Image: AdobeStock/Marzky Ragsac Jr.

Unpaid Church Payroll Taxes: A Hidden Liability for Churches and Leaders

A recent case in the for-profit world underscores the potential threat.

Matthew Branaugh

“A company’s CFO is liable for its past-due employment taxes,” a court says.

He had control over the company’s bank account and oversaw all aspects of the firm’s operations and finances, including payroll, tax return preparation and personnel matters.

The man also knew that the firm failed to deposit payroll taxes and file tax returns when due. He had check-signing authority and paid creditors before the IRS. That makes him liable for the tax shortfall” (The Kiplinger Tax Letter, Feb. 8, 2019).

The Church Law & Tax Take

The case referenced by The Kiplinger Tax Letter involved a motion for summary judgment by the government against the company’s CFO, a certified public accountant who was caught in 2009 embezzling from the company. The CFO’s actions resulted in more than five years of unpaid payroll withholding taxes by the company, or more than $11 million total. Throughout the scheme, the CFO told the company’s board the company was financially strong and meeting all of its tax obligations.

The CFO was charged with first-degree felony theft of property worth over $200,000 in 2013, pled guilty, and was sentenced to 10 years in prison.

$4.3 million in penalties

Separately, the IRS instituted $4.3 million in penalties against the company’s founder, indicating he faced personal liability as a “responsible person” of the company.

The estate of the founder, who had since died, legally challenged the penalties, prompting the government to file a counterclaim naming both the founder and the CFO. Earlier this year, a federal district court in Texas found the now-imprisoned CFO was a “responsible person” and ruled his “failure to pay taxes was willful,” making him responsible for the $4.3 million, plus interest.

Why is this issue relevant to churches?

The IRS watches this issue closely, doling out billions of dollars in fines and penalties for unpaid employment taxes every year. This means pastors and church board chairs must make certain all employment-related taxes are being withheld and remitted, on time and in full, every quarter. Failure to do so can lead to fines and penalties for both churches and individuals alike.

Get more help on payroll matters through CPA Elaine Sommerville’s book, Church Compensation – Second Edition: From Strategic Plan to Compliance.

Could You Raffle Away Your Tax-Exempt Status?

Insights on a common misconception that gaming is a “charitable” activity

The Editors

Bio

Last Reviewed: October 30, 2024

Congregations that raise funds through raffles, bingo nights, or other games of chance would be wise to familiarize themselves with IRS Publication 3079, “Tax-Exempt Organizations and Gaming.” Here is an excerpt that specifically addresses 501(c)(3) organizations—including churches:

An organization may qualify for exemption under IRC Section 501(c)(3) if it is organized and operated exclusively for religious, charitable, scientific, literary or educational purposes or for the purposes of testing for public safety, fostering national or international amateur sports competition or preventing cruelty to children or animals. To be exempt under Section 501(c)(3), an organization must engage in activities that accomplish one or more of these purposes. Examples of Section 501(c)(3) organizations include schools, churches and non-profit hospitals.

A common misconception is that gaming is a “charitable” activity. There is nothing inherently charitable about gaming. It is a recreational activity and a business. Although a charity may use the proceeds from gaming to pay expenses associated with its charitable programs, gaming itself does not further any charitable purpose. Thus, gaming cannot be a more than an insubstantial purpose of a 501(c)(3) organization. . . .

An organization puts its exempt status in jeopardy when gaming results in inurement or prohibited private benefit to individuals, or where funds from the activity are diverted for private purposes.

A charity conducting gaming as an insubstantial part of its activities will not ordinarily jeopardize its tax-exempt status but may be subject to the tax on unrelated business income. . . .

The IRS determines whether an organization is conducting a “substantial” unrelated activity by examining all the facts and circumstances. There is no “bright-line” or numerical test prescribed by the [Internal Revenue Code]. The IRS will consider the dollars raised by and spent on an unrelated activity as well as the time and other resources devoted to it in making the determination of substantiality.

The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.

Image: LumineImages | Getty

Q&A: What Do We Need to Know About Outsourcing Financial Tasks?

Keep these factors mind: cost, security, and savings.

David Fletcher, Founder of XPastor.org

Bio

Last Reviewed: November 21, 2023

Q: My church is considering outsourcing our financial roles. If we choose to do this, what should we keep in mind as we search for the right outsourcing service?

When a church considers outsourcing its financial roles, there are a few key factors to keep in mind: cost, security, and savings.

As for the security or risk factor, you need to be aware that, in essence, you are handing your church’s bank accounts over to an outside service. But this doesn’t have to be viewed as a negative—especially if you land a reputable firm.

“Internal controls are a key area where churches are at risk,” writes Sam Yeo, a partner at ChurchWest Insurance Services, in an online article about outsourcing bookkeeping. “Having someone outside of the financial system reconciling your bank accounts, tracking and verifying your deposits and checks means there is a second set of eyes going over all of your system, increasing the safeguarding of your congregation’s resources.”

Justin Spicer, president of Empower Consulting, offered the following pointers on what a church should consider when evaluating each financial outsourcing service:

Church experience

What kind of direct experience does the firm and its staff have in local church financial leadership, including a deep understanding of the “language of church”?

Client profile

Does the firm have a focus on serving churches, or is it a side segment of its client base? Does the service have church clients that are similar in size, budget, and financial operations to your church?

Technology

Does the service use the latest technology (cloud-based software, paperless accounting, mobile apps) and do these technologies integrate with your church’s software?

Level of expertise

Along with considering the time you might save, how much additional high-level expertise can you gain from outsourcing? I would argue that you not only want to find a bookkeeper but also a strategic partner in your ministry.

References

What do church clients say about the firm? Contact several current client references to hear about their experiences working with the firm. Again, get references from churches that are similar to your own in size, budget, and financial operations.

Cost

Does the upfront and monthly expense make sense from a cost-savings perspective (saving staff wages or reallocating current staff) and your current budget? Since the price will increase as you grow, are you willing to absorb that into your operating budget?

Regarding Justin’s thoughts on costs, I would add this advice: Look at the salary and benefits for hiring in-house staff to oversee financial operations. This easily runs from $50,000 to $150,000. That’s just the initial cost of a hire. You would also need to add in expenses such as equipment and overhead.

If you decide to pursue a service, get three bids from outsource firms. Vet the firm to ensure that each one has the highest caliber of leaders and proven integrity. Compare the costs. Then compare the “ease of use.” Will you be able to get a check cut quickly? Can you easily get reports?

Finally, you will still need a team to count and deposit the offering, unless you pay a bank to do this.

David Fletcher has more than 35 years of experience as a pastoral leader in churches. In 2003, he founded XPastor, a resource website for executive pastors, and XP-Seminar, an annual church leadership conference.

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What Are the Penalties for Pastors Who Do Not Pay Taxes?

Discover the penalties pastors face for not paying taxes and how to avoid legal and financial consequences.

Richard R. Hammar, Attorney, CPA

Bio

Last Reviewed: January 17, 2025

Q: A minister on staff at our church has never filed a federal tax return. What are the consequences?

Why Some Pastors Don’t File Taxes

It’s not uncommon for ministers to misunderstand their tax responsibilities. Some believe they are exempt from taxation, while others are unaware of specific tax rules, such as the exemption of clergy wages from income tax withholding. Ministers must either elect voluntary withholding by filing IRS Form W-4 or prepay their taxes using the estimated tax procedure (Form 1040-ES).

Failing to file can result in substantial tax debt and penalties. Below is a summary of the consequences pastors may face for not filing or paying taxes.

Penalties for Not Filing Tax Returns

Failure-to-File Penalty

The penalty is 5% of the unpaid taxes for each month or part of a month that a return is late, up to a maximum of 25% of the unpaid tax.
If the failure to file is due to fraud, the penalty increases to 15% per month, up to a maximum of 75% of the unpaid tax.
If a return is filed more than 60 days late, the minimum penalty is the smaller of $210 or 100% of the unpaid tax.
Reasonable cause, not willful neglect, can exempt pastors from this penalty.

Failure-to-Pay Penalty

The penalty is 0.5% of unpaid taxes for each month or part of a month after the due date, up to a maximum of 25% of the unpaid tax.
If a notice of intent to levy is issued, the penalty increases to 1% per month starting 10 days after the notice.
The penalty doesn’t apply during the automatic six-month extension if at least 90% of the tax liability was paid by the due date.
Reasonable cause can also exempt pastors from this penalty.

Combination of Penalties

If both failure-to-file and failure-to-pay penalties apply, the failure-to-file penalty is reduced by the failure-to-pay penalty for the same months. However, for returns filed more than 60 days late, the minimum penalty applies.

Criminal Penalties for Tax Evasion

In addition to civil penalties, failing to file tax returns may lead to criminal charges if there is a willful attempt to evade taxes. Tax evasion is a felony and carries severe penalties:

A fine of up to $100,000.
A prison sentence of up to five years.
Both a fine and imprisonment in some cases.

Criminal penalties require an affirmative act, such as filing a false return. Omissions alone are generally insufficient for prosecution. Most pastors face civil penalties rather than criminal charges.

Importance of Filing Taxes Correctly

Filing taxes correctly and on time is critical for pastors to avoid penalties and interest. The services of a qualified CPA can help ensure compliance. Churches should also educate clergy on the quarterly estimated tax procedure to prevent future issues.

FAQs About Penalties for Pastors Who Do Not Pay Taxes

Are pastors exempt from paying taxes? No, pastors must pay taxes on their ministerial income unless they qualify for specific exemptions, such as a housing allowance. Can pastors avoid penalties by claiming reasonable cause? Yes, if they can demonstrate a valid reason for not filing or paying taxes on time, they may avoid penalties. What happens if a pastor files taxes late but pays the full amount owed? They may still face a failure-to-file penalty, though the failure-to-pay penalty would not apply if the full amount was paid. Should churches educate clergy on tax requirements? Yes, educating clergy about tax filing and payment procedures helps avoid misunderstandings and potential penalties.

Conclusion

Failing to file or pay taxes can have serious consequences for pastors, including substantial penalties and possible criminal charges. Churches should ensure that their clergy understand their tax obligations and provide resources or access to tax professionals to help them stay compliant. Proactive measures can prevent financial and legal difficulties in the future.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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When the Church Office Closes for Bad Weather, Does Everyone Get Paid?

The legal—and logical—considerations regarding how to handle an office closure.

Sally Wagenmaker, Attorney

Bio

Last Reviewed: January 31, 2025

Winter weather advisories always urge caution when dealing with snow, gusty winds, ice, and bitter cold.

But how should churches address inclement weather issues for their employees? And are employees entitled to pay for time missed due to bad weather?

Combine caution and common sense

As an overarching human resources matter, caution and common sense must be practiced when it comes to inclement weather situations.

No employer should expect employees to risk life and limb to get to the office.
It may be prudent to cancel or postpone program activities, too.
Watching the weather forecast and staying attentive to public service announcements (e.g., school closings, public transit schedule adjustments) should help church leaders make responsible decisions.
Remote-working options can help as well, with employees handling tasks from home through available technology.

Understand employee classifications

With respect to employers’ pay obligations, three key factors apply: (a) whether the employees are “exempt” or “nonexempt” under the federal Fair Labor Standards Act (FLSA) and comparable state laws, (b) whether the employer is open for business, and (c) whether money matters more than morale.

The FLSA distinguishes between exempt and nonexempt employees.

To be classified as “exempt,” an employee must (a) be paid a salary, (b) of at least $455 per week, and (c) have certain skills or duties (e.g. executives, professionals, or administrative employees who regularly exercise discretion over significant matters—this is known as the “white-collar exemption”; but also note how the “ministerial exception” plays a role for certain positions).

All other employees are considered “nonexempt,” and are entitled to overtime pay and other legal protections.

On inclement weather days, exempt employees are slightly better off than nonexempt employees. The key difference is that nonexempt employees are entitled to pay only if they work, unless the business is closed.

Exempt employees, on the other hand, are entitled to pay regardless of the circumstances.

One common mistake churches make is to improperly deduct pay for exempt employees, essentially giving them unpaid leave for missed work. At least theoretically, a risk may then arise that employees may be reclassified as nonexempt based on such a pay modification. That’s why it’s better for churches to make certain that exempt employees receive their regularly scheduled compensation.

Requiring PTO in exchange for office closures

Some churches might consider making all employees to take paid leave as a result of an office closure.

Legal considerations aside, this may be a very unpopular decision.

Accordingly, churches should adopt an inclement weather policy. The policy should:

1) provide clear guidelines addressing potential use of paid leave;
2) address pay deductions for nonexempt employees’ missed work, and perhaps even offer extra paid “snow,” “cold,” or other inclement weather days when appropriate.

Sally Wagenmaker is a partner at Wagenmaker & Oberly, a law firm serving nonprofit organizations across the nation with offices in Chicago and Charleston, South Carolina. She provides legal counsel in corporate, tax, employment, and real estate matters for clients, including churches and other religious organizations, social service providers, and schools. Sally is the current president and board chair of Christian Legal Society.

Sally Wagenmaker is a founder and partner in the Chicago office of Wagenmaker & Oberly, a law firm serving churches and nonprofits nationwide. Wagenmaker currently serves as president of Christian Legal Society.

Image: getty/javier ghersi

Does Your Church Have a Capital Reserve Account?

Setting and building a capital reserve account fund can help your church prepare for inevitable future expenses.

The Editors

Bio

A capital reserve account is one that is established to save money in a designated account to pay for a major capital expenditure (replacement, repurposing, and so on) when an expensive item’s effective life is over.

For example, the average life of your church’s HVAC systems may be 15 years. If you spend $100,000 on a new HVAC system today, how much should you set aside in a reserve account to have the adequate funds to replace it in 15 years? Is it $100,000? More? Less?

Here are five considerations that will help determine future costs and develop a capital reserve account for any inevitable expenditures:

Deferred maintenance. If you have any deferred maintenance, you must develop a plan to bring things current based on their age and expected life. If that is not done prior to developing the ongoing capital reserves, you will always be playing catch up.

Current replacement value. What would it cost today to replace the item?

Expected life. How many years of life are still expected from this item?

Annual inflation. As you look at the economic environment, what percentage of annual inflation would be prudent to plan on?

Annual budget. Based on the above four considerations, how much money should be set aside every year?

Adapted from 5 Intentional Steps to Establish a Capital Reserve Account, an eBook from the Cool Solutions Group.

The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.

Image: AdobeStock/Farknot Architect

Church Board Member Removal: Handle With Care

Avoid potential litigation and internal strife with proper bylaws, policies, and procedures.

Myron Steeves

When Conflict Arises

One of the toughest challenges a church board may face is removing one of its own members—especially when the pastor, congregation, or other board members initiate the process. Unfortunately, many churches lack clear procedures, and that can lead to costly legal battles.

Real-World Example

In one case, several church members accused two board members of moral failings and demanded their removal. The board expected a quick resolution. Instead:

The church’s bylaws were unclear.
The accused members saw the move as personal and refused to step down.
Tensions escalated into a lawsuit.

After two years in court, the church was left deeply in debt and barely survived. The primary cause? An inadequate removal process in the bylaws.

Preventing Litigation and Disruption

To avoid this kind of turmoil, churches should:

Review their state laws, articles of incorporation, and bylaws related to board member removal.
Add a clearly written provision to the bylaws if one doesn’t exist.
Address this issue while the board is stable—not during a crisis.

Why Remove a Board Member?

Reasons for removal can include:

Health or job issues affecting a member’s ability to serve
Departures from church doctrine or lifestyle standards
Personality conflicts that disrupt board function

Most churches rarely face this issue. Often, members serve short terms (1–3 years), or willingly resign when asked. But when they don’t, problems can escalate quickly.

What State Law Says

When bylaws are silent, state nonprofit laws apply. These laws vary by state and fall into three categories:

1. Removal for Any Reason

Some states allow:

The group that elected a board member (either the board or the congregation) to also remove them, for any reason.
A simple vote—no cause required.

This is the simplest approach and minimizes legal risk. It aligns with the Model Nonprofit Corporation Act, followed by many states.

2. Removal for Cause Only

Other states allow removal only for specific, serious reasons, such as:

Mental incompetence (as declared by a court)
Felony conviction
Chronic absence from meetings
Failure to meet membership standards

But what qualifies as “cause” under these laws may not include doctrinal or lifestyle concerns—issues that are often critical for churches.

3. No Guidance at All

Some states offer no rules at all. In those cases, churches face legal uncertainty unless their bylaws clearly address removal procedures.

Why Bylaws Matter

State laws typically act as default rules. Churches can override them by writing their own standards into their bylaws or articles of incorporation.

A well-crafted bylaw provision:

Provides clarity for both the church and the courts
Helps prevent drawn-out conflicts
Aligns with the church’s governance needs

Drafting Bylaws for Two Audiences

Church bylaws must speak to:

Church leaders, who will apply them
Courts, who may need to interpret them

Vague spiritual language—like removing a member for “ungodly behavior”—can be difficult for courts to enforce.

Instead, bylaws should:

Specify who makes the decision (e.g., the pastor, after counseling)
Describe the process clearly
Avoid requiring courts to define religious standards

This approach allows courts to defer to church leadership without violating First Amendment protections.

Three Approaches to Board Member Removal

Churches typically use one of three approaches in their bylaws:

1. Removal by the Membership

This is most common when members elect the board.

Pros:

Aligns with congregational polity
Reflects the authority of the church body

Challenges:

Members may lack access to sensitive information
Difficult to make factual determinations in disputes
Annual meetings may delay action

Best Practices:

Allow removal for any reason, not just “cause”
Include provisions for special meetings with adequate notice
Avoid requiring the congregation to determine whether standards were violated

Model Language:

“The membership of the church may remove, with or without cause, one or more board members at a meeting of the church membership.”

Or:

“The membership of the church may remove one or more board members at a meeting of the membership for the following reasons: [list cause].”

Notice Requirements:

Notice must be provided at least two weeks in advance.
Include the date, time, location, and purpose of the meeting.
Clearly name the board member(s) whose removal will be considered.

Avoid ambiguous terms like “posted notice.” Use precise language (e.g., “publication in the church newsletter”).

Member Rights:

State whether the board member may attend and speak before the vote.
This adds fairness and transparency—even if tensions are high.

2. Removal by the Board

This is common in churches without a membership model. The board is “self-perpetuating” and governs itself.

Pros:

Efficient decision-making
Board members are often well-informed and meet frequently

Risks:

Can be politicized in divided boards

Safeguards:

Add removal standards, such as:
- Excessive missed meetings
- Doctrinal or lifestyle conflicts
- Criminal conduct
- Disruptive behavior

Optional Strategy:

Use shorter board terms (e.g., one year) to reduce the need for mid-term removals.

3. Removal by a Designator

Though less common, this approach can be useful.

A designator could be:

A denominational leader
A nominating committee
A specific individual or group

Advantages:

Brings outside expertise and objectivity
Can focus on spiritual concerns, not politics
Reduces conflict of interest

Cautions:

Avoid giving too much power to one person
Use a group to ensure accountability

Final Thoughts: Prepare Before Problems Arise

Disputes over board member removal can be painful and divisive. Often, the issue is resolved when a board member steps down voluntarily. But that’s not always the case.

Every church should:

Develop a clear bylaw provision for removal
Ensure the provision aligns with state law and church polity
Review and update governing documents before conflict arises

Doing so protects the church, its mission, and its people from unnecessary risk and damage.

Attorney Myron Steeves has practiced law for more than 25 years in California. He founded the Church Law Center of California (ChurchLawCenter.com) in 1995, where he continues to help meet the legal needs of churches and nonprofit organizations. Steeves also was dean of Trinity Law School from 2010 to 2016. He is an active member of the American Bar Association’s Model Nonprofit Corporation Act Subcommittee.

Image: Getty

Minimizing the Risks of Child Molestation in Churches

Our checklist can help your church protects the most vulnerable members from abuse and molestation.

Richard R. Hammar, Attorney, CPA

Bio

From a 5-Step to a 14-Step Approach

For years, I followed a five-step process to help prevent child sexual abuse in churches:

A written application
An interview
Reference checks
A six-month rule (no one may serve in youth or children’s ministry unless they’ve been a church member for at least six months)
A two-adult rule (no child should be alone with one unrelated adult)

Later, I added a sixth precaution: criminal background checks using national databases and sex offender registries.

Now, based on recent legal cases, public sentiment, and best practices, I recommend a 14-step plan to reduce the risk of abuse more thoroughly.

14-Step Plan to Protect Children in Church Settings

Key Point: These steps are designed first and foremost to protect children—not just to manage risk. Churches that prioritize safety over liability tend to maintain better long-term compliance.

1. Conduct Interviews

Interview all applicants—both paid and volunteer—who seek to work with children or youth. Interviews offer a chance to:

Explore backgrounds
Assess fit for ministry roles
Clarify expectations

2. Require Written Applications

Applications should include:

Full name and address
List of youth-serving organizations where the applicant has volunteered or worked
Explanation of any criminal convictions
At least two personal references

3. Obtain Institutional References

The most reliable references come from organizations where the applicant previously worked with minors.

Ask if the applicant is known to pose a risk to children.
If institutional references aren’t available, collect personal references—preferably from church members or trusted community members.
For pastors, references from denominational offices or previous churches are best.

If you don’t receive a written reply, call the reference and document:

Who was contacted
Date and time of contact
Questions asked
Summary of the conversation
Names of both caller and witness (if applicable)

🛑 Caution: Some states require criminal background checks for childcare workers. Check with legal counsel for state-specific rules.

4. Follow a Six-Month Rule

Only allow volunteers who’ve been church members for at least six months to serve with children. This gives time to evaluate their behavior and motives.

5. Benchmark Your Policies

Compare your procedures to those of:

Public schools
Charities like the YMCA, Boy Scouts, and Girl Scouts

Aligning with these organizations can help demonstrate that your church is acting reasonably.

6. Legal Review of Policies

Have an attorney periodically review your safety policies to ensure they meet legal standards and best practices.

7. Enforce a Two-Adult Rule

No minor should ever be alone with one unrelated adult on church property or during church activities.

Note: Some churches follow public school models, allowing one adult with multiple children in a classroom during regular hours. This is generally seen as legally acceptable.

Examples of violations:

A tent shared by one adult and three boys during a church campout
A youth pastor driving one teen home alone after an event

8. Conduct Criminal Background Checks

Run a nationwide search of:

Sex offender registries
National criminal records

🚫 Never allow individuals on a sex offender registry to serve with minors.

If uncertain about a conviction, use public school eligibility as your standard.

9. Report Known or Suspected Abuse Promptly

Know your state’s child abuse reporting laws. In many cases, reports must be made within 24 hours.

Always report if you have reasonable suspicion.

Benefits of prompt reporting:

Legal compliance
Avoids criminal and civil penalties
Protects victims
Helps flag abusers for other churches and organizations
Reduces public backlash if additional abuse occurs

📝 Document your report. Include the date, agency, name of reporter, and a witness if possible.

Key Point: You’re not required to investigate—only to report suspected abuse.

10. Confront High-Risk Behaviors Immediately

Watch for these grooming behaviors:

Minors spending unsupervised time at a leader’s home
Sleepovers at a leader’s home or hotel
One-on-one car rides or trips with unrelated minors
Gift-giving to unrelated minors

Shut these behaviors down immediately.

Prohibit private messaging between youth leaders and unrelated minors.

✔ Check with local school districts to understand their policies on adult–minor communication.

12. Use Video Technology

Install cameras in high-risk areas to:

Deter abuse
Protect staff from false accusations

Best camera locations:

Nursery areas (where young children can’t report abuse)
Hallways outside children’s restrooms

13. Provide Regular Training

Train volunteers and staff on:

Identifying abuse
Reporting abuse
Your church’s prevention policies

Invite experts from child abuse hotlines or prosecutors’ offices to support your training.

14. Prevent Negligent Supervision

Even with proper screening, churches can still be liable for poor supervision.

Avoid negligence by:

Locking unused rooms
Using video monitoring
Maintaining adequate adult supervision
Enforcing the two-adult rule
Only releasing minors to approved adults
Being extra vigilant during off-site activities
Barring sex offenders from all youth and children’s events

Key Point: Reframe these steps as child protection—not risk management. When leaders are motivated by care rather than liability, compliance is stronger and more consistent.

Legal Case Example: Andrews v. Cronin (Mass. Super. 2018)

The Massachusetts Supreme Judicial Court ruled that a Catholic diocese could be held liable for negligent supervision and retention, though not for negligent hiring.

Case Summary:

A priest took two altar boys on multiple overnight trips where he allegedly molested them.
The boys later sued the diocese for failing to stop the abuse.

Findings:

The diocese was not liable for negligent hiring—there was no evidence of prior abuse.
The court found sufficient evidence that the bishop “should have known” about the priest’s ongoing contact with the boys and failed to intervene.

Key Takeaway: Churches can be held liable if they fail to act on warning signs, even if the initial hire seemed appropriate.

The Growing Public Outrage

Public anger toward churches mishandling abuse claims has intensified. Three recent developments illustrate this shift:

1. Pennsylvania Grand Jury Report (2018)

Investigated abuse in six Catholic dioceses:

Found 300+ predator priests
Identified 1,000+ known child victims
Triggered a federal investigation and calls for mass resignations

2. Brooklyn Diocese Settlement (2018)

The diocese paid $28.5 million to four men abused by a priest—one of the largest per-victim settlements ever.

3. Federal Law: Protecting Young Victims from Sexual Abuse Act (2017)

Passed after hundreds of young athletes were abused in USA Gymnastics and other youth sports.

Spurred by victim testimony and congressional outrage
Reinforced the need for mandatory reporting and prevention in all youth-serving organizations

Final Thoughts for Church Leaders

Public tolerance for mishandling child abuse is gone. Today’s juries—and communities—expect churches to take strong, proactive steps to protect minors.

Now is the time to review your policies, close the gaps, and reaffirm your church’s commitment to safety.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Image: Rawpixel |Getty

Does Our Church Owe Unrelated Business Income on Goods Sold?

Understand how selling certain items may affect your church’s tax burden as it pertains to unrelated business income.

Frank Sommerville, Attorney, CPA

Bio

Last Reviewed: January 21, 2025

Q: We are considering selling T-shirts, coffee cups, water bottles, and other items in our church’s welcome center. These items have our church logo on them. Does the logo make them “related” to our nonprofit status, or does this create unrelated business income?

Does it make a difference if the proceeds go to, say, “youth missions” versus church revenue? And lastly, do you have any insights on paying sales tax on such items?

First off, it doesn’t matter if your proceeds go toward youth missions or your general revenue budget. What matters is whether or not the items being sold are substantially related to your exempt purposes. Something does not become “related” just because you put your church logo on it.

Determining whether or not an item creates unrelated business income must be determined through an item-by-item analysis. For example, let’s say you sell a T-shirt with a scripture verse or a Christian symbol—like a cross—on it and the shirt comes with a gospel tract or instructions on how to become a Christian. The sale of a T-shirt in this manner is more likely substantially related to the exempt purposes of spreading the gospel.

Finally, sales tax is determined on a state-by-state basis. Many churches confuse the exemption from paying sales tax with an exemption from collecting sales tax. Most states do not exempt churches from collecting sales tax on taxable transactions.

If the church is required to collect sales tax, then these items will likely create a sales tax obligation. As a result, a church that conducts taxable transactions is required to have a sales tax permit. You should check with your state revenue department for the applicability of sales tax to a specific type of sale.

I advise my own church clients to get me involved early on in the process of idea development, so I can help them avoid unrelated business income. I must give you similar advice: Don’t proceed before receiving expert advice from a tax attorney who has experience with churches.

Frank Sommerville is both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.

Image: AdobeStock/VIK

How to Reduce EPLI Costs and Claims

Best practices for preventing lawsuits.

Bobby Ross Jr.

Experts agree that your church can save money on its liability insurance (EPLI) policy while lowering claims.

Reducing risk from the start

“The best way to prevent these claims is to manage employees well,” said GuideOne’s Brian Gleason. “This policy is intended to be a backstop if everything should go wrong.”

Gleason recommends preventive steps starting before hiring, with a thorough application process that includes background screenings. After hiring, he recommends regular performance appraisals that allow communication about an employee’s performance and include expectations for the future.

“Clear lines of supervision are important,” Gleason said. “It helps to have a defined understanding of expectations of the employee and for the supervisor to communicate them.”

Establish clear policies and procedures

Attorney Thomas Bentz said having employment policies in place and written in a handbook format are essential. So is having someone designated to handle issues that arise. “If you can demonstrate you have these to your underwriter, they’ll be much more willing to give you a better rate,” said Bentz, who specializes in insurance law.

Seek legal advice before taking action

Attorney Nathan Adams’ practices include labor, employment, and benefits law. He said it’s important for churches to consider whether their employment practices are good and whether they’re followed consistently.

“Sometimes we’ll get calls from a client after they’ve released an employee, and you wish they would have contacted a lawyer beforehand,” Adams said. “Had they taken two or three different steps than they actually took, they might have minimized the claim or prevented it altogether. If you’ve consulted with a professional on the front end before taking adverse action, that’s usually better than waiting until afterward.”

Update policies and procedures as needed

Attorney Tiffany Releford has expertise in labor and employment law. She said claim prevention is the best way to keep EPLI premium costs low.

Releford advocates updating employee handbooks. She also suggests updating policies that prevent discrimination and harassment as well as those that address theft, fraud, and embezzlement.

“You have to think of EPLI as any other insurance,” she said. “The day you don’t have it is the day you’re going to have an issue. But you’re best served by making sure you have the correct policies in place, not just to reduce your liability but to provide you with a defense in case there is some sort of occurrence that arises.”

Brotherhood Mutual’s Steve Case agrees.

“Reducing the cost of the insurance and reducing the risk of a claim go hand in hand,” Case said. “One of the best things that ministries can do on the front end is make sure that, through their employee handbook and through their interview and hiring process, that they’re clearly communicating their sincerely held beliefs, their standards of conduct, and their behavioral expectations for their staff. They also must clearly communicate their harassment policy and their discipline policy, and reaffirm that the employment is at-will employment, that you can be terminated for any reason that’s not illegal.”

Understanding state and federal employment laws is critical for churches, said Attorney Frank Sommerville, specifically because churches aren’t the typical employers in the sense that for-profit businesses may be.

“Churches cannot assume just because they’re a church that none of the employment laws apply,” he said. “That’s just not true; all of these employment laws apply in one shape or another.”

See also:

“Employee Lawsuits Against Churches Are on the Rise”
“What You Need in an EPLI Policy”

Board Monitoring of Church Finances: What to Do—and When

A step-by-step guide for meetings.

Rob Faulk

Below is a summary of financial actions your board finance/audit committee should complete during their meetings throughout the year. It outlines a minimum of three meetings that a combined church finance/audit committee should have, and the tasks that should be completed in each meeting. Due to the amount of agenda items covered in each meeting, the board may decide to separate these into multiple meetings to shorten the agenda for each.

Tasks that should be completed by the audit committee are marked with an (A). Note that some states have laws prohibiting the combination of these two committees. If so, the duties below should be separated by committee.

It’s important to emphasize that this model assumes the committee has skilled members with a financial background. The frequency of meetings and the tasks covered in each meeting may be more or less than outlined below, depending on the number of meetings and whether the committee is combined or split out into separate audit and finance committees.

Standing agenda listing for finance/audit committee with a fiscal year-end of December 31

Reminder: Minutes should be maintained for all meetings

MEETING 1: FALL MEETING MINUTES

Budget approval
Approval of audit firm services, if any (A)
Review and approval of miscellaneous auditor services, if any (A)
Review of progress on auditor comment letter items (A)
Financial reporting risk evaluation
External auditor engagement scope and audit plan review, if any (A)
Discussion and approval of estimates and judgments
Review of internal audit report, if available (A)
Review of fraud risk
Review of unique transaction report
Review of agreements report
Review of service organization controls, if any [AICPA, Professional Standards, AU sec. 324]
Review of annual conflict of interest questionnaire completed by each board member and senior managers of the church
Review/approval of housing allowances for the next year (the IRS requires housing allowances to be approved by the board on a prospective basis)
Review of policies and procedures in effect for determining executive compensation and benefits. (This committee would not set or suggest compensation and benefits, just monitor the system in place to review them.)
Review of unrelated business income (UBI)
Review of internal control cycles (including documentation) and inquiry about any significant changes
Executive sessions or a session where only the board members (no management) and specific outside parties are present.
- Financial Secretary
- Treasurer
  Note: If any issues of concerns are raised to the committee, within its scope of responsibility the committee should cause an investigation to be made and report such to the board.
MEETING 2: SPRING MEETING MINUTES
1. Review of whistleblower activity, if any (A)
2. Review of code of conduct for continued adequacy
3. Review of internal control cycles (including documentation) and inquiry about any significant changes
4. Review of override of controls
5. Audit and accounting update
6. Review of conflict of interest transactions
7. Review of the internal audit function, if applicable (A)
8. Review of master vendor report
9. Executive sessions
  - Executive Pastor
  - Auditor’s communication with those charged with governance auditor meeting [AICPA, Professional Standards, AU sec. 380]. This occurs between assessment and final fieldwork; determine the extent of reliance on internal auditor’s work, if applicable (A).
    Note: If any issues of concern are raised to the committee within its scope of responsibility, the committee should cause an investigation to be made and report such to the board.
10. MEETING 3: SUMMER MEETING MINUTES
  1. Review and acceptance of external auditor reports, if any (A)
  2. Evaluation of external auditor performance, if applicable (A)
  3. Review and adjustment of agenda for the next 12 months
  4. Review of the findings of any examinations by regulatory agencies (including taxing authorities, local, state, and national), if any (A)
  5. Reaffirm finance/audit committee charter
    
    Appropriate membership?
    
    Appropriate work cycle?
    
    Self-evaluation by both committees
    
    Assessment/self-evaluation by finance staff
    
    Review of loan agreements and debt covenants
    
    Review of internal control cycles (including documentation) and inquiry about any significant changes
    
    Executive sessions:
    
    CIO
    
    Senior/Lead Pastor
    
    General Counsel
    
    External Auditor (A)
    Note: If any issues of concern are raised to the committee within its scope of responsibility, the committee should cause an investigation to be made and report such to the board.
    
    Cycles control reviews
    
    Consider ways to improve these controls and whether the accounting and financial policies are adequate.
    
    Discuss during Meeting 1
    
    Assets
    Liabilities
    Net assets
    Override of controls
    
    Discuss during Meeting 2
    
    Support/Online giving
    Revenue
    
    Discuss during Meeting 3
    
    Compliance
    Unique transactions
    Fraud
    Expenses/Electronic payments
    
    Rob Faulk is partner and church and denomination services director at the accounting firm CapinCrouse LLP, which offers the Church Financial Health Index. Rob has more than 40 years of financial leadership experience in serving both for-profit and nonprofit entities, as well as more than eight years of direct ministry experience as executive pastor and CFO of large churches. He previously served with a Big Six accounting firm, where he was the lead manager on the project that developed the COSO Internal Control framework. Rob holds an MA in ministry management from Azusa Pacific University Graduate School of Theology.

Image: Westend61 | Getty

The Role of Your Church Board in Providing Financial Oversight

Consider the value of strong finance and audit subcommittees with specific responsibilities.

Rob Faulk

Balancing Ministry and Management

Church boards typically focus on two key areas:

Faith-based governance
Business and stewardship oversight

Both are essential. A weakness in either can undermine the church’s overall governance.

Too often, boards lean heavily in one direction:

Some prioritize mission but lack fiscal discipline.
Others run strong operations but drift from the church’s spiritual vision.

As a former executive pastor, I’ve worked at the intersection of both. In this article, I focus on the business and stewardship responsibilities church boards must manage well.

Who’s Watching the Church’s Finances?

When I meet with a new church client through my work at CapinCrouse, one of my first questions is:

“Who’s monitoring the church’s finances?”

The answers vary:

An elder
A subcommittee of the board
Or—alarmingly—no one

In some churches, the bookkeeper or executive pastor is tasked with oversight. But if that person is also producing or receiving the financial reports, they may lack the time or expertise to use the information strategically.

Why This Matters

Without proper review and insight:

Financial reporting may be incomplete or inaccurate
The board may lack the data needed for sound decisions
The church’s financial health could deteriorate silently

What to Do

Churches should:

Hire skilled accounting staff to manage financial records
Train staff to prepare reports that meet the board’s needs—timely, accurate, and relevant

What Should the Board Monitor?

Regardless of who handles the day-to-day work, the board holds ultimate fiduciary responsibility.

Key Oversight Areas

Church boards should:

Monitor overall financial health and trends
Maintain adequate reserves
Protect investments
Enforce internal controls to reduce fraud risk

Ask the Right Questions

Board members should regularly consider:

Are we using financial resources effectively?
How do we compare to similar churches?
What indicators should we monitor—and how?
Are we financially healthy?

See the “Additional Reading” section for key ratios and measurements to track.

Structuring Financial Oversight

Board structures vary, especially across denominations. Some are fixed by denominational rules; others are more flexible.

But effectiveness depends on who serves—not how many committees exist.

Who Should Serve?

Key qualifications for financial oversight roles:

Business owners
CFOs, accountants, or controllers
Experience with nonprofit financials
Understanding of internal controls

Finance Committee vs. Audit Committee

Many churches use one committee to handle both roles. But these responsibilities differ—and some states prohibit combining them.

Finance Committee Responsibilities

Develop and monitor the annual budget
Ensure regular financial statements
Set policies for maintaining appropriate reserves

Audit Committee Responsibilities

Verify that financial policies are followed
Confirm controls are effective
Oversee annual budget approvals
Review financial statements
Monitor reserve levels
Work with external auditors
Address and implement audit findings

Can One Committee Do Both?

In some churches, yes—if state law allows. But combining the roles:

Increases the workload
Can deter volunteers
Reduces checks and balances

Practical Alternatives

If splitting the committees isn’t feasible, consider this approach:

Create an Audit Committee as a subset of the Finance Committee
Appoint 2–3 Finance Committee members to serve on the Audit Committee
Have the Audit Committee report to the Finance Committee, which reports to the board

Important Note

Executive pastors and church staff should not serve on the Audit Committee
- Their roles present conflicts of interest
- They may attend meetings to answer questions—but should not vote or serve

Planning for Better Financial Oversight

Establishing effective financial oversight takes time and training. Medium-sized churches, in particular, may need:

Dedicated training for elders or committee members
A clear plan for gathering, presenting, and reviewing financial information

Why It Matters

When your board receives the right information—consistently and accurately—it can:

Monitor reserves effectively
Make strategic decisions
Steer the church toward long-term sustainability and growth

Additional Reading

For specific help monitoring and measuring key financial ratios, see these articles by CPA and Church Law & Tax editorial advisor Vonna Laue:

The ratios and measurements in Laue’s article are based on metrics developed for CapinCrouse’s Church Financial Health Index.

For a summary of financial actions the board finance/audit committee should complete during meetings throughout the year, see “Board Monitoring of Church Finances: What to Do—and When.”

Rob Faulk is partner and church and denomination services director at the accounting firm CapinCrouse LLP, which offers the Church Financial Health Index. Rob has more than 40 years of financial leadership experience in serving both for-profit and nonprofit entities, as well as more than eight years of direct ministry experience as executive pastor and CFO of large churches. He previously served with a Big Six accounting firm, where he was the lead manager on the project that developed the COSO Internal Control framework. Rob holds an MA in ministry management from Azusa Pacific University Graduate School of Theology.

Image: baona | Getty

Home Equity for Pastors: Helping Your Pastor Build Financial Stability

How equity allowances help pastors build financial security while living in church-provided housing.

Richard R. Hammar, Attorney, CPA

Bio

Last Reviewed: January 17, 2025

Ministers who live in church-owned parsonages often miss out on a critical benefit of home ownership: the ability to accumulate equity in a home over the years. Without this equity, many pastors face significant financial challenges during retirement.

Understanding the Challenge of Parsonage Living

Many ministers who have spent most of their active ministry living in parsonages retire without housing. In contrast, pastors who purchased homes earlier in their careers often retire with homes that are either substantially or completely paid off.

Learn more: Chapter 6 of our annual “Church & Clergy Tax Guide” covers equity allowances in depth.

Equity Allowances: A Practical Solution

To address this issue, some churches increase their minister’s compensation by providing an equity allowance. This allowance can offer pastors a similar financial benefit to building home equity. Key considerations include:

The equity allowance should not be accessible by the minister until retirement.
Many churches choose to deposit the allowance directly into a tax-sheltered retirement account.

Recommendation: Equity allowances should also be considered for pastors who rent their homes.

Potential Pitfalls of Gifting the Parsonage

Some churches attempt to address the lack of home equity by transferring ownership of the parsonage to the minister upon retirement. However, this approach can create several problems:

The value of the home is taxable income, leading to a significant tax burden for the pastor.
The transaction may create unreasonable compensation and result in intermediate sanctions for both the church and its decision-makers.

For More Information

FAQs About Home Equity for Pastors

What is a parsonage?

A parsonage is a home provided by a church for its minister to live in while serving the congregation.

What is an equity allowance?

An equity allowance is additional compensation provided to pastors to help them build financial security similar to home equity.

How can equity allowances benefit pastors?

Equity allowances allow pastors to accumulate retirement savings that can help with housing costs after they retire.

What are the tax implications of transferring a parsonage?

Transferring a parsonage to a pastor as a retirement gift can result in a significant tax burden, as the value of the home must be reported as taxable income.

Conclusion

Churches can help their pastors build financial security by implementing equity allowances. This proactive approach can prevent housing-related challenges during retirement and demonstrate care for the long-term well-being of ministers.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Image: AdobeStock/agongallud

Can My Church Force Me to Retire at Age 65?

The legal and ministry considerations of an age-based retirement policy.

David Fletcher

Last Reviewed: January 28, 2025

Q: I just got out of a meeting with my executive pastor. He told me that the church has a policy that pastors have to retire at age 65. I don’t get it. I’m effective in my role, love it, and have a good five to ten years of ministry left in me. What should I do?

Ouch. I’m so sorry to hear this. I strongly disagree with such a policy. You have great ministry ahead of you … somewhere!

When it comes to non-pastors, there are many rules about age discrimination. When it comes to pastors, the rules are different.

Attorney Richard Hammar, senior editor of Church Law & Tax, cites an age discrimination case from a federal appeals court. The ruling said: “We believe that the free exercise of religion clause of the First Amendment also prohibits the courts from deciding cases such as this one. Personnel decisions by church-affiliated institutions affecting clergy are per se religious matters and cannot be reviewed by civil courts.” Separately, Richard covers other cases that show a more mixed position on this issue.

Going deeper, the United States Supreme Court’s 2012 ruling in Hosanna-Tabor Evangelical Lutheran Church and School v. Equal Employment Opportunity Commission reaffirmed the constitutional protection churches receive when it comes to the selection and dismissal of their ministers. Writing for the Court in its unanimous decision, Chief Justice John Roberts noted:

“Seeking to escape the control of the national church, the Puritans fled to New England, where they hoped to elect their own ministers and establish their own modes of worship …. It was against this background that the First Amendment was adopted. Familiar with life under the established Church of England, the founding generation sought to foreclose the possibility of a national church. By forbidding the “establishment of religion” and guaranteeing the “free exercise thereof,” the Religion Clauses ensured that the new Federal Government—unlike the English Crown—would have no role in filling ecclesiastical offices. The Establishment Clause prevents the Government from appointing ministers, and the Free Exercise Clause prevents it from interfering with the freedom of religious groups to select their own.”

From a legal perspective, it appears it will be difficult for you to challenge your church’s forced-retirement policy. Consulting with qualified legal counsel is still wise. But even if the legal grounds for a challenge don’t exist, you still can appeal the policy to your church’s governing board. Ultimately, they are responsible for all policies in the church.

On a broader level, I strongly recommend against age-based retirement policies for pastors. Older pastors have enormous wisdom and experience. They are vital to mentoring younger pastors and to doing effective ministry in the church.

Image: Douglas Sacha | Getty

Can People Donate Savings Bonds to the Church?

What to do if someone donates a US Savings Bond to your church.

Frank Sommerville, Attorney, CPA

Bio

Last Reviewed: January 23, 2025

Q: I just recently received a donation of a US Savings Bond. I have been a church administrator for 30 years and have never processed such a donation. What do I need to know in order to accept this contribution and issue a receipt?

US Savings Bonds are nontransferable. This means that the owner may not donate them to the church. The church may not issue a charitable contribution receipt because the donor does not have the power to transfer the bond to the church. As a result, the church did not secure ownership of the bond. Without an ownership transfer, there is no deduction. If the donor wants to have the savings bond reissued in the name of the church, the donor must cash the bond. The donor then must recognize the interest income at the time of the reissuance.

Frank Sommerville is both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.

Image: AdobeStock/Gatherina

When Should a Church Board Vote Be Unanimous?

Requiring unanimous approval can easily immobilize the church when it comes to important decisions

Michael E. Batts, CPA

Bio

My church’s governing elder board recently had a vote to lay off an employee, and the vote was not unanimous. Some board members believe that important decisions like this one should be unanimous. As you can imagine, trying to get unanimity on any vote can be extremely difficult.

Even if we instituted some sort of a quorum, we would still have a problem because we currently have eight voting members. A tie would keep us from moving forward with a decision.

Another complication: My church is nondenominational and so we can’t receive guidance from a denominational authority.

How should my church resolve this problem?

While many churches and ministries find it comforting and reassuring to have unanimity on significant decisions, that can be a difficult standard to apply to every decision. While it is ultimately a matter of judgment and discernment as to what your church’s governance policy should be in this area, you’ve discovered that requiring unanimous approval can easily immobilize the church when it comes to significant decisions.

Most churches operate with polity that allows a majority of board members present at a meeting with a quorum to approve most decisions. Very significant decisions (like the dismissal of a board member, employment of a senior pastor, acquiring or selling real property, and entering into significant debt) often have supermajority requirements (such as requiring two-thirds or three-fourths of the board to approve). Rarely, however, do you see unanimity requirements.

One big disadvantage of a unanimity requirement: If one board member is preventing a decision by voting no and the other board members are passionate about the decision, they may need to remove the one board member from the board in order to move forward. And you should always be able to remove a board member without counting that board member’s vote in the decision to remove him/her—except in cases where the board has adopted certain “founder protection” provisions in the governing documents. Such provisions protect the original founder and visionary of a church or ministry. Even then, there should be exceptions for moral turpitude.

If you do go with a simple majority requirement for most decisions, together with a supermajority requirement for major decisions, the board is always free to require a unanimous decision on any particular issue. For example, if the board is considering a spiritually significant issue and some board members believe that the decision should be unanimous, a motion can be made for that decision to require a unanimous vote. If a majority approves that motion, then the decision at hand will require unanimous approval to pass.

One final thought: There is a reason we require an odd number of justices on the Supreme Court. You should really try to have an odd number on your governing board.

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.

Image: AdobeStock/elina

Payroll Rules for Housing Allowances: Can a Pastor Set Up a Housing Allowance on Two Payrolls?

Can pastors set up housing allowances on multiple payrolls? Learn the rules and requirements here.

Richard R. Hammar, Attorney, CPA

Bio

Last Reviewed: January 18, 2025

Q: If a pastor is receiving payment from more than one payroll, can they set up a housing allowance on both payrolls? Our tax attorney has given us the green light, but we wanted to confirm with additional expert advice.

Can a Pastor Have Multiple Housing Allowances?

Yes, it is permissible for a minister to receive a housing allowance from two revenue sources. This situation typically arises when neither revenue stream is sufficient to cover all of the minister’s housing expenses. To qualify, the housing allowance must meet the following criteria:

It must constitute compensation for the performance of ministerial service by a credentialed minister.

What Are the Requirements for Housing Allowance Exclusions?

The combined housing allowances are nontaxable only if the following conditions are met:

The allowances are used to pay housing expenses.
The allowances do not exceed the annual fair rental value of the minister’s home (furnished, plus utilities).

Additional Resources on Housing Allowances

For comprehensive guidance on clergy housing allowances, refer to chapter 6 of the Church & Clergy Tax Guide.

FAQs About Payroll Rules for Housing Allowances

What is a housing allowance?

A housing allowance is a portion of a minister’s compensation designated to cover housing expenses, which may be excluded from taxable income if certain criteria are met.

Can a pastor receive housing allowances from more than one employer?

Yes, as long as each allowance is compensation for ministerial services and the combined allowances meet the exclusion requirements.

What happens if housing expenses exceed the housing allowance?

Only the portion of the allowance used for actual housing expenses can be excluded. Any excess allowance is subject to income tax.

Are there tax implications for having multiple housing allowances?

The total allowances must not exceed the annual fair rental value of the home (furnished, plus utilities), and all expenses must be documented to qualify for exclusion.

Conclusion

Pastors receiving income from multiple payrolls can set up housing allowances for both, provided they meet the requirements for tax exclusions. Understanding the rules ensures compliance and maximizes the benefits of housing allowances.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Image: Iurii Motov | Getty

Knowing When to Outsource Church Accounting Duties

Running a financially-sound ministry begins with knowing whether to outsource church accounting duties.

Bob Smietana

Last Reviewed: November 7, 2023

Church accounting can be a challenge for churches, especially those that are just starting out. But sound bookkeeping and accounting remains a necessity, even with technology and user-friendly accounting software.

Understanding church accounting is key

When Steve Dawson started working with churches, much of the accounting work was done by hand.

Churches were just starting to use computers for spreadsheets and bookkeeping software. Not everyone was convinced that was a good idea, said Dawson, president emeritus of Chicago-based National Covenant Properties. And not every church had someone who understood both finances and how computers work.

These days accounting software is easier for churches to use and much more sophisticated. But churches still need someone who understands the unique aspects of church finances.

“That’s probably the biggest challenge for churches,” he said. “Do you really have someone who knows what they are doing?”

Knowing when to outsource church accounting

Finding the right person can be especially hard for small churches or for congregations that are just starting out. That’s why the Evangelical Covenant Church—the denomination served by National Covenant Properties—decided to outsource all the bookkeeping for its church plants.

“We’ve got a couple people scattered around the country who understand churches—and they handle 20 or 25 church plants at a time,” he said.

Those outsourced bookkeepers can help churches get their finances in order from the start. As a result, pastors can focus on building the congregation and not on making sure all the bills get paid and all the accounting is done. It’s one less thing for a church planter to worry about.

“All they have to do is worry about getting the church up and going and make a deposit with the offering,” he said.

Once the church is up and running, the outsourced bookkeeper can hand the finances back over the church. Or, the church can keep a long-term relationship with the bookkeeper.

“In most cases, the churches are continuing with the bookkeeping being outsourced,” he said.

Dawson also suggests that churches consider using a payroll service whenever possible. Those services can file all the paperwork that churches need to file for tax purposes. And they get the forms filed on time, he stressed. That’s one less headache for a church to worry about.

Portions of this article appear in “The Changing Dynamics of the Church Treasurer Role.”

Image: getty/andrii yalanski

Communicating Key Financial Information to Church Boards, Committees

The key to sharing financial information with church committees and boards? Be accurate, be timely, be relevant.

Vonna Laue, CPA

Bio

When communicating key financial information to church boards and committees, keep the following factors in mind.

1. Accuracy

Your credibility is on the line when you provide financial information for meetings. A mistake can happen, but if there is a pattern of necessary revisions to reports that have already been released, people will begin to lose trust in the information. It’s important to view preparing for these meetings as more than just another task on your to-do list. The information you provide may be used to make significant decisions about the direction of the ministry. It is critical that every report is accurate.

2. Timeliness

Information that is received too late may be as useless or detrimental as incorrect information. For example, let’s say you made an electronic payment for a large bill incurred to resurface the parking lot. It didn’t come through as a check, so it would require a journal entry to record the activity. If you are not entering information and producing monthly bank reconciliations in a timely manner, the bank balance will be overstated. Also, if you find that you are not closing the month and are producing month-end financial statements late, look closely at what is causing the delay. Once you get behind, catching up becomes difficult.

3. Relevance

Is the information you’re producing of value to the board or committee? You may be working hard and generating multiple reports that are many pages long, but your readers are probably looking specifically at a couple of pieces of information. They flip through the reports, look at those numbers, and then shut down. Work with the group to identify their key information needs and then generate reports that provide those specifics. It may take some training for them to understand what they should be looking for, but giving board or committee members 40 pages of material won’t be beneficial.

Vonna Laue has worked with ministries and churches for more than 20 years. Vonna was a partner with a national CPA firm serving not-for-profit entities through audit, review, tax, and advisory services. Most recently, she held the role of executive vice president for a Christian ministry that works to enhance trust in the church and ministry community.

Image: Getty

The Changing Dynamics of the Church Treasurer Role

Five key developments that have reshaped the position during the past 25 years.

Bob Smietana

Last Reviewed: January 12, 2024

Over the past 25 years, major changes in technology, staffing, and financial practices have reshaped how churches operate.
While many developments have made life easier for church treasurers and leaders, they also bring new challenges.

Here are five key changes churches must navigate today.

1. Rapid Changes in Technology

Twenty-five years ago, churches had limited tools for handling finances.
Most giving came in through cash or checks, and basic tools like Quicken or QuickBooks were common for tracking donations.

Today, churches have:

Fully integrated software that tracks giving, expenses, membership, and even room scheduling
Easy acceptance of electronic giving via ACH payments, texting, and credit cards
Sophisticated reporting capabilities, even for small congregations

CPA Vonna Laue noted that technology has significantly impacted how churches manage donations, tithes, and offerings.

Tip:
Laue recommends caution when adopting new software:

Research options thoroughly.
Avoid rushing to buy the latest tool.
Remember: technology may solve some problems—but it can introduce new ones, too.
(For more, see Church IT: Using Information Technology for the Mission of the Church by Nick Nicholaou.)

2. The Rise of the Cloud

Cloud-based services have transformed church financial management.
Today, church leaders benefit from:

24/7 access to financial information
Easy dissemination of data via internet and apps
Smartphone expense reporting through photo receipts linked to the general ledger

CPA Stan Reiff emphasizes that cloud services often offer better cybersecurity than most churches could afford on their own.

Cybersecurity Risks:
Hackers often target churches.
Reiff shared an example where a hacker impersonated a traveling pastor, emailing a treasurer to wire $10,000.
Luckily, a mistake in entering the routing number saved the church.

CPA Rob Faulk stresses the importance of cybersecurity policies:

Delete donor account numbers quickly.
Consult cybersecurity experts—even for small churches.

Tip:
Leverage technology for positive engagement:

Use live video to connect with missionaries.
Offer real-time updates on mission trips, instead of waiting until teams return.

Related Resources:

3. People Are Working Longer and Seeking Second Careers

Two staffing trends are helping churches today:

More Americans are working past age 65 (Bureau of Labor Statistics)
Older Christians are moving from the for-profit sector into church work

“We’ve seen a lot more second-career people come into the church—bringing valuable business skills with them,” said Laue.

These shifts have raised the competency of church administrators.
Still, people remain a church’s most valuable asset.

Tip:
Provide training to staff transitioning from the business world:

Utilize training from ECFA, CapinCrouse, and Church Law & Tax resources.
Explore webinars, podcasts, and workshops at CLTStore.com.

4. The Growing Use and Value of Outsourcing

Outsourcing—once rare among churches—is becoming a common solution.

Benefits of outsourcing include:

Access to experienced, faith-aligned workers
Cost savings compared to hiring full- or part-time on-site staff
Filling essential needs like bookkeeping, payroll, event scheduling, and communication

Insights:

Bryan Miles (Belay Solutions) said outsourcing helps churches fulfill their missions without local hiring limitations.
Steve Dawson (National Covenant Properties) noted that outsourcing bookkeeping frees up pastors to focus on ministry, not administration.

Payroll Tip:
Use a payroll service to handle tax filings and reduce administrative headaches.

Tip:
To approach outsourcing wisely:

Make a list of essential tasks.
Identify which tasks could be outsourced.
Vet providers carefully to ensure they understand church needs.

5. Updated Accounting Practices

The Financial Accounting Standards Board (FASB) released a new reporting standard in 2016 that affects churches issuing external financial reports.

Key Changes:

Redefined Fund Categories:
- Now reported as with donor restrictions or without donor restrictions.
- Previously categorized as unrestricted, temporarily restricted, or permanently restricted.
Liquidity Disclosure Requirement:
- External financial statements must disclose available liquid assets.
- Even churches not required to comply may benefit from including a liquidity statement.

Vonna Laue’s advice:
Liquidity statements help church leaders and members better understand financial health.

Tip:
Add a liquidity statement to internal or external financial reports.
(For more details, see: Preparing for FASB Financial Reporting Standards Changes at CapinCrouse.com.)

Conclusion

Modern churches face a dynamic mix of opportunities and risks.
By adapting thoughtfully to technological advances, staffing shifts, and updated financial practices, churches can steward their resources wisely—and strengthen their ministries for the future.

The Church Law & Tax Take

$4.3 million in penalties

Why is this issue relevant to churches?

Church experience

Client profile

Technology

Level of expertise

References

Cost

Why Some Pastors Don’t File Taxes

Penalties for Not Filing Tax Returns

Failure-to-File Penalty

Failure-to-Pay Penalty

Combination of Penalties

Criminal Penalties for Tax Evasion

Importance of Filing Taxes Correctly

FAQs About Penalties for Pastors Who Do Not Pay Taxes

Conclusion

Combine caution and common sense

Understand employee classifications

Requiring PTO in exchange for office closures

When Conflict Arises

Real-World Example

Preventing Litigation and Disruption

Why Remove a Board Member?

What State Law Says

1. Removal for Any Reason

2. Removal for Cause Only

3. No Guidance at All

Why Bylaws Matter

Drafting Bylaws for Two Audiences

Three Approaches to Board Member Removal

1. Removal by the Membership

Pros:

Challenges:

Best Practices:

Model Language:

Notice Requirements:

Member Rights:

2. Removal by the Board

Pros:

Risks:

Safeguards:

Optional Strategy:

3. Removal by a Designator

Advantages:

Cautions:

Final Thoughts: Prepare Before Problems Arise

From a 5-Step to a 14-Step Approach

14-Step Plan to Protect Children in Church Settings

1. Conduct Interviews

2. Require Written Applications

3. Obtain Institutional References

4. Follow a Six-Month Rule

5. Benchmark Your Policies

6. Legal Review of Policies

7. Enforce a Two-Adult Rule

8. Conduct Criminal Background Checks

9. Report Known or Suspected Abuse Promptly

10. Confront High-Risk Behaviors Immediately

11. Monitor Social Media Use

12. Use Video Technology

13. Provide Regular Training

14. Prevent Negligent Supervision

Legal Case Example: Andrews v. Cronin (Mass. Super. 2018)

Case Summary:

The Growing Public Outrage

1. Pennsylvania Grand Jury Report (2018)

2. Brooklyn Diocese Settlement (2018)

3. Federal Law: Protecting Young Victims from Sexual Abuse Act (2017)

Final Thoughts for Church Leaders

Reducing risk from the start

Establish clear policies and procedures

Seek legal advice before taking action

Update policies and procedures as needed

Standing agenda listing for finance/audit committee with a fiscal year-end of December 31

MEETING 1: FALL MEETING MINUTES

Balancing Ministry and Management

Who’s Watching the Church’s Finances?

Why This Matters