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Can a Church Offer Free Preschool Tuition Only to the Pastor’s Children?

Churches with preschools must follow IRS guidelines when offering tuition benefits to staff. Learn the tax rules and eligibility requirements.

Richard R. Hammar, Attorney, CPA
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Last Reviewed: January 30, 2025

Q: Our church has a preschool. If we allow the pastor’s two children to attend the preschool free of charge, then don’t we also have to allow the children of our preschool and church staff to attend free of charge? I called the IRS and they said it had to be the same for everyone. This makes sense to me but our board members have questions. They want this to be a benefit only for the pastor. Must we offer this same benefit to everyone?

Understand what the tax code says

Many churches operate schools or preschools. They also offer tuition discounts to employees of both the school and church whose children attend the school. Section 117(d) of the tax code specifies that qualified tuition reductions are not taxable. To be qualified, however, certain conditions must be met. These include the following:
  • The tuition reduction is provided to an employee of an “organization described in section 170(b)(1)(A)(ii)” of the tax code. This section refers to “an educational organization which normally maintains a regular faculty and curriculum.”
  • This organization also normally has a regularly enrolled body of pupils or students in attendance. And the body of pupils or students are located where educational activities are regularly carried on.
  • The tuition reduction must be for education below the graduate level.
  • The qualified tuition reduction must be provided to a current school employee; a former school employee who retired or became disabled; or a dependent child of a school employee.
  • Highly compensated employees cannot exclude qualified tuition reductions from their gross income unless the same benefit “is available on substantially similar terms” to non-highly compensated employees. Refer to the IRS for what defines a highly compensated employee. The fact that a highly compensated employee must report the value of a tuition reduction in his or her income for tax reporting purposes does not affect the right of employees who are not highly compensated to exclude the value of tuition reductions from their income.

Is the school ‘operated as an activity or function of’ a church?

In the past, it has not been clear whether the IRS or the courts would consider an employee who works directly for a church to be an employee of an educational institution, even if the church operates a private school. The IRS has ruled that church employees are not eligible for qualified tuition reductions. It noted that nontaxable qualified tuition reductions must be provided by an educational organization described in section 170(b)(1)(A)(ii), which refers to schools. The IRS conceded, however, that a school that is “operated as an activity or function of” a church may qualify as an educational organization for purposes of section 117(d), even though not separately organized or incorporated. It concluded:

An unincorporated school operated by a church or parish…or the school system of a synod or diocese, all may constitute “educational organizations” described in 170(b)(1)(A)(ii) for purposes of section 117(d). The employees generally of such an “educational organization” would be eligible to receive excludable “qualified tuition reductions” from their employer; the exclusion is not limited solely to individuals providing teaching services, but would extend to the employees generally within such function, including secretarial, managerial, administrative, and support function employees.

However, in these circumstances, an excludable [qualified tuition reduction] could not be extended to church employees who were not employed within the context of the school function, or “educational organization,” so defined. Thus, for example, a diocese operating a school system may not properly exclude from reportable wages as “qualified tuition reductions”…the value of tuition reduction benefits it might provide to employees of a hospital it also operates.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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Does the Presence of a Third Party Negate Penitent Privilege?

Definitions of roles, and state laws, factor heavily in this question.

Richard R. Hammar, Attorney, CPA
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Q: We understand that if a third party is present, then it potentially jeopardizes the clergy-penitent privilege. Our pastor counsels people. If the elders are present, are they considered “pastors”? If not, is the clergy-penitent privilege broken? Our elders say they should be in the same position as the pastor, and they don’t feel it breaks the privilege.

There are two components to your question: are elders “pastors” for purposes of the clergy-penitent privilege? And, is the privilege negated by the presence of third persons?

Are elders “ministers”?

The clergy-penitent privilege, which is recognized in every state, provides that clergy cannot be compelled to testify in a judicial proceeding concerning statements made to them in confidence while acting as a spiritual advisor.

Clergy-penitent privilege laws generally limit the privilege to confidential communications made to clergymen, priests, or ministers of the gospel. Several courts have ruled that deacons and elders are not “ministers” and so communications with them by persons seeking spiritual counsel are not protected by the clergypenitent privilege.

Rule 505 of the Uniform Rules of Evidence

Rule 505 of the Uniform Rules of Evidence, which has been adopted by several states, limits the privilege to confidential communications with a “cleric,” and defines this term as “a minister, priest, rabbi, accredited Christian Science Practitioner, or other similar functionary of a religious organization, or an individual reasonably believed so to be by the individual consulting the cleric.” Note that so long as a counselee reasonably believes that a person with whom he or she is seeking spiritual advice is a member of the clergy, the privilege applies, even if this belief is unfounded. Many state clergy-privilege laws incorporate this rule. This more expansive definition of “minister” may apply to deacons or elders in some cases. This will not always be the case, however.

Illustration

To illustrate, one court ruled that confidential statements made to a church deacon were not protected by the clergypenitent privilege, and therefore, the deacon could be compelled to testify in court about them. The court rejected the argument that the counselee “reasonably believed” the deacon to be a minister or “similar functionary.” He never observed the deacon “attired in ministerial garb or conducting services” and never heard him say that he was a minister. Further, the court pointed out that the defendant’s father was a pastor, and so he “should be even more aware than the average person that deacons and pastors are hardly one and the same.”

It is possible that in some faith traditions a deacon or elder would be deemed a “minister” for purposes of the clergy-penitent privilege. This will depend on the governing documents, theology, and practice of a church. But this will not always be the case.

Confidentiality

The clergy-penitent privilege only protects confidential communications. State clergy-penitent privilege laws define confidentiality in two ways. First, most state laws have adopted the Uniform Rules of Evidence, which defines confidentiality in the context of the “religious privilege” as “a communication … made privately and not intended for further disclosure except to other persons present in furtherance of the purpose of the communication.” There are two points to note about this definition. First, the communication must be “private,” and second, it must not be intended for further disclosure except to “other persons present in furtherance of the purpose of the communication.” According to this definition, other persons can be present, and listening, when a person seeks out a minister for spiritual counsel so long as their presence is “in furtherance of the purpose of the privilege.”

A minority of state clergy-penitent privilege laws define confidentiality more narrowly to mean that a communication was made in private in the presence of no other persons besides the minister. This is a very different view of confidentiality than the more expansive view taken by the Uniform Rules of Evidence and a majority of the states. In these states, the presence of elders or deacons in the course of pastoral counseling would likely negate the privilege. This illustrates the importance of ministers being familiar with their state’s clergypenitent privilege.

Richard Hammar’s “50-State Child Abuse Reporting Laws Survey for Clergy and Church Leaders” sets forth the text of the clergy-penitent privilege of each state, and this material should be consulted if a question arises regarding the applicability of the privilege. If there is any doubt, legal counsel should be consulted.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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Ensuring Compliance with IRS Substantiation Requirements for Charitable Contributions

Understand the IRS rules for substantiating charitable contributions and ensure compliance to protect tax deductions for your donors.

Richard R. Hammar, Attorney, CPA
Bio

Last Reviewed: January 10, 2025

Reference: Durden v. Commissioner, TC Memo. 2012-140 (2012)

Donors must follow specific IRS substantiation requirements to claim tax deductions for charitable contributions. These rules, particularly for contributions of $250 or more, are crucial for churches and donors to understand and comply with.

IRS Requirements for Substantiating Contributions

The IRS outlines three key requirements under section 170(f)(8) of the tax code:
  • Written Acknowledgment: The acknowledgment must state the contribution amount, whether goods or services were provided in exchange, and a description of any such goods or services.
  • Contemporaneous Documentation: Donors must obtain the acknowledgment on or before the earlier of the tax return filing date or its due date.
  • Specificity: If only intangible religious benefits were provided, this must be explicitly stated in the acknowledgment.

Case Analysis: Durden v. Commissioner

In this case, a couple claimed deductions for $250+ donations to their church but failed to meet substantiation requirements. The IRS disallowed their deduction due to:
  • Lack of a statement regarding goods or services in the church’s initial acknowledgment.
  • Failure of the second acknowledgment to meet the contemporaneous requirement.

Practical Tips for Churches

Churches play a key role in ensuring donors can claim deductions:
  • Issue receipts with all required details, including a statement about goods or services provided.
  • Use language like: “No goods or services were provided in exchange for your contributions, other than intangible religious benefits.”
  • Maintain accurate records and provide donors with timely acknowledgments.

Examples of Proper Acknowledgments

Here are examples of IRS-compliant receipts:
  • “Thank you for your cash contribution of $300 received on [date]. No goods or services were provided other than intangible religious benefits.”
  • “Thank you for your contribution of a used oak baby crib and dresser received on [date]. No goods or services were provided.”

Noncash Contributions

For noncash contributions exceeding $500, donors must complete IRS Form 8283. Ensure donors are aware of these requirements, especially for higher-value items.

Conclusion

Failure to meet IRS substantiation rules can jeopardize tax deductions for donors. Churches must prioritize proper acknowledgment practices to safeguard both donor relationships and compliance with tax laws.

FAQs About IRS Substantiation Requirements
  • What is required in an acknowledgment for contributions of $250 or more? The acknowledgment must state the amount, describe any goods or services provided, or confirm that only intangible religious benefits were received.
  • What happens if the acknowledgment is issued late? The IRS requires acknowledgments to be contemporaneous. Late acknowledgments may disqualify deductions.
  • Are separate contributions under $250 aggregated for substantiation? No, contributions under $250 are not subject to these additional requirements, even if they total $250 or more over the year.
  • What is the rule for noncash contributions? Donors must complete Form 8283 for noncash contributions exceeding $500 and meet additional requirements for higher values.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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Are Benevolence Gifts to Church Employees Taxable?

Benevolence gifts to church employees are always taxable and must be reported on Form W-2. Learn about IRS rules and tax implications.

Frank Sommerville, Attorney, CPA
Bio

Last Reviewed: January 30, 2025

Q: Can a church give a cash benevolence gift to an employee? And is it taxable income?

Yes and yes. Yes, a church can give a benevolence gifts to an employee. And, yes, it is taxable. The Internal Revenue Code requires all benevolence payments provided to employees be taxed. The church must add the amount of the benevolent payments to the employee’s Form W-2, and if nonclergy, withhold all payroll taxes like the payment was wages. It makes no difference if the payment is direct or indirect, like to the employee’s doctor.

As a result, “love offerings,” pastoral appreciation gifts, Christmas gifts, anniversary gifts, and birthday gifts that flow from the church to its employees are always taxable. Even retirement gifts are taxable to the recipient. No exceptions to this rule exist.

If the church pays a benevolence payment to a “control person,” then the tax consequences get more complicated. A control person is generally someone having substantial authority within the church.

For Additional Help

For more help on benevolence, check out our resource Benevolence Fund Basics.

To get help with payroll withholdings and excess benefit transactions, check out Richard Hammar’s annual Church & Clergy Tax Guide.

If the IRS decides that the payment to a control person did not represent a true “need,” then the payment may represent an excess benefit transaction, subjecting the control person and the board or committee to an excise tax that can range from 10 percent to 200 percent, plus requiring the control person to repay the benevolent payment.

It’s clear that the senior minister, the treasurer, the business administrator, or executive minister is treated as a control person. The ministers on staff that have substantial authority over a significant part of the church are likely to be control persons. Volunteer board members, finance committee members, benevolence committee members, and personnel committee members may become control persons subject to the excise taxes.

This Q&A is adapted from “Benevolence: The Right Help Given the Right Way,” an article that originally appeared on the website of Weycer, Kaplan, Pulaski & Zuber, P.C. Used with permission.

Frank Sommerville is a both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.
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Tips For Starting a Church Food Pantry

Tips for deciding whether to launch this community-wide ministry.

Tyler Charles
Bio

Last Reviewed: February 10, 2025

For a church that feels compelled or called to do its part to address hunger in its community, establishing a food pantry might be an effective way to make a difference. Before launching a food pantry ministry though, here are some things to consider:

Need
  • Does your community need a food pantry? Are there other food pantries in the community? If so, could your church help by volunteering there? What could your church accomplish by creating a new food pantry rather than assisting with an existing pantry? Are there definitely food needs in the community that aren’t being met?
  • Who would benefit from your church’s food pantry? Would the food go to people within the church, or others in the community? Both?

Location/Storage
  • Would the food pantry be housed within the church or somewhere else? Is there sufficient storage space on church premises? Is the space conducive for large-scale food distribution? Is the space equipped to safely store food (protecting it from rodents, insects, spoilage, etc.)?
  • On what days would the food pantry be open? If the pantry operates within the church, would that interfere with other church activities?

Food Sources/Distribution
  • What food sources are available to you? Are there any food banks in the area? Is your church committed enough to this ministry to donate food and money to purchase additional food items? Does it have a budget to allow for these expenditures?
  • Which distribution model is the best fit for you: standardized distribution or client-choice?

Safety
  • Are you equipped to store refrigerated foods at the proper temperatures? What about frozen foods? Will your pantry distribute any meats, eggs, fruits, vegetables, or other foods that are susceptible to spoilage? If so, how will you ensure that these foods remain safe to eat? Will food pantry volunteers be trained to recognize any unsafe food items?
  • Do you understand the differences between a “sell by” date, a “use by” date, and a “best if used by” date? Will you train your volunteers about these terms so they know the difference between acceptable and unacceptable donations?

These are just some of the questions a church should consider before launching a food pantry ministry. For those who have the space and the manpower, and are equipped to handle these challenges, a food pantry can be a rewarding and beneficial ministry. But the decision to start one should not be made rashly. Before you begin, take time to discuss and pray about these things to make sure your church can sustain this ministry, and ultimately, do its part to help erase hunger in your community.
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Strengthening Church Financial Controls: Tips for Cash Receipts and Disbursements

Practical tips for managing church cash receipts and disbursements while maintaining strong financial controls.

Laura Brown
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Last Reviewed: January 26, 2025

When churches receive tithes and offerings, there’s more going on than meets the eye. Along with physically collecting people’s money and bringing it to the bank, you should be tracking how much comes in, who it comes from, what it’s used for, and how much each individual gives during a year.

This requires substantial record keeping and an effective internal control structure to ensure that the information is accurate and the money stays safe. Here are 10 ways to strengthen control of your cash receipts, and some tips on making cash disbursements:

For your offerings, enlist money counters (tellers) who aren’t related by family and don’t work at the same place during the week.

Avoid selecting someone experiencing a financial crisis. This kind of responsibility may expose such a person to temptation.

Rotate tellers periodically. Try using teams.

When offering plates are emptied, have at least two tellers present. Ask them to count and bag offerings on church premises.

Designate a teller to record the money received. Ask another to review and initial the record.

On a regular basis, have someone other than the tellers reconcile the bank account and list of money received (to the bank deposit, donor records, and general ledger).

Immediately stamp all checks “for deposit only” and place the funds received in a lockable canvas cash bag. Use a bag with only two keys–one you keep at the bank, the other at the church.

Deposit cash daily in your bank account. Never keep cash on the premises unless you use a lock box.

Compare deposits from the regular services to previous services, noting the consistency of amounts. The amount of money received during morning worship services usually doesn’t vary greatly from week to week.

Send periodic statements to donors detailing the dates and gift amounts received. If a discrepancy arises, resolve it immediately by securing the assistance of someone other than the teller who originally counted the money.

Procedures for Controlling Cash Disbursements
  • Make all disbursements, except from petty cash, by check or draft.
  • Require two signatures on all checks over a stated dollar amount.
  • Prepare cash disbursements only when someone has approved and documented payment.
  • Mark supporting documents “paid” to prevent resubmission.
  • Lock up all blank checks.
  • On a regular basis, have someone other than the individual preparing disbursements reconcile check registers to the bank statements.

Find more help: Check out Internal Controls for Church Finances.

Laura Brown is a communications specialist for Brotherhood Mutual Insurance Company. This article originally appeared on BrotherhoodMutual.com. Used with permission.

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Minister Social Security Exemption Explained

Does a Social Security exemption apply to past secular work?

Richard R. Hammar, Attorney, CPA
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Last Reviewed: January 21, 2025

Q: Our pastor worked for several years in secular employment before going to seminary and becoming a pastor. Soon after he was ordained, he applied for exemption from self-employment taxes by filing a timely Form 4361 with the IRS. He is now concerned that by opting out of Social Security, he will not be eligible for any benefits based on all the years of secular employment. Is he right? Should he be concerned?

How the Exemption Affects Social Security Benefits

An approved exemption from Social Security taxes applies only to services performed in the exercise of ministry. It does not affect benefits based on secular employment earnings. In other words, Social Security benefits earned through secular employment remain intact, assuming those earnings meet the eligibility requirements.

The income tax regulations clarify this distinction: “A minister performing service in the exercise of his ministry may be eligible to file an application for exemption on Form 4361 even though he is not opposed to the acceptance of benefits under the Social Security Act with respect to service performed by him which is not in the exercise of his ministry.” (Treas. Reg. 1.1402(e)-2A(a)(2)).

Impact on Future Benefits

Ministers who are exempt from Social Security coverage for their ministerial income should be aware that this exemption can reduce their overall retirement benefits. The longer the exemption applies, the lower the potential benefits from non-ministerial employment may be, due to fewer total credits being accrued over time.

Relevant Case Study

The Tax Court addressed this issue in a case involving a pastor who also operated a handyman business. Although the pastor had filed for exemption from self-employment taxes, the court ruled that the exemption applied only to income earned in the exercise of ministry. Earnings from his handyman business were subject to self-employment taxes. The court noted that, “although the income [the pastor] derived from his handyman business may have enabled him to sustain his ministry…those reasons or motives do not cause the handyman business to be integral to the conduct of his ministry.” (Williams v. Commissioner, T.C. Memo. 1999-105).

Key Takeaways
  • Ministers exempt from Social Security taxes through Form 4361 retain eligibility for benefits earned through secular employment.
  • The exemption applies only to income earned in the exercise of ministry.
  • Ministers should carefully evaluate the long-term impact of opting out of Social Security on their retirement benefits.

FAQs About Minister Social Security Exemptions
  • Does opting out of Social Security affect benefits from previous non-ministerial work?
    No, benefits from prior secular employment are not affected by the exemption.
  • What income is covered by the exemption?
    Only income earned in the exercise of ministry is exempt from Social Security taxes.
  • Can ministers re-enter Social Security?
    No, the exemption is irrevocable once granted, so careful consideration is essential.
  • Does the exemption apply to non-ministerial side businesses?
    No, income from secular side businesses remains subject to self-employment taxes.

For additional insights, consult the IRS guidelines or a qualified tax professional to fully understand the implications of Form 4361.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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Protecting Your Church’s Youth From Cyberbullies

Cyberbullying is a growing issue for today’s youth. How can churches respond?

Lee A. Dean
Bio

Years ago. a Georgia teen, Alex Boston, sued two of her classmates for defamation and libel after they created a false Facebook page purporting to be Boston’s own page. ABC News reported that the page contained taunts, links to racist websites, and reports of sexual exploits. According to the ABC News report, the lawsuit alleged school officials did nothing about the page because it represented an off-campus activity.

The lawsuit named the two students and their parents as defendants and claimed, “humiliation, mental anguish, harassment and emotional and physical distress,” according to the news report.

Boston’s story highlights an unfortunate growing trend—the use of social media to bring bullying behavior to Generation Facebook.

With the near-ubiquitous use of social media by today’s generation of students and children, harmful behaviors that were once limited to playgrounds and mall parking lots can relentlessly follow kids home.

In the past decade, national attention has been brought to the issue of cyberbullying as a result of several high-profile legal cases. Sadly, several of these involved the suicides of students experiencing extreme cyberbullying. It is difficult to gauge the depth of possible trauma associated with digital bullying, but it is important to seriously consider your church’s ability to combat it.

In cyberbullying, the victim can be intimidated on a computer screen or cell phone. And while many bullying incidents are relatively private, frequently the whole world can see the encounter online.

Fortunately, this rarely happens overtly in the social media life of a church. But that doesn’t mean churches can let their guards down. What happens in society inevitably spills into the life of the local church. The children and youth who are bullied (one-third of all junior high and high school students, according to one statistic), and the bullies themselves, often are the same kids who participate in a church’s activities. As with many problems, leaders need to be prepared to recognize and respond to the possibilities of the changing face of bullying.

“I think it’s bigger than we understand,” said CJ Malott, student pastor at Fielder Church in Arlington, Texas.

“We’re ready to deal with the issue of sexuality. We’re quick [to respond to] alcohol and drug abuse. But we dismiss bullying a little bit easier. We don’t take it to heart as much as the sex, drugs, and alcohol. In the long run, that could end up hurting us, because I only see it getting worse.”

Traditional bullying happens face-to-face, in private encounters, or on the schoolyard with an audience. While always possible, this kind of bullying on church property or during church activities is relatively rare.

“Even with kids we know to be bullies outside the church setting, when they come onto our campus, they don’t do a lot of that here. Whether from conviction or an understanding of where they are, it doesn’t happen a lot,” said Malott.

Bullies are understandably hesitant to persecute their peers in a well-organized church setting. However, a physical encounter is no longer the only—or even preferred—outlet for a bully’s cruelty.

Getting Pushy on the Online Playground

“Bullying” and “cyberbullying” are not legal terms, but umbrella phrases that cover a variety of behaviors. As such, there are a range of uses for the terms. According to Paula Burns, an agent for Insurance One Agency who studies bullying and other social media risks, these differing definitions agree on key points. With these in mind, it can be said that bullying can include some or all of these elements:
  • Attack or intimidation with the intention to cause fear, distress or harm
  • Physical attacks, such as hitting, punching, or taking property
  • Verbal attacks, such as name calling or teasing
  • Psychological/relational attacks, such spreading rumors and social exclusion
  • The presence of a real or perceived imbalance of power between the bully and the victim
  • Repeated incidents between the attacker and the victim

According to Burns, cyberbullying is “an aggressive, intentional act carried out by a group or individual using electronic forms of contact repeatedly and over time against a victim who cannot easily defend him or herself.”

It can take the form of sending mean, vulgar, or threatening messages and images, posting sensitive or false information about a person, pretending to be someone else in order to make that person look bad, or intentionally excluding someone from an online group.

But leaders should realize that being the victim of such behaviors carries its own inherent stigma. No one wants to admit to being bullied. According to Malott, middle-schoolers and high-schoolers don’t particularly like to use the term “bullying.” He observes that “A lot of students ask for counseling about being bullied, but they say they’re being ‘picked on,’ or ‘made fun of.’ They don’t use the word ‘bullying’ anymore, but that’s what it is.”

Legally, a church is at risk if it fails to monitor and supervise youth under its direct care. Churches may be at legal risk if they know bullying goes on and yet do not take appropriate action to recognize and respond to such situations.

Policies and Protection

So many of these potential situations are digital that the Internet may be the area of biggest risk, according to church law attorney Frank Sommerville.

“Churches have to have a good social media policy if they are writing on behalf of the church or if it’s a church Facebook page,” he said. “That means you have the responsibility to monitor what’s being posted and to remove those comments that are inappropriate. Having good policies in place goes a long way toward reducing the risks that are out there.”

That kind of policy is in place at Fielder Church, said Malott. Each student ministry staff member has administrative rights to the ministry’s Facebook page.

“Anything that hits the page gets pushed to us so we can quickly see whether it’s appropriate. If it isn’t, any one of us can remove it,” said Malott. “You can come into our student ministry facilities and get connected to our Wi-Fi as a guest without a password. But it’s extremely protected by Barracuda software. So we have layers of protection.”

An Internet use policy for church staff and workers should specifically state that no cyberbullying is permitted on any church-related website, including blogs by pastors and staff, Burns said. Although these blogs often do not apply to issues of children and youth, they do fit into the wider area of cyberliability.

Insurance companies offer cyberliability policies to protect businesses and non-profit organizations from risks associated with Internet communication and commerce. Cyberbullying may need to be included with a policy that covers other items, such as invasion of privacy, libel, slander, and copyright infringement.

“If you put on Facebook that so-and-so is sleeping around, that will be a slanderous statement, even if it’s true, because it denigrates the reputation of the person they’re talking about,” said Sommerville.

Should a church have a written policy covering bullying of both the old-fashioned, personal type and the newer, technology-driven variety?

“I don’t think the law is the best place to address this issue,” Sommerville said. “A written policy, if a church is not going to follow it, is worse than no policy at all. Ask if your existing policies adequately address your responsibilities if you’re going to have a webpage, chat rooms, or social media sites.”

A downloadable resource, Using Social Media Safely, provides guidance for churches trying to craft a social media use policy.

“Big-time” Bullying

In rare cases, the victims of bullying have been the youth pastors and workers and the bullies have been the students.

“I know of a youth minister who had some girls who had a beef with him, made accusations, took it to the Internet and ganged up on him,” said Malott. “The guy ended up resigning because it all became too much. When I heard the story, I didn’t believe it could happen in real life. But it was the guy’s testimony. As a student pastor, that makes me nervous.”

Despite the legal murkiness of the subject, churches can empower staff and students by teaching about bullying and knowing what to do if an incident flares up. Student codes of conduct, in whatever form they take, should be clear that bullying of any kind will not be tolerated.

“As a church, we should be educating parents,” said Burns. “Have parents and student youth ministry leaders get together and talk about what to do when someone is cyberbullied. It would be great to do an educational campaign for the students and the parents to understand the impact of this, because sometimes they just think it’s funny.”

If an incident of bullying occurs, including those involving a physical altercation, churches should notify parents and make an incident report, said Burns.

“You don’t know if the parents will come back and say the church was negligent in supervising their children,” she explained.

Cyberbullying may be so new that churches, lawyers, and insurance companies are still learning how to cover it from a liability and risk reduction standpoint. One thing is likely, however: bullying, which has a history as old as humanity, won’t disappear.

“I don’t know where all of it is going,” said Malott, “but it’s not an issue that’s going to go away.”
Lee Dean is a frequent contributor to Christianity Today’s Church Law & Tax resources and publications.

To learn more about keeping student ministries safe, see Essential Guide to Youth Ministry Safety, an eBook available on ChurchLawAndTaxStore.com.
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Are We Legally Required to Verify a Housing Allowance is Fair?

Understand whether churches must verify housing allowances and the IRS rules that apply.

Richard R. Hammar, Attorney, CPA
Bio

Last Reviewed: January 14, 2025

Q: Does a church have a legal obligation to review the housing allowance requested by a pastor to determine both how it was computed and whether it fairly reflects the value of expected housing expenses for the new year?

The simple answer is that while a church is free to exercise this level of oversight over the pastor’s housing allowance, it is not legally required and is, in fact, rarely done. Section 107 of the tax code specifies that “in the case of a minister of the gospel, gross income does not include—(1) the rental value of a home furnished to him as part of his compensation; or (2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.”

The income tax regulations state: “In order to qualify for the exclusion, the home or rental allowance must be provided as remuneration for services which are ordinarily the duties of a minister of the gospel.”

What Does the Tax Code Require?

In summary, the tax code and regulations require that a “church” designate a housing allowance from the compensation paid to a “minister” for services performed in the exercise of ministry. However, there is no requirement for the church to verify the reasonableness of the housing allowance it declares.

Key Points to Consider:
  • Neither the IRS nor any court has imposed a duty upon a religious congregation to determine the reasonableness of a housing allowance. While it is permissible for a congregation to do so, it is not mandatory.
  • To determine the reasonableness of a housing allowance, a church would need to review its minister’s anticipated housing expenses for the year. This process can be burdensome and subject to change as actual expenses are incurred.
  • Churches are unlikely to face penalties for failing to verify a pastor’s housing allowance. The main penalty would be aiding and abetting in the substantial understatement of tax, outlined in Section 6701 of the tax code. However, no reported case has applied this penalty to a religious congregation for this reason.

Best Practices for Housing Allowance Designation

Churches should ensure that the housing allowance represents compensation for services performed in the exercise of ministry. While there is no legal limit on the portion of a minister’s compensation designated as a housing allowance, the allowance is nontaxable only to the extent it does not exceed the fair rental value of the home or the amount spent on housing expenses.

Common Practices:
  • Ministers typically report the nontaxable portion of their housing allowance and list any “excess allowance” as taxable income on their Form 1040, following IRS Publication 517.
  • This approach reduces administrative burdens on the congregation and aligns with IRS guidelines for housing allowances.
  • Most churches opt to designate housing allowances conservatively, avoiding amounts that significantly exceed the fair rental value of a minister’s home.

FAQ: Housing Allowance Verification

1. Does the IRS require churches to verify housing allowances?

No, the IRS does not require churches to verify the fairness or accuracy of housing allowances. It is sufficient for the church to designate an allowance as part of the minister’s compensation.

2. Can a church be penalized for not verifying housing allowances?

It is highly unlikely. Penalties for aiding in the understatement of taxes have not been applied to churches for failing to verify housing allowances in any reported cases.

3. Should churches designate housing allowances conservatively?

Yes, churches should avoid designating allowances that significantly exceed the fair rental value of the minister’s home, as the nontaxable portion is limited to actual housing expenses and fair rental value.

4. How should a minister handle excess housing allowance amounts?

The minister must report any excess allowance as taxable income on their Form 1040, ensuring compliance with IRS requirements.

For further details on housing allowance regulations, consult IRS.gov or legal counsel specializing in church tax matters.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
close up image of W-4 form
Image: Getty / NadyaPhoto

Annually Reviewing W-4s for Church Employees

An annual review of W-4s by church employees can best address changes affecting their tax situations.

Richard R. Hammar, Attorney, CPA
Bio

Last Reviewed: January 4, 2024

Q: Should our church ask each employee to fill out a new Form W-4 each year? If so, why?

The W-4 form is used by employees to report withholding allowances. This information will determine how much income tax the church withholds from the wages of a nonminister employee.

The important point is this—W-4 forms often become obsolete because of changes in an employee’s circumstances, but the employee fails to submit a new form to the church. This can result in withholding that is significantly above or below the actual tax liability.

Here are some reasons why an employee’s W-4 may need to be updated
  • the birth of a child
  • a pay raise
  • a divorce
  • significant medical expenses.

Tip: These same considerations apply to ministers who have elected “voluntary withholding” of their taxes. Also, note that the tax cuts passed by Congress in recent years have reduced taxes for most Americans, and this is another reason why church employees should periodically review their W-4 form.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Image: AdobeStock/Andrii Yalanskyi

Protecting Churches from Investment Fraud: Strategies and Lessons

Key strategies for preventing investment fraud in churches, including training staff and adopting protective policies.

Pat Huddleston
Bio

Last Reviewed: January 26, 2025

“The greatest trick the devil ever pulled was convincing the world he doesn’t exist.”

That quote from 19th century French poet Charles Baudelaire appeared in the Oscar-winning movie “The Usual Suspects.” And it speaks to why Christians have been, and will continue to be, victims of investment fraud. Just as many people don’t believe that the devil exists, many Christians don’t believe that we are at risk from investment fraud. We tell ourselves, People who lose their life savings to a scam or an unethical financial adviser are gullible, stupid, or greedy. I am none of those things. Therefore, it can’t happen to me. It’s the big lie that makes us all so vulnerable. Just as the devil is pleased that so many deny his existence, scam artists and unethical brokers are pleased that the universe of possible victims feels immune to fraud.

Many articles discussing investment fraud against Christians include a subtle suggestion that Christians are more gullible than most people, but that’s just not true. It isn’t their status as Christians that makes believers vulnerable to investment fraud; it’s their status as healthy human beings. Protecting Christians and Christian fellowships from investment fraud must therefore begin with helping them understand why we are so prone to believe—falsely—that it can’t happen to us.

All healthy human beings are born with what psychologists call “cognitive biases.” In essence, cognitive biases are pre-wired breakdowns in logical thinking. God wired our brains with certain shortcuts that help us in most contexts. But those shortcuts hurt us in the investment context.

Scientists believe that cognitive biases flow from the complex world in which we live. In an environment with more relevant information than we can comfortably process, we look for shortcuts and our brains work to simplify an issue to boil it down to a manageable size. So, rather than consider the dozens of factors that are empirically relevant to a decision to invest through a particular broker or in an investment he or she recommends, our brains make the problem more manageable. We put all of the complicated, inter-related factors aside and focus instead on a single question: “Can I trust this person?” The result, in my estimation, is more than $1 billion stolen from Christians every year and an epidemic of investment fraud that will destroy dozens, if not hundreds, of fellowships this year.

The optimism bias

Neuroscientists have observed a phenomenon they call the optimism bias. Don’t let the name fool you; it infects even the most naturally pessimistic person. The optimism bias is most directly to blame for our sense of invulnerability to fraud. We naturally believe that tragic events, including the tragedy of losing our life savings, are more likely to happen to other people than to us.

You can understand how this bias is important for everyday life. Without a deep-seated conviction that nothing too terrible is going to happen to us today, we would never leave our homes into a world full of germs, crime, and teenaged drivers. Unfortunately that bias makes us discount the possibility that the financial adviser with whom we are dealing will steal our hard-earned nest egg. And if we don’t believe the danger is present, we take no precautions to protect ourselves. While we like to believe that our assessment of ourselves as “too smart to fall for a scam” is accurate, intelligence alone is not sufficient protection, and that sense of invulnerability is the mental approach that every scam artist most wants you to have.

The congruence bias

You like to think that you never take anything at face value and always do your homework. There is another bias that often wrecks the best efforts of those of us who think of ourselves that way. The “congruence bias” is a product of the way in which our brains make us more efficient. If we had to consider every possible explanation for the hundreds of situations that present themselves to our senses every day, we’d never get anything done. So our brain quickly suggests a theory to explain any new situation. The congruence bias makes us stubbornly attached to that first theory.

When we meet with a financial adviser who we know through church and listen to her describe a seemingly sound investment opportunity, the first theory that occurs to us is that the adviser is honest and that the investment performs as described. Even if we set out to investigate the investment, the congruence bias leads us to accept evidence that supports our theory of legitimacy and reject evidence that seems to contradict that theory.

The congruence bias therefore sets the scam artists’ hook deeper even as we believe that we are doing a thorough pre-investment investigation.

The solution

As church leaders, it’s imperative we have a solution to combat the vulnerabilities that members of our congregations, including ourselves, may have. That solution is a combination of smart risk management strategies involving training and policies and procedures.

Training
Wise Christian fellowships will train all staff and key volunteers. That training must include workers in every ministry area because, especially at large churches, a scam can gain steam in a far corner of the body and destroy hundreds of nest eggs without the leadership ever learning about it.

One example of this came in 2006. Lambert Vander Tuig, a member of Saddleback Church in Lake Forest, California (where more than 20,000 people attend), gave Pastor Rick Warren’s A Purpose-Driven Life to investors in Carolina Development Properties Inc., which supposedly developed luxury communities with exclusive golf courses. Using glossy brochures that included pictures of Jack Nicklaus and Greg Norman, Vander Tuig sold stock in Carolina Development to more than 1,000 people, including Saddleback members. In January 2009, California prosecutors charged Vander Tuig with securities fraud. While neither Pastor Warren nor anyone in leadership at Saddleback knew about the scam, it gathered $52 million.

There is more to learn than this article alone can teach, but an effective training session will last at least half a day and must cover, at a minimum:

  1. cognitive biases,
  2. the different types of characters who prey on Christian fellowships (not all are professional con artists),
  3. subtle red flags, and
  4. effective investigative techniques.

For example, training the staff should include helping them:

  • Overcome cognitive biases by looking for fraud, rather than a confirmation of legitimacy. They’ll never find the former by looking for the latter. Help them understand that most fraudsters are not career criminals; rather, it’s otherwise honest financial professionals who seek to cover up a relatively small loss, only to see the first lie lead to another and another.
  • Recognize vague or jargon-laced answers as a subtle red flag. Encourage them to become students of investment fraud. When we read about actual scams, it equips us to spot red flags that we would never otherwise recognize.
  • Know about two powerful—but little known—websites where they can begin the search for fraud. Pacer.gov allows a search of the docket of every federal court nationwide and can reveal criminal convictions, bankruptcy filings, and lawsuits by disappointed investors from previous deals. Studentclearinghouse.org can uncover misrepresentations about claimed academic credentials. There are no “white lies” in the investment world. A broker who will misrepresent his credentials is afraid that you won’t be impressed with the truth and is more likely to cover up losses.

Armed with such knowledge, staff members can not only protect the flock, but also can alert regulators early and thereby protect the public at large.

policies and procedures
Every fellowship of any size has policies and procedures designed to promote efficiency and transparency. Few, though, have adequate policies and procedures designed to stop the fraud contagion from taking hold.

Anyone who works in sales appreciates the value of satisfied customers. The investment world is no different. The endorsement of a satisfied investor speaks volumes to prospective investors. There is no endorsement a financial scamster would rather have than the endorsement of the lead pastor of a Christian church. Smart fellowships will therefore adopt policies designed to protect the flock against such endorsements. Whether they prohibit the pastor from using a financial adviser from within the flock, require an extensive background search of any investment adviser pastors use, or prohibit pastors from endorsing financial advisers altogether, such policies can protect the church from the most damaging type of financial catastrophe—one seemingly endorsed by church leadership.

Crossroads Christian Church in Corona, California, experienced this very scenario. According to news reports, at least one of the pastors at Crossroads vouched for choir member Randall W. Harding. Harding promised many of Crossroads’s 8,000 members that his business, JTL (“Just the Lord”) Financial Group, could generate attractive, guaranteed returns. He swindled hundreds of Crossroads members out of more than $18 million and served 51 months in federal prison. He was released in December 2009.

Effective policies will also address how the church raises money for expansion. Many churches sell church bonds to construct or expand their church campus. There are more than a few companies that offer to help with that process.

“Never sell the facts. Instead, sell warm stewardship and the Lord,” former Pastor Vaughn Reeves, Sr., told the salespeople he recruited to sell church bonds. Reeves’s company, Alanar, Inc., identified Protestant churches that needed money to build or expand but could not get financing from a bank. Alanar helped its church clients sell bonds to raise that money. The church got the money from the sale of the bonds and the investors received interest payments until the church paid off the debt, at which time the investors received return of their principal. At least that’s how Reeves said it would work. By having his salespeople open each sales call with a prayer and stress each prospect’s “Christian duty” to help the church, Alanar raised more than $120 million from more than 11,000 investors in 150 separate church bond offerings between 1988 and 2005.

Reeves and his sons Chip, Chris, and Josh had a taste for luxurious living. They bought two airplanes, expensive vacations, luxury cars, and enormous houses. Soon there was not enough cash to make interest payments to bondholders, and Reeves began moving cash from the proceeds of one church’s bond offering to make interest payments to investors in a separate bond offering. In October 2010, Reeves was convicted on nine counts of fraud. In December 2010, he was sentenced to 54 years in prison.

Thousands of investors lost millions of dollars in the Alanar scam. Churches that had used Alanar were inevitably stained by Alanar’s misconduct as their members lost money they had invested to fund a building campaign. A policy that required a professional due diligence investigation may have steered churches clear of Alanar and potentially saved those fellowships.

The stakes

In the past ten years, hundreds of Christian fellowships have disappeared because an investment scam swept the body away. Many churches will die this year for that reason, with members moving elsewhere amid doubts about the competence of church leadership. Most tragically, some who were anxious to learn about Christ will leave, never to fill another pew, because the conduct of Christians in the midst of a scam has given them a false, negative picture of the faith.

Albert Einstein defined insanity as “doing the same thing over and over and expecting a different result.” What Christian fellowships are doing—and not doing—over and over is costing Christians (based on multi-year surveys conducted by the North American Securities Administrators, I estimate Christians lose about $1 billion or more every year in fraud losses). It’s time to do something different, and there’s never been a better time to start. With 10,000 baby boomers turning 65 every day, and Social Security and Medicare soon to become less generous, now is the time for Christian leaders to take the fraud threat seriously by adopting sensible policies and training their staffs to be proactive protectors of the resources that God has entrusted to members of the church.
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Can We Be Penalized for an Inflated Property Value?

What churches and donors should know about penalties for property overvaluations.

Richard R. Hammar, Attorney, CPA
Bio

Q: Are there penalties that apply to church members who donate property to their church and claim an inflated value (in excess of the property’s fair market value) when computing their charitable contribution deduction?

The charitable contribution for donations of property is generally the fair market value of the property at the time of the contribution. However, if the property has increased in value, you may have to make some adjustments to the amount of your deduction.

Donors are subject to a penalty if they overstate the value or adjusted basis of donated property. The penalty is 20 percent of the amount by which the donor underpaid his or her tax because of the overstatement, if:
  1. The value or adjusted basis claimed on your return is 150 percent or more of the correct amount, and
  2. The donor underpaid income taxes by more than $5,000 because of the overstatement.
  3. The penalty is 40 percent, rather than 20 percent, if:
    • The value or adjusted basis claimed on the donor’s tax return is 200 percent or more of the correct amount, and
    • The donor underpaid income taxes by more than $5,000 because of the overstatement.

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

Simple Tips for Improving Access and Safety for Elderly Adults

Minor adjustments can remove many barriers to church involvement.

Older adults have a wealth of spiritual gifts, experience, and wisdom to offer others, but physical barriers or poor health can restrict them from participating in church activities. Senior citizens’ greatest frustrations with sanctuaries, arenas, and other facilities that accommodate large crowds are often related to a lack of accessible seating, the need to negotiate stairs, and even the distance from the entrance to the seating. Here are some ideas you can use to improve your ministry’s accessibility and responsiveness to seniors’ safety needs.

Removing Obstacles to Involvement
  • Ramp it up. Adding sturdy ramps at entrances with stairs improve access not only for wheelchair users, but also for people who have arthritis or who use walkers, crutches, or canes. Moms using strollers find them invaluable, as well.
  • Cut the curb. Removing a curb and adding a depressed sidewalk can be accomplished by removing a four-foot section and replacing it with a ramp.
  • Keep rails handy. It’s inexpensive to add handrails to the steps leading to the worship center platform, and it vastly improves safety. Take a few extra minutes each month to make sure the handrails on all stairs and ramps are firmly attached and splinter-free.
  • Give chairs a lift. A portable mechanical lift can help people in wheelchairs get up stairs without a costly elevator.

Improving Safety During Church Activities
  • Have medics on hand. Ask volunteers with medical experience to be present during worship services and senior adult activities at the church.
  • Take a look at your floors. Simply switching to a non-slip wax can make bare floors less slippery. Stretching or replacing lumpy carpeting reduces tripping hazards.
  • Mop up spills. Dry wet floors as soon as possible. Whether it’s melting snow or spilled coffee, liquid of any kind on the floor increases the risk of slip-and-fall accidents.
  • Know how to help. Identify which senior adults may need special attention during an evacuation or medical emergency, and learn how to help them survive.
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Who Owns a Pastor’s Sermons?

Most clergy are shocked when they learn the answer.

Richard R. Hammar, Attorney, CPA
Bio

Most clergy would be shocked to learn that their sermons are works made for hire that are owned by their employing church, and that their sermons cannot be used in any other churches with which they are later employed without the permission of the church with which they were employed when the sermons were created. This can become a contentious issue in the case of clergy whose sermons are recorded and sold publicly by the church.

Are sermons works made for hire?

Are a minister’s sermons works made for hire that are owned by the employing church? To the extent that sermons are written in a church office, during regular working hours, using church secretaries and equipment, it is possible if not likely that they are works made for hire since they are created by an employee within the scope of employment.

The argument could be made that sermons are works for hire even if composed by ministers at home, during “non-office” hours, since they comprise one of the most important functions that they perform on behalf of their employing church and congregation.

What this means for you and your church:
  • The church owns the copyright in the sermons, unless the parties have expressly agreed otherwise in a signed writing that meets the requirements of section 201(b) of the federal law governing copyright.
  • Any written agreement between a church and a minister that transfers copyright ownership in works for hire to the minister may constitute inurement of church assets to the personal benefit of the minister in violation of section 501(c)(3) of the tax code. This jeopardizes the church’s tax-exempt status.
  • The church has the exclusive right to copy and distribute the minister’s sermons. To illustrate, if a minister’s sermons are recorded and distributed publicly, and the minister resigns his or her position and accepts a position at another church, he or she does not have any legal rights with respect to the sermons preached at the previous church. Any further public distribution of the sermons could be done only by the previous church, and not the minister.
  • The minister would not have the legal authority to publish a book based on the sermons that he or she has preached at the church, since the church is the copyright owner of the sermons (as works for hire). As a result, only the church can create, publish, and distribute publications based on the sermons.
  • If the church receives royalties on the sales of the works for hire, this may generate unrelated business income tax.
  • If the church receives royalties on the sales of works for hire, this may violate the “operational test” under section 501(c)(3) of the tax code (which requires that public charities be operated exclusively for exempt purposes), thereby jeopardizing the church’s tax-exempt status.
  • If the church receives royalties from the publication and sale of a work for hire, and remits them back to the employee-author, this may constitute prohibited inurement that will jeopardize the church’s tax-exempt status.

Doing outside work at home

Do you have a writer or composer on staff at your church? If so, it is possible that this person is doing some writing or composing on church premises, using church equipment, during office hours. One way to avoid the problems associated with work made for hire status is to encourage staff members to do all their writing and composing at home. Tell staff members that (1) if they do any writing or composing at church during office hours, their works may be works made for hire; and (2) the church owns the copyright in such works. By urging staff members to do all their personal writing and composing at home, the church also will avoid the difficult question of whether works that are written partly at home and partly at the office are works made for hire.

However, it is likely that pastors’ sermons will be considered works made for hire, whenever and wherever they are composed, since sermons are the most important function that a pastor performs.

The best way to eliminate confusion over who owns the right to a work is by creating an appropriate copyright policy. Such a policy should be drafted by an attorney with experience in handling intellectual property issues. This can be included in a church’s employee handbook and should be communicated clearly to clergy and staff, ideally during the hiring process.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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Preparing Your Church For a Disaster

Six things churches and their members should know.

Richard R. Hammar, Attorney, CPA
Bio

In response to the record number of tornadoes in 2011, and projections for an above-average number of hurricanes, the IRS has issued guidance to assist individuals and employers in preparing for natural disasters. The IRS recommends the following steps when preparing your church for a disaster:

1. Take Advantage of Paperless Recordkeeping for Financial and Tax Records

Many people receive bank statements and documents by e-mail. This method is an outstanding way to secure financial records. Important tax records, such as W-2s, tax returns, and other paper documents, can be scanned onto an electronic format.

Back up your electronic files and store them in a safe place. Make duplicates and keep them in a separate location. Other options include copying files onto a CD or DVD. Also, many retail stores sell computer software packages for recordkeeping.

For off-site records storage, convenience should not be your primary concern. A disaster that strikes is also likely to affect other facilities nearby, making quick retrieval of your records difficult and maybe even impossible.

2. Document Valuables and Business Equipment

The IRS has disaster loss workbooks for individuals (Publication 584, Casualty, Disaster, and Theft Loss Workbook) and businesses (Publication 584-B, Business Casualty, Disaster, and Theft Loss Workbook) that can help you compile a room-by-room list of your belongings or business equipment. This will help you recall and prove the market value of items for insurance and casualty loss claims.

One option is to photograph or videotape the contents of your home or church, especially items of greater value. Ideally, you should store the photos off-site, away from the geographic area of risk.

3. Check on Fiduciary Bonds

Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.

4. Continuity of Operations Planning for Businesses

How quickly your church can get back to business after a disaster often depends on emergency planning done today. Start planning now to improve the likelihood that your church will survive and recover. Review your emergency plans annually. The following preparedness strategies are common to all disasters:
  • Learn where to seek shelter from all types of hazards.
  • Back up your computer data systems regularly.
  • Decide how you will communicate with employees, members, and others.
  • Use cell phones, walkie-talkies, or other devices that do not rely on electricity as a backup to your telecommunications system.

5. Review Insurance

Periodically review your church insurance coverage with your insurance agent to be sure you are adequately insured in the event of a natural disaster.

6. IRS Assistance

If disaster strikes, you can call 1-866-562-5227 to speak with an IRS specialist trained to handle disaster-related issues.

Back copies of previously filed tax returns and all attachments, including Forms W-2, can be requested by filing Form 4506, Request for Copy of Tax Return.

Alternatively, transcripts showing most line items on these returns can be ordered online by calling 1-800-908- 9946 or by using Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript or Form 4506-T, Request for Transcript of Tax Return.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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Official Documentation Requirements for Housing Allowances

Understand how to properly document housing allowances and meet IRS requirements.

Richard R. Hammar, Attorney, CPA
Bio

Last Reviewed: January 20, 2025

Q: For the past several years, our church board has not entered our pastor’s housing allowance in the minutes of its meetings. Members of the board recall discussing housing allowances each year, and many can recall the amounts of the allowances for recent years. Our pastor is wondering if he has improperly been claiming a housing allowance for the years when nothing was reflected in the board minutes.

What Does the IRS Require for Documenting a Housing Allowance?

The income tax regulations specify that the designation of a housing allowance may be contained in “an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action.”

Although it is best practice for the church’s designation to be in writing, the Tax Court has ruled that an oral designation is sufficient. For instance, in Libman v. Commissioner, 44 T.C.M. 370 (1982), the court found no requirement for the designation to be written. Furthermore, if a church board orally agrees to a specific allowance and neglects to document it in writing, the Tax Court has permitted drafting a written record of the action later, dated to the earlier meeting when the unrecorded action occurred (Kizer v. Commissioner, T.C. Memo. 1992-584).

Key Takeaways from Kizer v. Commissioner:
  • The court acknowledged that there was discussion about the allowance, and the board members had a clear recollection of the agreement.
  • The recording secretary confirmed the discussion and the intended amount.
  • The court emphasized that proof of official action, even if oral, could satisfy the designation requirement.

Can Housing Allowances Be Designated Retroactively?

Under no circumstances can a housing allowance be designated retroactively. If a church board never discussed its pastor’s housing allowance for a particular year, the minutes cannot be amended to insert a reference to an allowance that was not officially adopted in advance.

To illustrate, the IRS issued a private letter ruling that disqualified a pastor’s housing allowance due to the lack of evidence that his employing church had designated an allowance for the year in question. Although the church had designated a $10,000 allowance for the previous year, the pastor claimed an additional $10,000 allowance for the following year based on his “understanding” that the previous year’s allowance applied to future years. The IRS disagreed, emphasizing that there was no official action taken in advance to designate the allowance (IRS Private Letter Ruling 8511075).

Best Practices for Documenting a Housing Allowance

To avoid challenges during IRS audits, churches should follow these best practices:
  • Designate housing allowances in advance of each calendar year.
  • Record the designation in writing, such as in the board minutes or a resolution.
  • Avoid relying on oral agreements or assumptions of continuity from previous years.

Failing to document housing allowances properly can create significant proof issues and may result in disqualification of the allowance. Churches should take proactive steps to ensure compliance with IRS guidelines.

FAQ: Documenting a Housing Allowance

1. Does the IRS require housing allowances to be in writing?

While a written designation is recommended, the Tax Court has ruled that oral designations are sufficient if there is satisfactory proof of official action.

2. Can a housing allowance be designated retroactively?

No, housing allowances must be designated in advance of the year for which they apply. Retroactive designations are not allowed under IRS rules.

3. What happens if a church fails to document a housing allowance?

If a church fails to document a housing allowance, the allowance may be disqualified, and the pastor may be required to pay additional taxes.

4. How should a church properly document a housing allowance?

A church should designate the housing allowance in advance through official action, such as board minutes, a resolution, or an employment contract.

For further guidance on housing allowance documentation, refer to IRS.gov or consult with a tax professional experienced in church matters.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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Are Quorums Always Needed at Church Board Meetings?

Whether a quorum is always needed depends on how your church answers these three questions.

Richard R. Hammar, Attorney, CPA
Bio

Q: Our church board meets monthly. Occasionally, less than a quorum is present. Is there any way that the board can conduct business if a quorum is not present? Is there an exception for emergency actions?

The answer to this question may be found in one of three sources:

1. Bylaws.

A church bylaws or other governing document should be consulted first, since its provisions generally will be superior to conflicting provisions in state nonprofit corporation law and parliamentary procedure.

2. State nonprofit corporation law.

Most state nonprofit corporation laws under which many churches are incorporated address the quorum requirement for church boards. To illustrate, the Model Nonprofit Corporation Act, which has been adopted in many states, states:

(a) Except as provided in subsection (b), the articles of incorporation, or the bylaws, a quorum of the board of directors consists of a majority of the directors in office before a meeting begins.

(b) The articles of incorporation or bylaws may authorize a quorum of the board of directors to consist of no fewer than the greater of one-third of the number of directors in office or two directors.

3. Parliamentary law.

The body of parliamentary procedure adopted by the church also may be relevant, especially for unincorporated churches that have not defined a quorum in their governing document. To illustrate, Robert’s Rules of Order, Newly Revised (10th ed.) states:

In the absence of a quorum, any business transacted is null and void. But if a quorum fails to appear at a regular or properly called meeting, the inability to transact business does not detract from the fact that the society’s rules requiring the meeting to be held were complied with and the meeting was convened—even though it had to adjourn immediately.

The only action that can legally be taken in the absence of a quorum is to fix the time to which to adjourn, adjourn, recess, or take measures to obtain a quorum.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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10 Principles for Growing Generous Givers in Your Church

Learn 10 principles to grow generosity in your church, emphasizing discipleship, trust, and the power of prayer for impactful stewardship.

Jay Pankratz

Several years ago, I committed myself to teach all of God’s Word, including giving. In the years since, I have seen God work in our church in amazing ways, and he has brought our people to new levels of maturity. Here are 10 principles I’ve learned about growing givers:

1. Plan ahead

The biggest reason capital stewardship campaigns increase offerings by more than 50 percent is not the new building, but the church’s thoughtful strategy. Churches can attain similar results every year without a building project. In my first church, when I implemented a thorough plan, offerings increased by more than 20 percent in one year.

2. Emphasize discipleship

God has supplied human resources, divine resources (such as prayer), and physical resources (such as buildings and money). How we develop each of these determines the success of our ministries. Effective resource development is not a money grab. It has a spiritual foundation that makes discipleship its primary goal. The key to resource development is growth in people.

3. Bathe it in prayer

Without prayer, a financial program loses its spiritual foundation. We begin our stewardship focus with a call to prayer. We hold special prayer times and conduct a 24-hour prayer service.

4. Identify specific goals

Early in the budget process, we ask all leaders to make a wish list of new ministries or purchases for their area. We do not allow people to designate their giving to these projects, though, because that would undermine giving to our general budget. Instead, we say if our total offerings exceed the budget, we will undertake wish-list items.

5. Get commitments

If I don’t get a specific commitment from people, my Bible teaching has little effect. The first year we had a stewardship emphasis, the line on our offering graph remained horizontal. The following year I used commitment cards, and giving went up 20 percent.

6. Involve more people

Seventy percent of offerings will come from those who serve in the church. That means one of the best ways to increase giving is to increase the number who serve. During our stewardship emphasis, we teach the stewardship of time and talents. We conclude by asking everyone to fill out a ministry service commitment for the coming year.

7. Build trust

Trust is earned by how we spend the church’s money. I must be frugal and spend wisely. People are more generous when they see they can trust me to get maximum ministry value out of the budget and not to overspend. They will also be more supportive of my ideas.

8. Model generosity

Even when financial records are confidential, people somehow discern a pastor’s level of giving. One man told me when his pastor talked about giving, the money counters smirked in disbelief because they knew what he gave. Others noticed and soon got the picture.

9. Be positive

We follow our prayer emphasis and home visitation with four weeks of positive biblical teaching on stewardship. Only one sermon focuses primarily on financial giving. I don’t promise financial wealth or immediate rewards from giving. I say God usually rewards our giving with better things than money—like love, joy, peace, good friends, and families.

10. Spell out sacrifice

Instead of calling our stewardship emphasis “faith promise giving” as I used to do, I now refer to it as “faith sacrifice investment.” Faith communicates that all giving requires us to give up something now based on our faith in God’s love and our future reward from him. I use sacrifice instead of promise because God desires loving sacrifice more than verbal promises. In addition, the only way most people will be able to fulfill their giving promises is by sacrificing a current expense. When people fail to fulfill the faith promise they made to God, it is usually because they tried to increase their giving without having increased income.

Image: AdobeStock/michaklootwijk

Beating Financial Ups and Downs: Analyzing Church Giving Trends

Discover how analyzing church giving trends with monthly reports and year-to-year comparisons can enhance financial planning and stabilize your church’s budget.

Vonna Laue, CPA
Bio

Last Reviewed: May 8, 2025

Understanding Inward Comparisons

Inward comparisons involve reviewing your church’s current financial data alongside past performance—either year-over-year or budget-to-actual. These comparisons can reveal trends that help identify changes within your congregation.

Tracking historical giving patterns is especially helpful. It allows churches to respond strategically instead of reactively when fluctuations occur.

The Value of Monthly Giving Reports

A monthly giving report offers a snapshot of typical fluctuations in church giving throughout the year.

For example, if the finance committee at St. Chaos—a fictional church modeled after many real ones—had tracked this data, the committee might have postponed a roof project until the second quarter, when giving is historically stronger.

Key benefits of understanding monthly giving trends include:

Informed budgeting decisions;

Better planning for large expenses;

Smoother cash flow management.

Monthly giving reports also provide a more realistic cash forecast, which is critical information for preparing the annual budget. Having this information in a graph format may be useful as well.

Year-over-year comparisons

A year-over-year comparison may also be helpful. If your church is growing and has a consistent pattern of increased giving, that is helpful to know. If there is continual decline in giving, wishful budgeting will not create funds. You need to have a realistic view of actual giving. It may also highlight anomalies.

For example, one year-over-year comparison might reveal a seven-percent jump in annual giving one year, a decline in the next year caused by the pastor’s retirement, then another jump of seven percent. As a result, there are significant differentials in giving over that three-year period.

Trend analysis can also be performed by line item. You may find it useful to prepare a statement of activities with multiple years displayed side-by-side. Looking at individual contributions and expense lines in this way can be beneficial for budgeting purposes. It will allow you to see the funds that are received and spent over a period of time, ensuring that the spending patterns of the church align with its mission and vision.

Looking inward

Certain inward comparisons may be required by organizations outside of the church as well. Capital campaign consultants, for example, would be interested in attendance and giving data. Lenders may also have reporting requirements related to debt covenants, or they may request some of these types of information before extending credit to your church.

For more help on church finances, check out Increase Giving at Church.

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

Preventing Embezzlement in Churches: Key Risks and Safeguards

Identify key risks of embezzlement in churches and learn strategies to protect your congregation’s assets.

Vonna Laue, CPA
Bio

Last Reviewed: January 26, 2025

Embezzlement in churches is on the rise. Regardless of a church’s size, three factors can make it more vulnerable to fraud.

Lack of segregation of duties

Churches often fall victim to embezzlement when they rely on one person to handle too many tasks related to handling the cash. For instance, even if Jane, the church bookkeeper, is able to sign checks, if she also has access to the check stock and the general ledger, she is in a prime position to steal money from the church. Her duties are not sufficiently segregated. A better practice would be to have Bill, the treasurer, sign the checks. By dividing the duties, there’s a greater degree of accountability and oversight.

Trust

Churches need to trust their employees, but trust itself can’t stand in the way of making good decisions regarding internal controls. Almost every church I have worked with that has experienced fraud said, “We trusted her.” Trust is not a sufficient strategy for protecting the church’s assets. Churches owe it to their congregation–and to their employees–to implement financial safeguards that help prevent fraud from occurring.

Change

Churches that experience fast growth are especially vulnerable to fraud. New personnel may not be trained properly or understand the importance of the procedures that are in place. If the church is growing quickly, leaders may not provide enough oversight of new employees to immediately recognize when certain practices are not being followed as assumed. Slow-growing churches are at risk too.

Like a frog in a pot of simmering water, if your church is growing gradually, you may continue doing things the way you’ve always done them without recognizing that some of your internal controls have fallen by the wayside or are no longer effective given your new, larger size. You may also be at risk because of changes such as new technology. If people aren’t properly trained on the necessary controls in software, there can be breakdowns there as well.

Is lack of segregation of duties, trust, or change putting your church at risk for embezzlement? What steps are you taking to prevent it?
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.
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