday morning, you wouldn’t say, “It happened at a church. We need to forgive him and show grace.” No, that’s a legal issue. That’s what we had. We had to flip that switch and call a lawyer.

What about assembling a response team? Who should be on this team and what should their roles be?

Self: Our senior pastor said, “We want the investigation and the decisions to be made by a lay group.” Since we would be investigating someone on staff—someone who had prominence and seniority—we didn’t think it ought to be an investigation done by the staff.

We assembled our team by office. We had the chairs of the deacons, finance committee, personnel committee, and a former chair of the missions council because that’s where the money was taken from. It’s important to point out that one was an accountant, one was a banker, and one was a lawyer.

Sommerville: The church has to select a small group vested with decision-making authority. They’re the ones who decide who to pursue, how to pursue, and what you’re going to do. They are the decision makers. I gather the facts and present them to this group. They then make decisions. If you have a church that is run by a board, it should be a subcommittee of the board.

A smaller group makes sense for two reasons: First, if it’s a mere misunderstanding, the problem can then be corrected without getting the whole church in an uproar. Second, very sensitive matters like this require a good deal of confidentiality at first, which is better accomplished by a smaller group.

If you suspect a staff member of fraud, should you terminate them or suspend them?

Sommerville: You don’t terminate the employee. You suspend them and say, “We’re looking at some items.” You don’t even need to tell them precisely what you’re looking at. Suspend them first and then issue a “preserve evidence order.” This means that the church suspends all document destruction until instructed otherwise. When it comes to electronic media, the church needs to preserve it without changes. It should not be turned on except by a forensic computer expert.

Call your accounting department and all your record keepers and say, “Stop, don’t change anything.” If the person suspected of fraud has a computer, don’t touch it. If they have a laptop, don’t touch it. You leave everything exactly the way it is right now because we don’t know where this is going to go. Sometimes they’re honest, and this is an honest mistake, and we resolve it fairly easily.

The other side is that you don’t know the size of the fraud. The Houston First Baptist case started with some questioning of credit card charges. My firm sees fraudulent credit card charges all the time. It also concerns me that many churches for convenience have gone to electronic statements and electronic approvals, and it’s fraught with opportunities for theft.

If you place the employee on a leave of absence, they can say whatever they choose to. There’s nothing you can do to stop them, but you can help the situation by explaining to people: “We have things we are looking into and we have been advised by our attorney not to discuss it publicly.” That usually gives enough gravity to the situation that no matter what is being said publicly by the person who is suspected, the people who really care are going to give you the benefit of the doubt.

You’re going to have situations where the person suspected of embezzlement is just as influential as this person was. They have a huge trust bank with the congregation. Those who are inclined to do bad things will exploit that trust bank to the maximum.

I don’t anticipate a suspension with pay would be for a long period of time. It’s just to give you enough to talk to the lawyer, talk to the public relations people, talk to the insurance company, and put your committees in place to investigate this so that then you can have a decision.

If you decide to terminate the employee, get together and have a meeting with the person suspected of fraud. The meeting will include the supervisor, HR representative, and maybe senior leadership. I don’t recommend you say, “We’re terminating you for theft” because it has not been adjudicated that he’s a thief yet. Instead, say, “There are irregularities, we have questions about them and we are going to terminate you because we have those questions.”

You will get requests to show grace and mercy to the accused. How should your church respond?

Self: That was the big question I got: “Where is the grace in this?” By “grace” they mean, “Cover it up. Let him go. Don’t do anything.” An attorney told me once, “David, without justice, you can’t have grace.”

Cummings: In the Bible, Paul wrote to the church and said, “Let him who steals, steal not.” In other words, he recognizes some church members are going to steal and they need to stop. If you say, “We’re going to show you grace, we’re going to forgive you, we’re going to restore you without any consequences,” you’ve really harmed that person and you’ve really harmed your church.

I understand the pain and agony of going through this with somebody in the congregation that you care about. All I’m saying is that, in my experience, when somebody says to me they stole X amount, the actual figure is usually more. They always understate it. There’s been a crime committed against not only the church but against the state. Forgiveness is great but there needs to be some accountability for what they did. I don’t see where grace has anything to do with anything until there’s accountability for what they’ve done.

Should a church enter into a restitution agreement in lieu of prosecution?

Sommerville: In 38 years of doing this, I have had several dozen churches enter into restitution agreements. I have yet to have a church receive the first payment. Restitution agreements make you feel good, but they don’t honor your members or the trust God gave you over their assets.

On the criminal side, to get a lighter sentence, they must provide the restitution. Restitution plays a key role in the length of time they serve. We’ve seen cases where they provided 100 percent restitution after they were charged and pled guilty where the judge gave them probation. But that’s pretty rare, depending on the size of the case.

Don’t let your congregation think in terms of restitution. We can still forgive them, but God’s Word says that he doesn’t always intervene on the consequences of our bad choices.

Self: If it’s all about restitution and forgiveness, then you’re setting up a culture of corruption within your staff and your church body. What you’re saying is, “Steal as much as you want, because if you get caught then you just pay it back and all is forgiven.”

What are best communication practices, both internally and to the community at large?

Self: A financial crime is a sin against the whole congregation. In Joshua 7, Achan’s theft and concealment of the spoils of battle affected the community. In our situation, the sin of theft impacted the congregation. It was hidden and it had to be brought to light, but in appropriate stages.

Early on, we met with the associate missions minister’s Sunday school class—he taught about 100 people on Sunday. We said there were some incongruities, that we did not terminate him, and that he voluntarily resigned.

We were legally constrained from saying much to the congregation and the community about the accusations. That put us in a difficult situation. It caused some real internal problems for us because we were not free to come out and say, “This is what happened.” The accused and those who supported him could say what they wanted to about us. I did get a text the first week from an attorney representing the the family of the associate missions minister that I could be sued for slander and libel.

Sommerville: You can’t call somebody a thief because they haven’t been determined to be a thief by a court. That’s a derogatory term. When the committee is doing the investigation, it’s very important that committee members not share their findings and discussions about the accused. You don’t want to create defamation or slander. Even though this person resigned, that didn’t stop the investigation and the need to be careful as to what was said in public.

Self: We engaged a crisis public relations firm, and followed their steps for communicating with the congregation, the community, and the media. We probably got them a month too late. We should have engaged them early on.

Sommerville: Notify your attorney that you’re going to get a PR firm involved pretty early, especially if you’re as high profile as Houston’s First Baptist. The attorney will work directly with senior church leadership regarding communications and PR.

Hiring a PR firm is money very well spent because you have to craft a message that is 100 percent truthful and yet not create liability. Public relations people know how to communicate and use words that will meet the legal standards, but will also satisfy the vast majority of your members.

Self: Our public relations firm said, “You need to identify the major donors who were affected.” Those would be the donors who have given large gifts to our missions restricted fund, from which the majority of funds were stolen. Since these donors were impacted the most by the theft, we felt they deserved an explanation.

The senior pastor and I, some members of the committee, and other senior staff made personal phone calls to all of those donors prior to this becoming public knowledge. We said, “This is what’s going on, these are the steps we’ve taken, and there’s probably going to be something in the news in the next 30 days.”

A high percentage of them said, “That’s terrible. I feel really bad for you. Now let me tell you of my story of embezzlement.” Almost all of those business owners had been through it and this was not news to them. That was a good step on our part to give a heads-up to some key people who might take this theft personally because it was their money.

Within 90 days of the publication of the indictment, we had two major gifts that have amounted to more than the amount of the theft. It wasn’t apples to apples. They weren’t paying us back for the theft. It wasn’t restitution at all. They were able to fulfill all those accounts, make whole what the moth has eaten, that sort of thing.

It was a spiritual thing for us that if we did the right thing, God was going to take care of his church.

What advice or guidance do you have when it comes to insurance coverage and communicating embezzled funds?

Sommerville: Make sure you have theft coverage or employee crime coverage. You need to notify them as soon as you have a suspicion. You have to notify some companies within 10 days. Others are more lenient and allow 30 days. But if you don’t notify them, you waive coverage. Then you have suddenly given the insurance company an unintended blessing.

Self: Concurrent with notifying the insurance company, we had to cooperate with law enforcement. In the first meeting with the associate missions minister, we said, “We have no interest in prosecution. We don’t want you to go to jail. You have two young kids at home. We want to restore you.” That was our opening response when we had no idea about the size of this thing. But to cooperate with the insurance company means we had to cooperate with legal authorities.

Sommerville: That’s a condition the insurance companies are putting into their policies now. You agree to prosecute criminally if they pay out a claim.

Should a church that’s been embezzled get the IRS involved? If so, how?

Sommerville: Embezzled funds are taxable income to the embezzler. The church, as the victim, files Form 3949-A with the IRS to report the previously unreported taxable income. That is something I strongly recommend. Some people say you’re adding insult to injury, but it’s just a consequence of their sin. Not only is the IRS going to require them to pay the money back, but they’re going to impose a 225 percent penalty on them for taking it.

Putting it all together: What is the plan of action to follow if a church catches someone embezzling funds?

Cummings: Contact your lawyer first. You want the lawyer to control everything that is about to happen. You should do this even before you call the cops because your risk is getting sued.

Be careful that you do not end up with a lawsuit with a charge of libel, slander, or false arrest. Do not put in the church bulletin that you just caught somebody stealing money. Don’t publicly accuse anyone of fraud. Do not even talk about it outside of the people who need to know.

Consider engaging a certified fraud examiner to assist you with your case. They are trained in investigations of frauds and handling those frauds.

Seriously consider prosecuting the fraudster for everyone’s sake, including any future employers. Most people who commit major fraud in a church need to be prosecuted. The percentage of cases that do not get prosecuted is very high—75 to 90 percent. The number one reason is embarrassment that someone got away with it. Some people say, “If I prosecute them, I won’t get paid back.” Let me give you a clue: you’re not going to get paid back. Restitution agreements in my view are totally useless.

Be prepared to have your case fully documented when you go to the district attorney (DA). The DA’s office might have time for your case in a small town, but in a big city, they simply don’t have time. Harris County, Texas, where Houston is located, has only four fraud investigators and two police officers dealing with fraud. You have to bring them a case and actually convince them to take it.

Engage a private investigator. This person can help locate assets and other helpful facts such as secret businesses, conviction records, real estate transactions, divorces, and lawsuits. If you’re reconstructing where their money is, it’s very helpful to take these steps.

More than anything else, be alert and less trusting. Why is the trust level too high in a church or a nonprofit organization? Because nobody could imagine somebody stealing from God. So everybody trusts people to do what is right. Unfortunately, they don’t always do what is right. The trust level is so high no one ever checks up on them. If they did, they would catch them. Trust is not an effective internal control. It’s probably the worst internal control you could ever have.
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Child Abuse: Emerging Trends from the Biggest Legal Threat to Churches

Important insights and best practices for keeping your church and children safe from child abuse.

Featuring Richard R. Hammar, Attorney, CPA
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Child abuse remains a perennial top reason churches go to court each year. Recent headlines nationwide only confirm this reality. From jury verdicts doling out multimillion-dollar damages awards, to expanded statutes of limitation for victims to come forward, to new interpretations of the clergy-penitent privilege affecting abuse reporting, the evolving nature of this issue demonstrates the need for church leaders to remain vigilant and intentional about protecting children and youth in their ministries.

Attorney and senior editor Richard Hammar joined Church Law & Tax content editor Matthew Branaugh to discuss these emerging trends. In this video, Hammar also provides valuable best practices and standards churches should follow to prevent possible abuse and avoid costly and painful litigation.

Download the presentation slides here.

Supreme Court Reaffirms and Expands Ministerial Exception

What the ruling means for churches and religious organizations.

Richard R. Hammar, Attorney, CPA
Bio

In a 7-2 ruling on July 8, 2020, the United States Supreme Court ruled that the “ministerial exception” barred civil courts from resolving employment discrimination lawsuits brought by former teachers against two Catholic schools.

This article reviews the facts of each case, summarizes the Supreme Court’s decision, and assesses the relevance of the ruling to religious organizations.

Case No. 1: Teacher Sues Over Age Discrimination

A woman (“Teacher”) worked for many years as a lay fifth and sixth grade teacher at a Catholic parochial school. She taught all subjects, including religion.

Key facts:
  • Education: BA in English with a minor in secondary education; California teaching credential.
  • Religious duties: Taught religion daily, attended faculty prayer services, led classroom prayer, and directed an annual passion play.
  • Employment agreement: Required to promote Catholic faith and morals and participate in religious activities. Her contract could be terminated for conduct discrediting the Church.
  • Performance reviews: Included evaluations of religious instruction and presence of Catholic values in the classroom.

The school eventually moved the Teacher to part-time and then declined to renew her contract. She filed an age discrimination claim, alleging she was replaced by a younger teacher. The school cited classroom performance issues related to a new reading and writing program.

Legal journey:
  • Federal district court: Dismissed the lawsuit under the ministerial exception.
  • Federal appeals court: Reversed, emphasizing lack of formal religious title or training.
  • Supreme Court: Agreed to review the case. (Our Lady of Guadalupe School v. Morrissey-Berru)

Case No. 2: Teacher Claims Disability Discrimination

Another woman (“Teacher”) worked for a year and a half at a Catholic primary school in Los Angeles.

Key facts:
  • Role: Substitute first-grade teacher, then full-time fifth-grade teacher.
  • Education: BA in liberal studies and a teaching credential.
  • Religious duties: Taught religion for 200 minutes per week, led daily prayer, used a religious textbook, and prepared students for sacraments.

The school declined to renew her contract after one full year. She alleged she was dismissed for requesting medical leave to treat breast cancer. The school cited poor classroom management and curriculum issues.

Legal journey:
  • Federal district court: Dismissed the lawsuit under the ministerial exception.
  • Federal appeals court: Reversed.
  • Supreme Court: Also agreed to review. (St. James School v. Biel)

Supreme Court’s Analysis

The Court combined both cases and applied its previous reasoning from Hosanna-Tabor Evangelical Lutheran Church and School v. EEOC (2012).

In Hosanna-Tabor, the Court:
  • Recognized the ministerial exception for religious institutions.
  • Emphasized that no rigid formula defines a “minister.”
  • Identified relevant factors like religious title, training, self-identification as a minister, and religious job duties.

Key takeaway:

“What matters, at bottom, is what an employee does.”

In these two cases:
  • Both teachers had core duties transmitting the Catholic faith.
  • Employment agreements and handbooks emphasized their religious responsibilities.
  • Their titles and formal religious training were less important than their actual duties.

The Court concluded that both teachers fell within the ministerial exception, protecting the schools’ employment decisions from civil court review.

What This Means for Churches

This ruling has significant implications for religious organizations beyond just Catholic schools.

1. Focus on Job Function, Not Titles

The Court emphasized that actions, not formal religious titles, determine who qualifies under the ministerial exception.
Even employees without “minister” in their title may be covered if they perform essential religious duties.

2. Possible Impact on Tax Law Definitions

Currently, the federal tax code defines “ministers” narrowly—requiring ordination, commissioning, or licensing.
The Court’s broader interpretation could:
  • Influence future adjustments to the tax definition of “minister.”
  • Expand eligibility for tax benefits like the housing allowance.

Five factors currently used in tax law (from Knight v. Commissioner, 1989):
  1. Administer sacraments
  2. Conduct worship services
  3. Perform services under church authority
  4. Be ordained, commissioned, or licensed (mandatory)
  5. Be regarded as a spiritual leader by their religious body

The Court’s decision could support including those who perform ministerial functions without formal designation.

3. Limited Guidance Beyond Employment Cases

The Court did not extend its ruling to other areas like:
  • Breach of contract claims
  • Defamation suits
  • Fair Labor Standards Act (FLSA) disputes

The focus remains narrowly on employment discrimination.

Church Autonomy and the First Amendment

The Court reinforced the independence of religious organizations in internal matters:
  • Religious groups must be free to decide faith and doctrine without government interference.
  • Courts must avoid intruding on religious hiring and firing decisions.
  • The ministerial exception is crucial to maintaining religious liberty.

“Without [this authority], a wayward minister’s preaching, teaching, and counseling could contradict the church’s tenets and lead the congregation away from the faith.”

Final Thoughts

Church leaders should carefully evaluate all staff roles—not just ordained pastors—when considering who might fall under the ministerial exception.
This ruling strengthens churches’ rights to make internal decisions without fear of civil litigation but also signals broader future debates, especially in tax law and religious freedom cases.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Image: Klaus Vedfelt | Getty Images

Supreme Court Endorses Some Aid to Parents of Religious School Students

Parents of religious school students may receive state aid, Supreme Court says.

Richard R. Hammar, Attorney, CPA
Bio

On June 30, 2020, the United States Supreme Court ruled in a 5–4 decision that a scholarship program enacted by Montana’s state legislature, which denied funds for use in religious schools, was an unconstitutional restriction on the free exercise of religion. This decision will allow religious schools, at least in some cases, to benefit from financial aid made available to all other kinds of schools.

Montana’s scholarship program

In 2015, Montana’s state legislature sought “to provide pa­rental and student choice in education” by enacting a schol­arship program for students attending private schools. The program grants a tax credit of up to $150 to any taxpayer who donates to a par­ticipating “student scholarship organization.” The scholarship organizations then use the donations to award scholarships to children for tuition at a private school.

So far, only one scholarship organization, Big Sky Schol­arships, has participated in the program. Big Sky focuses on providing scholarships to families who face financial hardship or have children with disabilities. Scholarship or­ganizations like Big Sky must, among other requirements, maintain an application process for awarding the scholar­ships; use at least 90 percent of all donations on scholarship awards; and comply with state reporting and monitoring re­quirements.

A family whose child is awarded a scholarship under the program may use it at any “qualified education provider”—that is, any private school that meets certain accreditation, testing, and safety requirements. Vir­tually every private school in Montana qualifies. Upon re­ceiving a scholarship, the family designates its school of choice, and the scholarship organization sends the scholar­ship funds directly to the school. Neither the scholarship organization nor its donors can restrict awards to particular types of schools.

The Montana legislature allotted $3 million annually to fund the tax credits, beginning in 2016. If the annual allotment is exhausted, it increases by 10 percent the following year. The program is slated to expire in 2023.

The “no-aid” provision and “Rule 1”

The Montana legislature also directed that the program be administered in accordance with the Montana state constitution, which contains a “no-aid” provi­sion barring government aid to sectarian schools. In full, that provision states:

Aid prohibited to sectarian schools. . . . The leg­islature, counties, cities, towns, school districts, and public corporations shall not make any direct or indi­rect appropriation or payment from any public fund or monies, or any grant of lands or other property for any sectarian purpose or to aid any church, school, acad­emy, seminary, college, university, or other literary or scientific institution, controlled in whole or in part by any church, sect, or denomination.

Shortly after the scholarship program was created, the Montana Department of Revenue promulgated “Rule 1” that prohibited families from using scholar­ships at religious schools. It did so by changing the definition of “qualified education provider” to exclude any school “owned or controlled in whole or in part by any church, re­ligious sect, or denomination.” The department ex­plained that Rule 1 was needed to reconcile the scholar­ship program with the “no-aid” provision of the Montana constitution.

The Montana Attorney General disagreed. In a letter to the department, he advised that the Montana constitution did not require excluding religious schools from the pro­gram, and if it did, it would “very likely” violate the United States Constitution by discriminating against the schools and their students.

Petitioners sue the Department of Revenue

Three mothers (the “petitioners”) enrolled their children in a private Christian school in northwestern Mon­tana. The school meets the statutory criteria for “qualified education providers.” It serves students in pre-kindergarten through 12th grade, and petitioners chose the school in large part because it “teaches the same Christian values that [they] teach at home.”

The child of one petitioner has already received scholarships from Big Sky, and the other petitioners’ children are eligible for scholarships and planned to apply. While in effect, how­ever, Rule 1 blocked petitioners from using scholarship funds for tuition at a Christian school.

To overcome that obstacle, petitioners sued the Department of Revenue in Montana state court. They claimed that Rule 1 discriminated on the basis of their religious views and the religious nature of the school they had chosen for their children.

The trial court concluded that Rule 1 was not required by the no-aid provision, because that provision prohibits only “appropriations” that aid religious schools, “not tax credits.” The ruling freed Big Sky to award scholarships to students regardless of whether they attended a religious or secular school.

For the school year beginning in fall 2017, Big Sky received 59 applications and ultimately awarded 44 scholarships of $500 each. The next year, Big Sky re­ceived 90 applications and awarded 54 scholarships of $500 each. Several families, most with incomes of $30,000 or less, used the scholarships to send their children to the Christian school the petitioners’ children attended.

The state supreme court reverses earlier ruling

In December 2018, the Montana Supreme Court reversed the trial court. The state supreme court ruled that the program aided religious schools in violation of the no-aid provision of the Montana constitu­tion.

In the court’s view, the no-aid provision “broadly and strictly prohibits aid to sectarian schools.” The scholarship program provided such aid by using tax credits to “subsidize tuition payments” at pri­vate schools that are “religiously affiliated” or “controlled in whole or in part by churches.” In that way, the scholarship program flouted the state constitution’s “guarantee to all Montanans that their government will not use state funds to aid religious schools.”

The US Supreme Court declares Rule 1 unconstitutional

The United States Supreme Court agreed to review the case, and in its 5–4 decision written by Chief Justice John Roberts, concluded that Rule 1 was an unconstitutional restriction on the free exercise of religion. The Court rejected the claim that the Montana scholarship program was an unconstitutional establishment of religion:

We have repeatedly held that the Establishment Clause is not offended when religious observers and organizations benefit from neutral government programs. . . . Any Establishment Clause objection to the schol­arship program here is particularly unavailing because the government support makes its way to religious schools only as a result of Montanans independently choosing to spend their scholarships at such schools.

The Court relied heavily on its recent ruling in Trinity Lutheran Church of Columbia, Inc. v. Comer, 137 S. Ct. 2012 (2017), in which it ruled that disqualifying otherwise eligible recipients from a public benefit “solely because of their religious character” imposes “a penalty on the free exercise of religion that triggers the most exacting scrutiny.”

In Trinity Lutheran, Missouri provided grants to help nonprofit organizations pay for playground resurfacing, but a state policy disqualified any organization “owned or controlled by a church, sect, or other religious entity.” Because of that policy, an otherwise eligible church-owned preschool was denied a grant to resurface its playground. The Court concluded that Missouri’s policy discriminated against the church “simply because of what it is—a church,” and so the policy was subject to the “strictest scrutiny,” which it failed.

The Court, in Trinity Lutheran, acknowledged that the state had not “criminalized” the way in which the church worshiped or “told the church that it cannot subscribe to a certain view of the Gospel.” But the state’s discriminatory policy was “odious to our Constitution all the same.”

Here, too, in the Montana case the Court concluded:

Montana’s no-aid provision bars religious schools from public benefits solely because of the religious character of the schools. The provision also bars parents who wish to send their children to a religious school from those same benefits, again solely because of the religious character of the school. . . . The provi­sion plainly excludes schools from government aid solely be­cause of religious status,” just as in Trinity Lutheran. . . . The Free Ex­ercise [of religion] Clause protects against even “indirect coercion,” and a State “punishes the free exercise of religion” by disqual­ifying the religious from government aid as Montana did here.

The Court continued:

The Montana Supreme Court should have “disre­garded” the no-aid provision and decided this case “con­formably to the Constitution” of the United States. That “supreme law of the land” condemns discrimination against religious schools and the families whose children attend them. They are “members of the community too,” and their exclusion from the scholarship program here is “odi­ous to our Constitution” and “cannot stand” (citing Trinity Lu­theran).

What this means for churches with religious schools

Churches or denominations with religious schools should note the following significant points regarding the Supreme Court’s decision:
  1. Most importantly, this case will allow religious schools, at least in some cases, to benefit from financial aid made available to all other kinds of schools (i.e., public and private secular schools). Religious schools cannot be excluded from such aid solely on the basis of their religious status. As the Court concluded, religious schools are “members of the community too,” and their exclusion from the scholarship program here is “odi­ous to our Constitution” and “cannot stand” (citing Trinity Lu­theran).
  2. This case may contribute to a greater degree of school choice, depending on current and future state-enabling legislation.
  3. The trial court in this case noted that the no-aid provision in the Montana constitution prohibits only “appropriations” that aid religious schools, “not tax credits” to donors.
  4. The Supreme Court noted that any Establishment Clause objection to the Montana schol­arship program “is particularly unavailing because the government support makes its way to religious schools only as a result of Montanans independently choosing to spend their scholarships at such schools.” In other words, the primary beneficiaries of the scholarship program were parents who were empowered to use scholarships to pay for the tuition of their children in a school of their choice. The fact that this might include a religious school did not make such schools the primary beneficiary.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Image: getty/valianstin suprunovich

Dynamic Cash-Flow Forecasting is Key to Managing Rapid Change

Budgeting during a time of rapid change is a matter of ditching the annual budget and doing some dynamic cash-flow forecasting and planning.

Michael E. Batts, CPA
Bio

Q: Our church has always tried so hard to stick to our budget. What do we do about budgeting in times of rapid change and uncertainty? What are some strategies for preserving cash, if that’s one of the things we should be doing?

Here’s some fairly radical advice as it relates to budgeting—radical in the sense that this is not conventional church financial management wisdom: Stop focusing on your regular annual budget. For churches experiencing rapid changes in their giving levels, the annual budget developed months ago is largely irrelevant.

Looking for help with other critical church finance topics? Pick up the second edition of Batts’

“Church Finance: The Church Leader’s Guide to Financial Operations“

I realize that as a matter of church governance and policy, you might have to have a budget. But what you planned when you developed that budget is no longer reality. Your spending levels and spending categories most likely have changed. Your revenue levels may be very different. So, what do you do?

Stop focusing on what you’re calling the budget and start doing what I call dynamic cash-flow forecasting and planning. That may sound like a fancy term. Dynamic just means it’s changing. It’s moving. And cash-flow forecasting and planning means estimating what’s going to happen, as best you can, and continuously updating your estimate based on new developments as they unfold.

Forecast this way each week over the next few months. Estimate as best you can, and adjust the forecast frequently based on new developments.

What dynamic cash-flow forecasts look like

Weekly cash-flow forecasts could start with a spreadsheet in which you start with your beginning cash and then project your expected cash inflow and your expected cash outflow. Put simply: cash inflow, which might include borrowing, is cash that’s coming into your church. And then cash outflow, including debt service—is whatever cash is going out for whatever purpose. And then, of course, the difference between your expected inflow and your expected outflow is your expected net cash flow. Add your beginning cash to your expected net cash flow; this would be your expected ending cash.

Forecasting also includes modeling different scenarios with different assumptions. If giving for your church so far is relatively flat, you should model one scenario that shows your giving level staying flat. You might also want to model a scenario of your giving level going down by 10 percent or 15 percent, or whatever makes sense to you depending on your current circumstances and trending. You might want to run various scenarios and update them each time as you have better information about what seems to be happening.

Weekly cash-flow forecasts should be developed for a reasonable and appropriate period of time in the future. I would suggest at least eight to ten weeks out. A forecast much shorter than that has little value for cash-flow planning and strategic decision-making. And in a highly dynamic environment, a forecast much longer than that is likely to have less reliability.

Rolling budgets

Rolling budgets are an alternative to annual budgets suitable for some churches to use as their regular approach to budgeting. Maintaining weekly cash-flow forecasts is an accelerated version of maintaining rolling budgets. Maintaining rolling budgets is not a “do it once a year” approach to budgeting. (I discuss this process on pages 18 and 19 of Church Finance: The Church Leader’s Guide to Financial Operations.)

Churches that are experiencing rapid growth are good candidates for rolling budgets, since their revenue and expense levels change more rapidly than a full-year budget is typically designed to address. Normally, for churches that utilize rolling budgets, I would recommend updating the rolling budget approximately quarterly. But these are not normal times. For this reason, I recommend updating it weekly—or every time you learn or observe something new and different. Doing this allows you to better manage cash and financial activities during a dynamic or very challenging, rapidly changing season.

Editor’s note. For additional details on dynamic cash-flow forecasting and planning—along with a helpful PowerPoints on the topic—see the free video of Mike Batts’s webinar with Church Law & Tax.

Protecting and preserving cash

Now, regarding protecting and preserving cash. While this is not conventional financial management, I suggest churches consider drawing on a line of credit—if you have a line of credit available. Borrowing money to pay operating expenses is a very high-risk proposition, and I am not saying you want to spend the borrowed funds on operations. Only do so if it’s deemed absolutely essential—and only if you have a viable plan to pay off the borrowed funds.

The main reason I suggest this is the risk that the bank may curtail your line of credit if it is not used. Banks curtailed lines of credit significantly during the Great Recession and it can easily happen again. Borrowing the funds can prevent a scenario where you go to borrow the funds later. . . only to be told by the bank that it has frozen your line of credit due to financial concerns. (Don’t forget to consider FDIC insurance levels with respect to your bank deposits. If you have significant bank account balances, you may wish to diversify the funds among multiple banks—banks also have economic risks in the current environment.)

For churches that do not have a line of credit—and if you, again, want to preserve cash—you may want to consider carrying a balance on a credit card account. Again, I stress that this is not traditional advice. It will be important to review your modeling—looking at the future. Maybe you have a loan that has been approved but not yet funded. This means, though, that those funds should be coming in. In the meantime, you could cautiously use the credit card in order to stay afloat until you have the needed funds from, say, the PPP money. When you are more financially stable, you would pay off the credit card. Keep in mind, though, that this is very short-term strategy.
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.

When Does the Clergy-Penitent Privilege Exempt Reporting Child Abuse?

Montana Supreme Court interprets the state’s mandatory child abuse reporting law did not apply and rules in favor of church.

Richard R. Hammar

Every state has a child abuse reporting law that requires designated “mandatory reporters” to report known or reasonably suspected child abuse.

Ministers are mandatory reporters in many states. However, some states exempt ministers if they learned of the abuse through conversations protected by the clergy-penitent privilege—communications made in confidence during spiritual counsel.

This article explores a Montana Supreme Court decision interpreting the state’s mandatory child abuse reporting law and the clergy-penitent privilege.

Background: $35 Million Judgment Reversed

Case: Nunez v. Watchtower Bible & Tract Society, 2020 MT 3 (2019)

In 1998, one of three siblings reported to a church elder that her step-father had inappropriately touched and fondled her as a child.
  • The elder directed her to two other elders.
  • They dismissed her allegations, citing the lack of a confession or a second witness, which they required before taking action.
  • With no church support, the victim returned home. The abuse escalated to repeated incidents of rape until she was old enough to leave.

In 2004, another sibling reported similar abuse to a different elder.

Church’s actions:
  • The elder obtained a signed corroborating letter from another sibling.
  • He contacted the national denomination’s legal department. An attorney advised that Montana law did not require reporting the abuse to authorities.
  • Acting on this advice, no police report was made.

Instead:
  • Three elders formed a judicial committee to confront the step-father.
  • The committee disfellowshipped him and informed the congregation.
  • A year later, the elders reinstated him into the congregation.

Lawsuit and Trial Court’s Decision

In 2016, two victims (the “plaintiffs”) sued the church for failing to report the abuse.

Legal claims:
  • Alleged negligence per se under Montana’s mandatory reporting law.
  • Claimed the church’s failure to report led to further abuse and damages.

Trial court outcome:
  • Ruled in favor of the plaintiffs.
  • Awarded $4 million in compensatory damages and $31 million in punitive damages.
  • Found the church liable under the negligence per se doctrine.

The church appealed, arguing it had no duty to report under Montana law.

Montana’s Child Abuse Reporting Law

Montana’s law requires certain professionals, including clergy, to report child abuse to the Department of Public Health and Human Services.

Key exemption:

“A member of the clergy or a priest is not required to make a report if the communication is required to be confidential by canon law, church doctrine, or established church practice.”

Arguments:
  • Church’s position: The exemption applied because their doctrine required confidentiality.
  • Plaintiffs’ position: The exemption did not apply because the church had disclosed information and lacked a confidentiality doctrine.

Montana Supreme Court’s Decision

The Montana Supreme Court reversed the trial court’s judgment.

Key findings:
  • The church’s doctrine, canon, or practice required confidentiality.
  • As a result, the clergy-penitent privilege exemption applied.
  • The church was not considered a mandatory reporter under Montana law in this case.

Court’s statement:

“We do not opine whether [the Legislature] could have made a different policy choice that would afford greater protection to child victims. The Legislature is the appropriate body to entertain such policy arguments.”

Relevance to Church Leaders

This case carries important lessons for church leaders:

1. Understand the Clergy-Penitent Privilege
  • Know when the privilege applies.
  • Understand how and when it can be waived.

2. Recognize Potential Civil Liability
  • In some states, clergy who fail to report may be held personally liable—if no exemption applies.
  • Liability can arise through statutes or judicial rulings.

Important:
Some courts have allowed child abuse victims to sue ministers for failure to report. Others, like Montana’s court, have not.
  • Always consult an attorney with questions about mandatory reporting laws.
  • Do not rely solely on internal church procedures or assumptions.

4. Be Aware of Criminal Penalties
  • In many jurisdictions, mandatory reporters who fail to report face potential criminal liability.

Final Note

Church leaders must remain informed about how clergy-penitent privilege interacts with state child abuse reporting laws to protect both their congregations and themselves.

The issues raised in this article are covered in greater detail in Richard Hammar’s article, “Child Abuse Reporting and the Clergy Privilege.”

Image: AdobeStock/vegefox.com

Free Download: How Thorough Is Our Background Screening Program?

Proper screening costs very little but increases safety a great deal.

The Editors

Last Reviewed: January 28, 2025

Use the following checklist to gauge how your church is doing at screening employees and volunteers.

Download a PDF version of this checklist.

We’d like to think that all people seeking to work or volunteer for a ministry are honest, ethical, and inherently trustworthy. Unfortunately, they’re not. They’re human, just like us. That’s why it’s so important for every church to conduct thorough background screens before filling any position—paid or volunteer. Use these tips to help your ministry implement an effective screening program.

Before Saying “You’re Hired!”
  • Fill in the blanks. Have prospective workers complete a written application form. This step may seem obvious, but many churches have informal hiring practices. A written application provides information that can be used to conduct reference checks and an interview.
  • Obtain asking rights. Your application form should include a liability release, signed by the applicant, giving you permission to contact references and obtain any criminal records. It also should release from liability the person being asked to provide information.
  • Check references. Contact all individuals, former employers, and organizations listed in the application. Learning what others say about an individual’s past performance and conduct is a vital part of the screening process.
  • Have a talk. Once you’ve narrowed the field to a few top candidates, it’s time for an interview. You’ll get a better sense of whether the applicant will be a good fit for your ministry when you meet in person.

After a Great Interview
  • Look for criminal records. Some states mandate criminal records checks for certain employees, such as teachers, childcare workers, and others in high-risk settings. It’s a good practice to conduct a criminal records check on all paid and volunteer staff, even ministers, before putting them to work.
  • Choose a reputable screening provider. The results you’ll get from a “free” or bargain criminal records search may be worth what you paid. Hire a screening company that uses county court records to verify database information, searches past locations where a person has lived, uncovers alternate or false names, and helps you to comply with state and federal laws.
  • Evaluate the results. Finding a criminal conviction may not be enough to disqualify someone from a church position. You’ll need to evaluate the severity of the offense, how long ago it happened, and whether it pertains to the position being filled. An attorney could help you with this analysis.
Image: AdobeStock/enterlinedesign

Downloadable checklist: Are We Protecting Our Youth Ministry?

This 12 question checklist can help your church assess the safeguards it has in place.

Karen Arneson
Bio

Last Reviewed: February 12, 2025

Use the following checklist to gauge how your church is doing at protecting youth in its ministry.

Download a PDF version of this checklist.

As a young, newly married couple, my husband and I worked with a small group of teens through our church. Barely older than the kids we worked with, I remember our struggle to maintain boundaries. I particularly remember one girl who came from an unchurched family. She made no secret of the crush she developed on my husband.

Looking back, I recognize the risk we naively assumed. The only instruction we had from church leadership was to befriend the teens, and provide spiritual instruction and some form of entertainment. No one thought about written policies and procedures to safeguard the ministry and those involved. We were on our own. That was more than thirty years ago.

Times have changed and today’s youth worker needs to be more aware than ever of the risks involved in ministry.
Image: AdobeStock/ BillionPhotos.com

Can We Respond to Gun Violence at Church? A Checklist for Churches.

Discover if you’re protecting your congregation.

Karen Arneson

Use the following checklist to see if your church is well-equipped to respond if the unthinkable should happen.

Download a PDF version of this checklist.

Not so long ago, believers were able to seek a quiet, solitary moment of worship in their church sanctuaries. No locked door, or armed guard, there was no prohibited entry. In many places, those opportunities to meet God in his house (without first being cleared for admittance) are gone.

The shooting of 14 people attending a youth rally at Wegdwood Baptist Church, in Fort Worth, Texas—the bomb that exploded at First Assembly of God in Danville, Illinois, injuring 35 people—the killing of a wife, son, and fellow-member by a congregant of New St. John Fellowship Baptist Church in Gonzales, Louisiana: these are only a few examples of the violence that has shattered the peace of sanctuaries across our nation.

Does this mean we should barricade the doors, shrinking back in fear of what could happen at our church? No! This is a time not only to exercise our trust in the Lord, but to fully equip ourselves with the right tools to protect our congregation.
Image: AdobeStock/ ibreakstock

Downloadable Checklist: Are We Prepared for a Sexual Misconduct Allegation?

Use this checklist to help prepare for a sexual harassment allegation in your church.

Lorie Quicke

Last Reviewed: February 3, 2025

Sexual harassment occurs in all kinds of work settings. While we may think it’s more prevalent in secular businesses and organizations, the church is not immune to incidents of sexual misconduct among ministry workers. Use the following checklist to gauge how proactive your church is at preventing sexual misconduct and how prepared it is to respond to an allegation of sexual harassment.

Download a PDF version of this checklist.

The legal definition of sexual harassment is when the terms, conditions, or privileges of employment are determined on the basis of sex. The two recognized forms of sexual harassment are (1) when an employee is subjected to unwelcome advances and submission is explicitly or implicitly made a condition of employment, and (2) when the employer (directly or through agents) creates an intimidating, hostile, or offensive work environment.
New study on sexual harassment in the Christian workplace: Learn about the extent of this troubling problem in churches and parachurch ministries.

The following are some simple steps you can take to help educate and equip your church body to prevent sexual harassment in your congregation.

Create a Safe Environment

Be vocal. Let your staff and congregation know that you take harassment seriously. Those who work at and attend the church should feel safe if they need to come forward with an accusation of sexual harassment.

Define policies. If there aren’t currently policies in place concerning sexual harassment in your church, create them. The church must be prepared if an allegation surfaces. Putting your staff and volunteers through a sexual ethics course may also prevent harassment at your church.

Keep a Safe Environment

Practice accountability. One way to keep your staff accountable is to monitor overtime hours, an individual’s declining performance, increased absences, inability to concentrate, or changes in his/her work habits.

Check your insurance. Make sure your church insurance covers employment-related claims, such as a sexual harassment claim.

Address allegation. When an allegation surfaces at your church, remove the accused from contact with the claimant during the investigation. The claimant should also be offered pastoral assistance, including counseling. Contact your insurer, attorney, and governing church bodies so they can further advise you on your next steps.
Image: AdobeStock/Eleanor Richards

Is Your Data Security Up to Speed? A Checklist for Churches

Keep your church records and data safe with the right precautions and software.

The Editors

Use the following checklist to gauge how your church is doing at protecting data.

Computers are absolutely vital to help keep a church running, but they are also vulnerable. Keep your church records and data safe with the right precautions and software. We’ve compiled the following simple tips to help you secure your valuable information.

Download a PDF version of this checklist.

Strategic Plans
  • One database is enough. If you’re using multiple databases to store information, the more you’ll need to protect. Try to consolidate your data so you can better secure it.
  • Guessable passwords. Are your passwords guessable? Avoid using words, names, or numbers that could be easily guessed by an outsider. Also, never share passwords with your coworkers.
  • Perform regular backups. Backing up your computers daily, even hourly will save you time in the future if there’s a power surge. Taking your vital records and data to an off-site location also gives you a safety if a natural disaster occurs.

Software Prevention
  • Suspicious activity. Has your Internet service been acting strangely? If new homepages, toolbars, or unwanted ads are continually appearing on your browser, update your security software immediately.
  • Don’t be fooled. Adware and spyware are softwares want to trick you into installing their software onto your computer. Never agree to install software before you know what it is.
  • Update security patches. Continually update security patches on your Windows, Internet server, and email. Sometimes these programs provide safety features to keep malicious software off of your computer.
  • The antivirus. If your church does not already own antivirus software, purchase it. If you own an older version of this software, you may need to update it since older versions do not protect against adware and spyware.
Image: AdobeStock/ Sunshine Seeds

Event Planner Checklist: Is Your Church Prepared to Host a Large Event?

Use this event planner checklist to host a well-organized church event with confidence.

Jonathan Sprowl
Bio

Last Reviewed: February 11, 2025

Use this event planner checklist to ensure your church is fully prepared to host a successful event.

Download a PDF version of this checklist.

Perhaps God has blessed your ministry with the vision and space to practice hospitality and put on a big event. Whether it’s a national conference or a smaller-scale event like a carnival night for your local community, opening your church’s doors to non-members presents many logistical challenges.

Why an Event Planner Checklist is Essential

Planning a large event requires foresight and meticulous attention to detail. Even the most well-organized events can face unforeseen challenges. Unfortunately, the more people you bring together in one place, the higher the probability of unexpected situations occurring. You might encounter uninvited guests, weather-related disruptions, or even emergency situations that require immediate action.

But take heart—through proactive risk management and thorough preparation, your church can ensure a smooth event experience. By using an event planner checklist, you’ll be equipped to handle any scenario with confidence.

Church Event Planner Checklist

Here’s a comprehensive checklist to guide your event planning process:

1. Define the Event’s Purpose and Goals
  • Clarify the purpose of the event and expected outcomes.
  • Identify the target audience and estimated attendance.

2. Secure Necessary Permits and Approvals
  • Verify zoning and occupancy restrictions.
  • Obtain permits for food service, amplified sound, or special activities.
  • Confirm fire safety compliance with your local fire department.

3. Plan the Venue and Logistics
  • Reserve and inspect the event space.
  • Confirm seating arrangements, parking availability, and accessibility features.
  • Set up a clear signage system to direct attendees.

4. Budget and Fundraising
  • Create a budget covering rentals, permits, catering, and other costs.
  • Consider sponsorships or fundraising to offset expenses.

5. Safety and Emergency Preparedness
  • Develop an emergency action plan with clear evacuation routes.
  • Ensure first aid kits and medical personnel are available.
  • Coordinate with local law enforcement for crowd control, if necessary.

6. Staffing and Volunteer Coordination
  • Recruit and train volunteers for registration, security, and hospitality.
  • Assign roles and responsibilities in advance.

7. Marketing and Promotion
  • Utilize social media, email newsletters, and flyers to spread the word.
  • Encourage RSVPs to gauge attendance numbers.

8. Technical and Audio-Visual Setup
  • Test microphones, projectors, and other AV equipment.
  • Have backup power sources in case of outages.

9. Catering and Hospitality
  • Plan food and beverage offerings based on dietary restrictions.
  • Ensure proper food storage and safety measures.

10. Post-Event Follow-Up
  • Send thank-you emails to attendees and volunteers.
  • Gather feedback through surveys for future improvements.

Frequently Asked Questions (FAQs)

What should be included in an event planner checklist?

An event planner checklist should cover logistics, budgeting, safety measures, volunteer coordination, marketing, and post-event follow-up.

How can churches improve event security?

Churches can improve security by coordinating with local law enforcement, training volunteers for emergency response, and having clear crowd management protocols.

What are the most common challenges in church event planning?

Common challenges include unexpected attendance surges, technical issues, security concerns, and last-minute venue restrictions.

How far in advance should a church plan a large event?

Churches should begin planning large events at least 6–12 months in advance to secure venues, permits, and key logistics.
Image: AdobeStock/Prathaan

Downloadable Checklist: Crime Prevention at Church

A checklist to help you evaluate your building’s security.

Brotherhood Mutual Insurance Company

Use the following checklist to gauge how your church is doing at preventing crime.

Download a PDF version of this checklist.

What Makes a Church Vulnerable?

The days of unlocking a church in the morning and leaving it open all day have gone the way of the one-room, wooden chapel. Churches today house thousands of dollars’ worth of sound equipment, musical instruments, and computers, not to mention sizable contributions. If criminals sense easy access to potential cash, it’s only a matter of time before your church becomes a target. By understanding your vulnerabilities, you can strengthen your resistance to property crimes.

Step 1: Do a Risk Assessment

The first step in knowing how to prevent burglaries, theft, and vandalism is to assess your risks. If you’re unsure how to do this, ask a security consultant or a local law enforcement agency to help you. The assessment section of this download can help you get started, but you’re also encouraged to examine the type and frequency of crimes in your area and determine if any of your policies and procedures are leaving you susceptible, such as leaving a door open all of the time or having one person be responsible for all financial records within the church office.

Step 2: Create a Security Plan

Once you know your vulnerabilities, you can create a plan for solving them. Your security plan should include:
  • An objective: What are you trying to achieve? In what time frame?
  • An analysis: How can the problems be solved? What problems take first priority?
  • A training component: Is staff trained in security awareness? What role should staff members and volunteers play in an emergency situation?
  • Implementation: What steps will we take to improve security in the next one to five years?

Step 3: Take Action

Knowing what makes your church vulnerable and what you can do about it gives you a road map to follow. Even if your church has improved security in the past, it makes sense to review your systems and procedures regularly, to make sure you haven’t missed anything or that new susceptibilities haven’t crept in.

Image: AdobeStock/ farland9

Choosing Church Insurance: Tips From a Professional (+ Free Download)

16 questions to help select and retain your church’s insurance.

Jeff Hanna

Use the following check list to gauge how your church is selecting insurance.

Download a PDF version of this checklist.

Why Learn about Insurance

True story: A pastor arrived at his church property only to witness the entire building burning in flames. It was a total loss. The following morning, as he wondered where the church would meet, and whether they had enough coverage to rebuild, he found out the church was underinsured. It would cost well over $1 million to rebuild what they had lost. But with only $700,000 in coverage, what were their options?

True story: After carefully performing reference and background checks, a church hired a part-time youth pastor. One year later, when he admitted to engaging in inappropriate behavior with students, he was arrested and charged. It was determined that there was prior knowledge of an incident, but no action had been taken. When the church was sued by parents, the church—without separate sexual misconduct coverage—quickly reached its general liability limit and was forced to find money from reserves, donations, and loans to pay the judgments.

Regardless of good intentions, inadequate church insurance can lead to significant and permanent losses. Some churches never recover. Though nearly every church has insurance coverage, many church leaders lack confidence in their understanding of their policies and the terminology associated with them.

So let me encourage you: You are not alone. Guidance is available, and you’re already taking important steps in receiving it. As you gain a better understanding of church insurance, as well as your church’s specific needs, you are making progress toward better safeguarding your ministry.

When it comes to church insurance, you must be informed. Get to know your insurance agent. And purchase only from a company that offers not only good prices, but good service, claims coverage, and specific knowledge of church insurance issues.
Video
The American flag flying in front of a church steeple.
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Advantage Member Exclusive

Video: Politics in the Church—What to Know for Election Season

Politics in the church is a complex topic. In this video, Richard R. Hammar offers helpful insights and tips in navigating the issues.

Featuring Richard R. Hammar, Attorney, CPA

Politics in the church is a complex and passionate topic. But there are realities to face.

In order to maintain their exemption from federal income taxes, churches must comply with several requirements specified in section 501(c)(3) of the tax code. Two of these requirements involve political activities: Churches may not participate or intervene in any political campaign on behalf of (or in opposition to) any candidate for public office. And, churches may not engage in substantial efforts to influence legislation.

So, what do these requirements exactly mean? How should church leaders navigate them as election season heats up? And what happens if they violate them?

In this webinar offered exclusively for Church Law & Tax Advantage Members, renowned church attorney and CPA Richard R. Hammar—author of Pastor, Church & Law, Fifth Edition and the annual Church & Clergy Tax Guide—explores the requirements and discusses how leaders should approach this sensitive, and often volatile, issue.

Want more information on this topic? Check out the “Churches and Political Activities” Recommended Reading page.

Editor’s Note. This video is part of the Advantage Membership. Learn more on how to become an Advantage Member or upgrade your membership.
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Supreme Court Rules that Title VII’s Ban on “Sex” Discrimination Includes Sexual Orientation

Why the Supreme Court’s Title VII decision changes the definition of “sex” discrimination–and how it affects churches.

Richard R. Hammar, Attorney, CPA
Bio

The United States Supreme Court in 2020 ruled that an employer who fires an individual for being homosexual or transgender engages in “sex” discrimination. Such actions are in violation of Title VII of the Civil Rights Act of 1964.

This article will review the facts and summarize the Court’s decision. It will also assess its significance to churches and other religious organizations.

The facts

The case involved three plaintiffs.

One plaintiff worked for a Georgia county as a child welfare advocate. Under his leadership, the county won national awards for its work. After a decade with the county, he began participating in a gay recreational softball league.

Soon after, he was allegedly disparaged by leading community members for participating in the league. He was later fired for conduct “unbecoming” a county employee.

The second plaintiff worked as a skydiving instructor in New York. After several seasons with the company, he mentioned that he was gay and, days later, was fired.

The third plaintiff worked for a funeral home. When she got the job, she presented as a male. But two years into her service with the company, she began treatment for despair and loneliness. Ultimately, clinicians diagnosed her with gender dysphoria and recommended that she begin living as a woman. In her sixth year with the company, she wrote a letter to her employer. In it, she explained that she planned to “live and work fulltime as a woman.” The funeral home fired her before she left, telling her “this is not going to work out.”

Each plaintiff brought suit under Title VII. (Title VII prohibits employers from discriminating in any employment decision on the basis of race, color, national origin, sex, or religion.) A federal appeals court dismissed the first plaintiff’s case. This dismissal was on the ground that Title VII’s ban on “sex” discrimination did not extend to sexual orientation. But another federal appeals court ruled that the second plaintiff could pursue his discrimination claim since Title VII’s ban on sex discrimination in employment did encompass sexual orientation. And a third federal appeals court allowed the third plaintiff’s discrimination claim to proceed for the same reason. All three cases were appealed to the United States Supreme Court.

The Court’s ruling

The Supreme Court sided with the two appeals courts. Both courts interpreted Title VII’s ban on sex discrimination to include sexual orientation and gender identity. Title VII states that it is “unlawful . . . for an employer to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s race, color, religion, sex, or national origin.”

The Court concluded that an employer that fires an employee merely for being gay or transgender violates Title VII.

Application to churches and religious schools

What is the relevance of the Court’s ruling to churches and other religious organizations, including schools? Consider the following points.

1. Title VII exemption for religious organizations

Title VII section 702 contains the following exemption for religious organizations:

This title shall not apply to . . . a religious corporation, association, educational institution, or society with respect to the employment of individuals of a particular religion to perform work connected with the carrying on by such corporation, association, educational institution, or society of its activities.

This provision permits religious corporations and educational institutions to discriminate on the basis of religion in the employment of any person for any position.

As originally enacted, section 702 permitted religious employers to discriminate on the basis of religion only in employment decisions pertaining to their “religious activities.” Congress amended section 702 in 1972 to enable religious organizations to discriminate on the basis of religion in all employment decisions. In the years following the 1972 amendment, a number of federal courts suggested that the amendment violated the First Amendment’s nonestablishment of religion clause. But in 1987, the United States Supreme Court resolved the controversy by ruling unanimously that section 702 did not violate the First Amendment’s nonestablishment of religion clause. Corporation of the Presiding Bishop of the Church of Jesus Christ of Latter-Day Saints v. Amos, 483 U.S. 327 (1987).

Note that religious organizations are exempt only from the ban on religious discrimination in employment. They remain subject to Title VII’s ban on employment discrimination based on race, color, national origin, or sex—except with respect to employment decisions involving clergy.

Churches that take an adverse action against an employee or applicant for employment based on religious considerations should describe their action appropriately. Refer to the religious or doctrinal principle at issue, and avoid generic labels like “sex” or other gender- or sexuality-based labels.

2. Covered employers

Title VII only applies to employers engaged in interstate commerce and having 15 or more employees. The courts have defined “commerce” very broadly, and so most churches will be deemed to be engaged in commerce. Note that most states have also enacted their own employment discrimination laws. These laws eliminate the commerce requirement and generally apply to employers with fewer than 15 employees.

3. Ministers

In 2012, a unanimous United States Supreme Court affirmed the so-called “ministerial exception.” The ministerial exception bars the civil courts from resolving employment discrimination disputes between churches and ministers. The Court concluded:

We agree that there is such a ministerial exception. The members of a religious group put their faith in the hands of their ministers. Requiring a church to accept or retain an unwanted minister, or punishing a church for failing to do so, intrudes upon more than a mere employment decision. Such action interferes with the internal governance of the church, depriving the church of control over the selection of those who will personify its beliefs. By imposing an unwanted minister, the state infringes the Free Exercise Clause, which protects a religious group’s right to shape its own faith and mission through its appointments. According the state the power to determine which individuals will minister to the faithful also violates the Establishment Clause, which prohibits government involvement in such ecclesiastical decisions. Hosanna-Tabor Evangelical Lutheran Church and School v. E.E.O.C., 132 S.Ct. 694 (2012).

This means that all discrimination disputes involving clergy are off limits to the civil courts. This includes not just those cases involving religious discrimination, but also those alleging discrimination based on sexual orientation or transgender status.

4. Religious schools

Title VII contains three religious exemptions for religious schools. The first, quoted above, is section 702. In addition, Title VII, Section 703(e)(2), of the Civil Rights Act of 1964 specifies:

[I]t shall not be an unlawful employment practice for a school, college, university, or other educational institution or institution of learning to hire and employ employees of a particular religion if:

  • such school, college, university, or other educational institution or institution of learning is, in whole or in substantial part, owned, supported, controlled, or managed by a particular religion or by a particular religious corporation, association, or society, or
  • if the curriculum of such school, college, university, or other educational institution or institution of learning is directed toward the propagation of a particular religion.

A federal appeals court interpreted this language as follows in a case involving a discrimination lawsuit brought against Samford University by a theology professor:

Samford says that, even if its refusal to allow Plaintiff to teach at the divinity school were not covered by the religious educational institution exemption, it is entitled to an exemption as an educational institution substantially “owned, supported, controlled or managed by a particular religion or religious corporation, association, or society.” Samford argues for a flexible interpretation of Section 703 and points to Samford’s historical ties with the [Southern Baptist] Convention, the fact that the Convention is the single largest contributor to the university, and that its Board of Trustees requires it to report to the Convention on all budgetary and operational matters. Plaintiff, on the other hand, says Samford is not “owned, supported, controlled, or managed” by a religious association because (1) the Convention no longer appoints trustees and (2) only seven percent of its budget comes from the Convention. Neither side cites precedents interpreting Section 703, and we are aware of no precedent that speaks to the issue of what it means to be “owned, supported, controlled, or managed” by a religious association.

The court quoted from another federal court ruling construing section 703(e)(2), Pime v. Loyola University of Chicago, 803 F.2d 351, 357 (7th Cir.1986):

Is the combination of a Jesuit president and nine Jesuit directors out of 22 enough to constitute substantial control or management by the Jesuit order? There is no case law pertinent to this question; the statute itself does not answer it; corporate-control and state-action analogies are too remote to be illuminating; and the legislative history, though tantalizing, is inconclusive.

The court concluded that Samford is “in substantial part” “supported” by the Convention:

“Substantial” is not defined by the statute. But the word substantial ordinarily has this meaning: “Of real worth and importance; of considerable value; valuable. Belonging to substance; actually existing; real; not seeming or imaginary; not illusive; solid; true; veritable. Something worthwhile as distinguished from something without value or merely nominal. Synonymous with material.” Black’s Law Dictionary, 1428 (6th ed. 1990). Continuing support annually totaling over four million dollars (even in the abstract, no small sum), accounting for seven percent of a university’s budget, and constituting a university’s largest single source of funding is of real worth and importance. This kind of support is neither illusory nor nominal. So, the Convention’s support is substantial. We hold—as an alternative to our Section 702 holding—that Samford qualifies as an educational institution which is in “substantial part” supported by a religious association and that the exemption protects Samford in this case.

A federal appeals court concluded that Title VII’s exemption of “religious institutions” from the ban on religious discrimination in employment applied to the school. It based this conclusion on the following considerations: (1) the university was established as a “theological” institution. (2) The university’s trustees are all Baptists. (3) Nearly 7 percent ($4 million) of the university’s budget comes from the Alabama Baptist Convention (the “Convention”)—representing the university’s largest single course of funding. (4) The university submits financial reports to the Convention, and its audited financial statements are made available to all Baptist churches in Alabama. (5) All university professors who teach religious courses must subscribe to the Baptist “statement of faith,” and this requirement is clearly set forth in the faculty handbook and in faculty contracts. (6) The university’s charter states that its chief purpose is “the promotion of the Christian religion.” (7) The university is exempt from federal income taxes as a “religious educational institution.”

5. Concerns about sweeping effects of the Court’s decision

Responding to concerns the Court’s June 15, 2020, decision “will sweep beyond Title VII to other federal or state laws that prohibit sex discrimination. And, under Title VII itself, they say sex-segregated bathrooms, locker rooms, and dress codes will prove unsustainable after our decision today.” The Court responded:

But none of these other laws are before us; we have not had the benefit of adversarial testing about the meaning of their terms, and we do not prejudge any such question today. Under Title VII, too, we do not purport to address bathrooms, locker rooms, or anything else of the kind. The only question before us is whether an employer who fires someone simply for being homosexual or transgender has discharged or otherwise discriminated against that individual “because of such individual’s sex.” . . . Whether other policies and practices might or might not qualify as unlawful discrimination or find justifications under other provisions of Title VII are questions for future cases, not these.

The employers also expressed concern that the Court’s decision may require some employers to violate their religious convictions. The Court responded:

We are also deeply concerned with preserving the promise of the free exercise of religion enshrined in our Constitution; that guarantee lies at the heart of our pluralistic society. But worries about how Title VII may intersect with religious liberties are nothing new; they even predate the statute’s passage. As a result of its deliberations in adopting the law, Congress included an express statutory exception for religious organizations. This Court has also recognized that the First Amendment can bar the application of employment discrimination laws “to claims concerning the employment relationship between a religious institution and its ministers.” Hosanna-Tabor Evangelical Lutheran Church and School v. EEOC, 565 U. S. 171 (2012). And Congress has gone a step further yet in the Religious Freedom Restoration Act of 1993 (RFRA). That statute prohibits the federal government from substantially burdening a person’s exercise of religion unless it demonstrates that doing so both furthers a compelling governmental interest and represents the least restrictive means of furthering that interest. Because RFRA operates as a kind of super statute, displacing the normal operation of other federal laws, it might supersede Title VII’s commands in appropriate cases.

But how these doctrines protecting religious liberty interact with Title VII are questions for future cases too. [The defendant funeral home] did unsuccessfully pursue a RFRA-based defense in the proceedings below. In its certiorari petition, however, the company declined to seek review of that adverse decision, and no other religious liberty claim is now before us. So while other employers in other cases may raise free exercise arguments that merit careful consideration, none of the employers before us today represent in this Court that compliance with Title VII will infringe their own religious liberties in any way.

6. Justice Alito’s dissent

Justice Alito issued a dissenting opinion in which he noted, in part:

Briefs filed by a wide range of religious groups—Christian, Jewish, and Muslim—express deep concern that the position now adopted by the Court “will trigger open conflict with faith-based employment practices of numerous churches, synagogues, mosques, and other religious institutions.” They argue that “[r]eligious organizations need employees who actually live the faith,” and that compelling a religious organization to employ individuals whose conduct flouts the tenets of the organization’s faith forces the group to communicate an objectionable message.

This problem is perhaps most acute when it comes to the employment of teachers. A school’s standards for its faculty “communicate a particular way of life to its students,” and a “violation by the faculty of those precepts” may undermine the school’s “moral teaching.” Thus, if a religious school teaches that sex outside marriage and sex reassignment procedures are immoral, the message may be lost if the school employs a teacher who is in a same-sex relationship or has undergone or is undergoing sex reassignment. Yet today’s decision may lead to Title VII claims by such teachers and applicants for employment.

At least some teachers and applicants for teaching positions may be blocked from recovering on such claims by the “ministerial exception” recognized in Hosanna-Tabor Evangelical Lutheran Church and School v. EEOC, 565 U. S. 171 (2012). Two cases now pending before the Court present the question whether teachers who provide religious instruction can be considered to be “ministers.” But even if teachers with those responsibilities qualify, what about other very visible school employees who may not qualify for the ministerial exception? Provisions of Title VII provide exemptions for certain religious organizations and schools “with respect to the employment of individuals of a particular religion to perform work connected with the carrying on” of the “activities” of the organization or school, 42 U. S. C. §2000e–1(a); see also §2000e–2(e)(2), but the scope of these provisions is disputed, and as interpreted by some lower courts, they provide only narrow protection.

The November 2019 Church Law & Tax Advantage Member article previewed the cases before the United States Supreme Court. The article and included five steps that churches and religious organizations holding traditionally orthodox views of human sexuality could take if the Court decided to expand the definition of “sex” under Title VII.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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