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Politics, Churches, and Constitutional Protections

The Johnson Amendment and other tax laws try to limit activities by churches that intersect with politics—but certain constitutional protections allow more engagement than some realize.

Erik Stanley

Every election year churches question what they can do or say about the upcoming election. And quite often the central question is how far is too far?

Many churches earnestly attempt to navigate this dilemma while others are simply silent.

As a pastor or church leader, do you know what your church may legally do during an election year? Or would you wonder if you really understood what the law says and how it applies to your church?

Unfortunately, articles and guides about the Internal Revenue Service (IRS) regulations on election-year activities by churches often overlook the US Constitution and its safeguards of the free exercise of religion, freedom of speech, and protection from government intrusion into the church.

Your church’s ability and freedom to address an election are broad, even under current tax law. This is especially true considering the constitutional guarantees churches enjoy.

Through exploring and explaining the Johnson Amendment (the law behind much of the confusion) leaders will learn more from this article about their constitutional protections.

This article will also point out key cautions wwith regard to candidates running for office.

Leaders also will learn more about how other tax laws allow churches to engage in some lobbying and advocacy efforts tied to legislative matters and ballot measures.

What is the Johnson Amendment?

The Johnson Amendment is a federal tax law restricting a tax-exempt organization’s interactions with candidates and elections. The Amendment gets its name from Senator Lyndon Johnson. He was the motivating factor in adding the provision to the tax code in 1954.

The history of the Amendment suggests that Johnson wanted to silence two powerful, secular nonprofit organizations. The organizations were opposing his reelection to the US Senate because they believed he was soft on communism.

The Amendment was part of a massive tax overhaul bill and was inserted into the bill by a voice vote.

There were no debates or committee hearings. There was no meaningful consideration of how the Amendment would impact the constitutional rights of churches.

President Eisenhower signed the tax bill, which included the Johnson Amendment, into law without comment in August 1954. Since that time, the Johnson Amendment has been part of federal tax law.

The Johnson Amendment is the last sentence of section 501(c)(3) of the Internal Revenue Code. It states that nonprofit organizations may not “participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.” Section 501(c)(3), of course, applies to churches.

How is the Johnson Amendment enforced?

The IRS enforces the Johnson Amendment along with the rest of the tax code. Its record of enforcement since 1954 has been spotty and uneven. For example, on its website, the IRS states that nonprofit organizations are “absolutely prohibited from directly or indirectly” violating the Johnson Amendment. Yet there is no explanation of what an “indirect” violation of the Johnson Amendment is or could be.

The Johnson Amendment itself prohibits a church from “participating in” a candidate’s campaign. However, the law contains no clear definition of what “participation” consists of.

Despite this vagueness, the IRS warns that a violation of the Johnson Amendment “may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes.”

The predictable result of the inherent vagueness and murkey enforcement rules is to chill the speech of America’s churches and pastors.

Pastors often admit they don’t know what is considered prohibited speech when it comes to candidates and elections.

So, most just say nothing. Only an intrepid few may decide to shoot in the dark and hope for the best.

This only magnifies the problem. Pastors are frequently intimidated because they do not know what the IRS thinks they can or cannot say.

This chill on speech is further exacerbated by the fact that churches cannot just sue the IRS to have the Johnson Amendment declared unconstitutional. The rules of federal court jurisdiction (when a lawsuit may be brought to court) prohibit lawsuits against the IRS until a provision of the tax code has been enforced against a taxpayer and a penalty has been levied and upheld during an internal IRS appeal process.

The IRS decides when to go to court

The result is that the IRS decides how, when, and with whom it will get into a lawsuit with. And the IRS has studiously avoided a lawsuit over the constitutionality of the Johnson Amendment.

The IRS prefers a status quo in which the law is never clarified. As a result, most churches simply self-censor.

No court has confronted the constitutionality of government regulation of a church’s political speech during a church service or event. Yet this is precisely what the Johnson Amendment claims authority to do.

Moreover, some organizations that advocate for radical enforcement of the “separation of church and state” take advantage the amendment’s vagueness.

One organization even conducted a nationwide advocacy campaign where it asked its supporters to turn in churches to the IRS.

Never mind that its view of the Johnson Amendment was so extreme the IRS wouldn’t act on the complaints.

Just the threat of a complaint or an actual complaint followed by a press release further chilled free speech.

Is the Johnson Amendment constitutional?

Numerous legal scholars have written law review articles arguing that the Johnson Amendment is unconstitutional. These arguments focus on the Establishment, the Free Exercise, and the Free Speech Clauses of the First Amendment to the US Constitution.

What follows is a summary of some of the legal arguments for how the Johnson Amendment appears to violate each clause.

The Establishment Clause

The Establishment Clause prohibits excessive entanglement of the government with religion. The IRS cannot enforce the Johnson Amendment without an IRS agent parsing the speech of a church or a pastor’s sermon or other speech to determine if it crossed the line into a Johnson Amendment violation.

The US Supreme Court has held—in more than one case—that a law that requires pervasive government surveillance and monitoring of religion results in excessive entanglement of the government with religion.

Put simply, the government cannot enforce the Johnson Amendment without intruding into the internal activities and speech of a church. Such enforcement of the Johnson Amendment would unconstitutionally entangle the government with religion.

The Free Speech Clause

The Free Speech Clause prohibits “content-based” restrictions on speech. This kind of restriction is one where the government must review the content of speech to determine if it violates the law.

In cases like this, courts hold the government to the highest constitutional standard in order to justify why it needs to review the content of speech.

The Johnson Amendment certainly requires the IRS to review the content of a church’s speech. In fact, there is no way to enforce the Johnson Amendment without reviewing the content of a church’s speech. This content review, coupled with the vagueness of the Johnson Amendment’s text, gives the government broad censorship power to prohibit speech.

Content-based restrictions on speech are highly disfavored. In fact, they are usually unconstitutional because these kinds of restrictions give the government far too much censorship power.

The Free Speech Clause also prohibits a speech restriction that creates an unconstitutional condition. Stated simply, the Johnson Amendment forces churches to give up their speech rights in order to retain their tax-exempt statuses. This is despite the fact that the Constitution (by virtue of the First Amendment’s Establishment Clause) requires the government to exempt a church from taxation.

Another way of looking at it

Would it be okay for the government to tell churches that they can retain their tax-exempt statuses only if they provide free housing for military troops (barred by the Third Amendment)? What about if they allow the police to search their buildings without warrants (barred by the Fourth Amendment)? Those kinds of restrictions would be instantly condemned—and rightly so—as unconstitutional. Yet the Johnson Amendment says churches can retain their tax-exempt statuses only if churches forfeit their First Amendment rights of speech. This is an unconstitutional trade-off.

The Free Speech Clause also prohibits vague restrictions on speech. The reason is that vague restrictions may result in self-censorship and a chill on speech. As we have already discussed, the Johnson Amendment is full of the type of vagueness to create such a chill.

The Free Exercise Clause

The Johnson Amendment also violates the Free Exercise Clause.

This is because it expressly discriminates against religious speech and penalizes such speech with civil or criminal penalties.

Why hasn’t the Johnson Amendment been declared unconstitutional?

Given the serious constitutional violations inherent in the Johnson Amendment, why has it not been declared unconstitutional? The answer lies in the IRS’s refusal to allow a direct constitutional challenge to the Johnson Amendment.

Again, most churches self-censor, thereby doing the IRS’s enforcement job for it. The few churches investigated for Johnson Amendment violations have generally settled with the IRS. They did so to avoid draconian tax penalties and consequences.

But outside of those few examples, the IRS has essentially avoided direct enforcement action against churches. Earlier in my career, I represented churches that wanted to create a civil rights “test case” challenge to the Johnson Amendment. Over the course of several years, I represented over 4,000 pastors who preached sermons seemingly violating the Johnson Amendment and sent them to the IRS.

This effort was intended to foster a serious constitutional challenge to the Johnson Amendment, something the Constitution gives citizens the right to do.

These churches were willing to endure the consequences for the right to challenge the constitutionality of the Johnson Amendment. Yet the IRS did not investigate or punish any of the churches. The IRS did not allow one court case. Even so, the law persists to this day despite the attempt to create a constitutional test case.

The IRS prefers the status quo of self-censorship by churches and a chill on speech. It can enforce the Johnson Amendment easily by making threatening statements that result in churches enforcing the law against themselves.

What should happen with the Johnson Amendment?

The status quo is a burden on the constitutional rights of America’s churches and pastors. In the absence of a court challenge to the Johnson Amendment, what should happen with the law?

Some have argued that getting rid of the Johnson Amendment would turn churches into pawns of the political parties. Yet the church does not need the government to protect it against itself. We should not allow an unconstitutional law to remain out of a misguided motivation to protect the theological purity of the church. That is not the government’s job anyway.

Others have argued that getting rid of the Johnson Amendment would allow churches to funnel “dark money” to political candidates, campaigns, and parties. Yet the Johnson Amendment applies to far more than just money.

Allowing an unconstitutional speech restriction that entangles the government with religion as a means of preventing political contributions by churches is overbroad. The simple answer is to prohibit political contributions by churches. Congress attempted to do just that when it introduced the Free Speech Fairness Act. The Act would have amended the Johnson Amendment to prohibit political contributions but remove the unconstitutional speech restrictions. The effort stalled, though, and has not moved forward to date.

The answer is not to jettison the Johnson Amendment entirely. Let’s instead remove provisions that prohibit the free speech and free exercise rights of America’s churches and pastors. Perhaps such an amendment will become politically viable in the future.

What about ballot initiatives and legislation?

In addition to the Johnson Amendment, section 501(c)(3) of the Tax Code also includes a limitation on legislative activities by tax-exempt organizations. This section was added to the tax code in 1934. It states that “no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation.” This restriction applies to activities that support or oppose pieces of legislation, such as bills and ballot initiatives.

The lobbying restriction was sponsored by Sen. David Reed. Reed is a Republican from Pennsylvania who wanted to silence a nonprofit organization, the National Economy League. The League was in direct with Sen. Reed over the issue of benefits to veterans. The National Economy League was lobbying against a bill introduced by Sen. Reed who had made the issue, and his bill, the centerpiece of his reelection campaign to the US Senate.

Tax Considerations

For additional discussion on what constitutes “substantial,” see attorney Richard R. Hammar’s article “The Tax Implications of Churches and Political Involvement.”

Unlike the Johnson Amendment, the restriction on legislation is not an absolute prohibition, but just a limitation. The IRS does not define what an insubstantial amount of legislative activity is, but some guidance suggests that more than 5 percent to 15 percent of a church’s overall activities might be considered substantial.

Churches are allowed to directly support or oppose legislation, encourage congregations to vote for or against proposed laws, and speak into broader matters of public policy. None of these activities come close to the legislative limit included in section 501(c)(3).

What should churches do when it comes to an election?

Unless or until Congress amends the Johnson Amendment or a court declares it to be unconstitutional, it is still law. And the law regarding lobbying about legislation remains in place. When it comes to interacting with elections and candidates, churches should consider the following.

Recognize the significant and underappreciated constitutional protections churches have

Church leaders may be surprised by how much their churches may do in an election year. There are valuable resources that will help to cut through some of the vagueness and provide a roadmap as to what is permissible under current law. That’s true with respect to candidates for political office, as discussed above. That’s also true with respect to lobbying efforts related to legislative matters and ballot measures, as also discussed above.

Additionally, there are numerous activities that fall well within the bounds of current IRS guidance and tax law that churches also should contemplate. Such activities range from public forums inviting all candidates to speak, to compilations of voting records (absent editorial comment or approvals/disapprovals of those records), to neutral voter registration drives.

More on Churches and Politics

Find additional guidance on Church Law & Tax’s Recommended Reading page, including a chart detailing the tax code and various political activities.

Even though the Johnson Amendment is unconstitutional, churches should appreciate the vast constitutional protections they currently enjoy without threat of losing their tax-exempt statuses. Doing so can help you avoid self-censorship and feel confident that there is a great deal your church may do should its leaders feel called to do so. Moreover, there are legal groups waiting and ready to provide pro-bono representation in the event a legal challenge ever arises.

Each church must decide for itself how to address politics and elections

For far too long, the Johnson Amendment and IRS guidance has made this kind of decision a legal decision, instead of a theological decision. The fact that this is true should be concerning.

Not every church will be called by its theology to speak about an election or candidates, but some will. Pastors and churches know their congregations best. Every church should have the choice to decide what to do for itself, not out of fear of violating the law, but out of its convictions informed by its theology.

Erik Stanley is an attorney at Provident Law, specializing in religious liberties, churches and nonprofits, commercial litigation, and business law, and the former senior counsel for Alliance Defending Freedom. He is an advisor at large for Church Law & Tax.

Key Tax Dates for May 2022

Along with monthly and semiweekly requirements, note quarterly filing and forms pertinent to your church or ministry.

Richard R. Hammar

Monthly requirements

If your church or organization reported withheld taxes of $50,000 or less during the most recent lookback period (for 2022 the lookback period is July 1, 2020, through June 30, 2021), then withheld payroll taxes are deposited monthly.

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Monthly deposits are due by the 15th day of the following month. Note, however, that if withheld taxes are less than $2,500 at the end of any calendar quarter (March 31, June 30, September 30, or December 31), the church or organization need not deposit the taxes.

Instead, it can pay the total withheld taxes directly to the IRS with its quarterly Form 941. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes (7.65 percent of wages), and the employer’s share of Social Security and Medicare taxes (an additional 7.65 percent of employee wages).

Semiweekly requirements

If your church or organization reported withheld taxes of more than $50,000 during the most recent lookback period (for 2022 the lookback period is July 1, 2020, through June 30, 2021), then the withheld payroll taxes are deposited semiweekly.

This means that for paydays falling on Wednesday, Thursday, or Friday, the payroll taxes must be deposited on or by the following Wednesday. For all other paydays, the payroll taxes must be deposited on the Friday following the payday.

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

May 10, 2022: Employer’s quarterly federal tax return—Form 941

Churches having nonminister employees (or one or more ministers who report their federal income taxes as employees and who have elected voluntary withholding) may file their employer’s quarterly federal tax return (Form 941) by this date instead of April 30 if all taxes for the first calendar quarter have been deposited in full and on time.

May 16, 2022: File forms 990, 990-T, and 5578

Information return—Form 990

An annual information return (Form 990) for tax-exempt organizations is due by this date for tax year 2021. Form 990 summarizes revenue, expenses, and services rendered. Organizations exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code must report additional information on Schedule A.

Note. Churches, conventions and associations of churches, “integrated auxiliaries” of churches, and church-affiliated elementary and secondary schools are among the organizations that are exempt from this reporting requirement. Organizations not exempt from this reporting requirement must file the Form 990 if they normally have annual gross receipts of $50,000 or more.

Unrelated business income tax return—Form 990-T

An unrelated business income tax return (Form 990-T) must be filed by this date by churches and any other organization exempt from federal income tax that had gross income from an unrelated trade or business of $1,000 or more in 2021.

Certificate of racial nondiscrimination—Form 5578

Annual certification (for calendar year 2021) of racial nondiscrimination by a private school exempt from federal income tax (Form 5578) must be filed by this date by schools that operate on a calendar-year basis.

Fiscal year schools must file the form by the 15th day of the fifth month following the end of their fiscal year. This form must be filed by preschools, primary and secondary schools, and colleges, whether operated as a separate legal entity or by a church.

If an organization is required to file Form 990 (Return of Organization Exempt From Income Tax), or Form 990-EZ (Short Form Return of Organization Exempt From Income Tax), the certification must be made on Schedule E (Form 990 or 990-EZ), Schools, rather than on this form.

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Lessons From Mars Hill: Who Pilots Your Church?

On-Demand Webinar: Why quiet governance changes run the risk of eroding congregational trust.

Erika E. Cole, Attorney

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

In recent years, a growing number of churches have contemplated changing the governance structures contained in their bylaws. For practical reasons, these changes have often moved those structures from ones where voting rights for key decisions reside with members of the congregation to ones where that authority exclusively rests in the hands of a group of elders or the church’s board. To some church leaders, the changes make sense because they can reduce burdens and create efficiencies. But as Christianity Today’s podcast The Rise and Fall of Mars Hill powerfully demonstrates, significant problems can arise in a church when a move to consolidate decision-making power occurs with little or no warning to the church’s members.

In this exclusive webinar for Advantage Members, attorney Erika Cole dives deeply into this trend, examining the roles and purposes of governance, the reasons some churches consider changes, and why leadership must exercise great caution and transparency before ever proceeding with one.

You can download the presentation slides here.

The Dangers of a Quiet Governance Change

Subtly shifting who has authority to make key decisions in your church may make sense—but may also erode congregational trust.

Erika E. Cole, Attorney

Bio

In recent years, and without much fanfare, many churches have quietly shifted their governance structures, moving from structures where voting rights for key decisions reside with members of the congregation to structures where that authority exclusively rests in the hands of a group of elders or the church’s board.

To church leadership, the shift may make sense on paper, reducing burdens and creating efficiencies. But making such a shift also threatens to erode the trust of a congregation if it is done for the wrong reasons, or if it is done for good reasons, but mishandled. When such a significant change goes awry—as has been witnessed at a handful of high-profile churches—the consequences can be devastating.

Christianity Today’s podcast The Rise and Fall of Mars Hill powerfully demonstrates the trouble that can arise in a church when decision-making power gets consolidated.

Situations like this one offer an important caution: Church leaders are wise to review and understand their church’s governance model, and why it exists, before making plans to change it. And if they choose to pursue a change, leaders must carefully contemplate how to communicate with their congregations to demonstrate transparency and integrity throughout that process.

What is church governance?

The word “governance” comes from a Greek word meaning “to pilot” or “to steer.” In the context of church operations, governance connotes who has decision-making authority in significant matters such as buying or selling church property, adopting the annual budget, the approval of a merger or acquisition, and the hiring or firing of key leaders.

More on Church Governance

Go deeper with Church Law & Tax’s Church Governance by attorney Richard R. Hammar and other legal and church leadership professionals.

A church’s governance structure most commonly gets set at the time the church is founded. How it gets set depends on several factors, including denominational affiliations.

The role of bylaws

Many churches incorporate at their founding. Whether incorporated or not, nearly all adopt governing documents known as bylaws. These documents define the systems and processes for decision-making and leadership within the church.

Common Church Governance Models

Church bylaws typically reflect one of these models:

Board-led church: A governing board (e.g., elders, trustees, directors) acts on behalf of the congregation. The board makes operational decisions without congregational involvement, unless required by state law.
Congregation-led church: Members vote on major decisions, as outlined in the bylaws. This model encourages broad participation and transparency.
Denomination-led church: A hierarchical structure, governed by a Book of Discipline or similar document. Local churches operate under the oversight and guidelines of the denomination.

A Healthy Governance Ecosystem

A strong governance model often includes:

Pastoral leadership
A governing board (elders, trustees, directors)
The congregation

All three components can coexist across different governance models.

Shifting Governance Trends

After more than 20 years representing churches, I’ve reviewed hundreds of bylaws. While the congregation-led model remains common, many churches are now shifting toward board- or elder-led models that consolidate decision-making.

This shift often occurs through bylaw revisions, reducing or eliminating the congregation’s decision-making role. When one part of the governance ecosystem is removed, problems frequently arise.

The Role of Church Members

Church members are often the lifeblood of a congregation. Removing their voice from decisions can cause confusion and distrust.

A Personal Example

I grew up in a rural church with fewer than 200 members. These members:

Maintained the building
Provided music and administration—unpaid
Shared meals and supported one another

Quarterly business meetings allowed members to vote on everything from budgets to special events. Membership came through baptism and fellowship. Members were deeply invested in church operations.

When a congregation-led church changes its structure suddenly, members can feel blindsided.

Why Churches Shift Away from Congregation-Led Models

Church leaders may choose to move away from congregation-led structures for reasons like:

Avoiding conflict: To reduce tension during contentious meetings.
Increasing efficiency: To streamline decisions without red tape.

However, fast decisions are not always wise. Requiring a majority or supermajority ensures careful deliberation and protects against impulsive decisions.

When Governance Changes Cause Conflict

I’ve observed a rise in litigation tied to governance changes, especially when:

Membership definitions are altered
Bylaws are revised without transparency

Courts are increasingly weighing in—especially when the dispute involves corporate governance rather than doctrine.

Key Legal Insight

Judges often side with long-term attendees and donors who are excluded from decision-making, especially if they were not informed of bylaw changes. Courts can rule on corporate matters that don’t require interpreting religious doctrine.

A Notable Cautionary Tale: Mars Hill Church

Mars Hill never used a congregation-led model, but its downfall underscores the risks of governance consolidation.

Founded in 1996, Mars Hill grew to 12,000 weekly attendees across 15 campuses. In 2014, internal conflicts and leadership issues led to its collapse.

One key decision: Founder Mark Driscoll revised the bylaws to concentrate power among a small group of elders—including himself. This governance shift limited accountability and fueled the church’s downfall. (See The Rise and Fall of Mars Hill, Episode 7.)

Six Key Considerations Before Changing Governance

Churches considering a move from congregation-led to board-led structures should address these:

Assess current governance: Review bylaws, incorporation documents, and denominational rules.
Check state laws: Some states require congregational votes regardless of internal governance.
Evaluate current model: Consider the reasons your church chose a congregation-led model.
Explore alternatives: Could your goals be met within the existing model?
Plan the process: How will you involve the congregation, communicate changes, and handle dissent?
Handle legal updates: Revise incorporation documents and bylaws to align with new governance.

Proceed with Transparency and Caution

A governance change made in secrecy can devastate a church. The Mars Hill story offers a strong caution: concentrated power with no accountability can create lasting damage.

Additional Resources

Podcast: Erika Cole interviews Rise and Fall of Mars Hill creator Mike Cosper on church governance
Bottom line: Don’t shrink decision-making to a few voices without careful review and counsel. Always consult experienced legal advisors before making major governance changes.

Video

Church Formation Basics

Church formation basics gives leaders insights into how a church is formed, why it matters, and how it guides future decisions.

Lisa A. Runquist, Attorney

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Last Reviewed: October 23, 2023

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Church formation basics is important because how a church is legally formed directly affects how it operates.

From articles of incorporation to bylaws to tax status, church leaders must understand how their church is formed and how that formation shapes the decisions they make, and the ways they make those decisions.

In this helpful, hands-on video, attorney Lisa Runquist, a longtime advisor for Church Law & Tax, delves deeper into the formation processes for churches and explains how the pieces that are essential to formation become instrumental to how those churches function, both internally and externally for years to come.

Download the slids to follow along and take notes as you watch.

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Editor’s Note. This video is exclusive to Church Law & Tax members only. However, you can sign-up here to watch this video for free.

Lisa A. Runquist has more than 40 years of experience as a transactional lawyer, both with nonprofit organizations and business organizations.

Key Tax Dates April 2022

Filing returns, key quarterly deadlines, exemptions, and more.

Richard R. Hammar, Attorney, CPA

Bio

Monthly requirements

If your church reported withheld taxes of $50,000 or less during the most recent lookback period (for 2022 the lookback period is July 1, 2020, through June 30, 2021), then withheld payroll taxes are deposited monthly.

Monthly deposits are due by the 15th of the following month. Note, however, that if withheld taxes are less than $2,500 at the end of any calendar quarter (March 31, June 30, September 30, or December 31), the church need not deposit the taxes.

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

Semiweekly requirements

If your church reported withheld taxes of more than $50,000 during the most recent lookback period (for 2022 the lookback period is July 1, 2020, through June 30, 2021), then the withheld payroll taxes are deposited semiweekly with a bank.

April 18, 2022: Tax returns, amended returns, extension, exemption from Social Security, and quarterly payment

Individual tax returns

Federal income tax and self-employment tax returns by individuals for calendar year 2021 are due by this date.

Amended federal income tax returns

Last day for most taxpayers to file an amended federal income tax return (Form 1040X) for calendar year 2019 (unless you received an extension of time to file your 2019 return). See the instructions for Form 1040X on the IRS website.

Extension for file tax returns

Filing Form 4868 gives taxpayers until October 15 to file their 2021 tax return but does not grant an extension of time to pay taxes due. Taxpayers should pay their federal income tax due by April 15, 2022, to avoid interest and penalties.

Exemption from Social Security coverage

Last day to file an exemption from Social Security coverage (Form 4361) for most eligible clergy who began performing ministerial services in 2020 (deadline extended if applicant obtains an extension of time to file Form 1040).

Quarterly estimated tax payments for certain employees and churches

Ministers who have not elected voluntary withholding and self-employed workers must file their first quarterly estimated federal tax payment for 2022 by this date (a similar rule applies in many states to payments of estimated state taxes).

Nonminister employees of churches that filed a timely Form 8274 (waiving the church’s obligation to withhold and pay Social Security and Medicare taxes) are treated as self-employed for Social Security purposes, and are subject to the estimated tax deadlines with respect to their self-employment (Social Security) taxes unless they ask their employing church to withhold an additional amount of income taxes from each paycheck (use a new Form W-4 to make this request) that will be sufficient to cover self-employment taxes.

A church must make quarterly estimated tax payments if it expects an unrelated business income tax liability for the year to be $500 or more. Use IRS Form 990-W to figure your estimated taxes. Quarterly estimated tax payments of one-fourth of the total tax liability are due by April 15, June 15, September 15, and December 15, 2022, for churches on a calendar year basis. Deposit quarterly tax payments electronically using EFTPS.

April 29, 2022: Employer exemption

Churches hiring their first nonminister employee between January 1, 2022, and March 31, 2022, may exempt themselves from the employer’s share of Social Security and Medicare taxes by filing Form 8274 by this date (nonminister employees are thereafter treated as self-employed for Social Security purposes).

The exemption is only available to churches that are opposed on the basis of religious principles to paying the employer’s share of Social Security and Medicare taxes.

April 30, 2022: Employer’s quarterly federal tax returns

Enclose a check in the total amount of all payroll taxes (withheld income taxes, the withheld employee’s share of Social Security taxes, and the employer’s share of Social Security taxes) if these taxes were less than $2,500 on March 31, 2022.

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

Key Tax Dates March 2022

Monthly and semiweekly requirements for depositing payroll taxes.

Richard R. Hammar, Attorney, CPA

Bio

Monthly requirements

Monthly deposits are due by the 15th the following month. Note, however, that if withheld taxes are less than $2,500 at the end of any calendar quarter (March 31, June 30, September 30, or December 31), the church need not deposit the taxes.

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

Semiweekly requirements

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

Key Tax Dates February 2022

Forms 941, 1098-C, 1095-C, and 1094-C are due this month.

Richard R. Hammar, Attorney, CPA

Bio

Monthly requirements

If your church or organization reported withheld taxes of $50,000 or less during the most recent lookback period (for 2022, the lookback period is July 1, 2020, through June 30, 2021), then withheld payroll taxes are deposited monthly. Monthly deposits are due by the 15th day of the following month.

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

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

Semiweekly requirements

If your church or organization reported withheld taxes of more than $50,000 during the most recent lookback period (for 2022, the lookback period is July 1, 2020, through June 30, 2021), then the withheld payroll taxes are deposited semiweekly.

February 10, 2022: Employer’s quarterly federal tax return due

Churches having nonminister employees (or one or more ministers who report their federal income taxes as employees and who have elected voluntary withholding) may file their employer’s quarterly federal tax return (Form 941) by this date instead of January 31 if all taxes for the fourth calendar quarter (of 2021) have been deposited in full and on time.

February 28, 2022: IRS forms due

Filing IRS 1098-C for reporting vehicle sale or donation

Churches file Copy A of Form 1098-C with the IRS by this date to report the sale or use of a donated vehicle. Generally, you must furnish Copies B and C of this form to the donor no later than 30 days after the date of sale if box 4a is checked, or 30 days after the date of the contribution if box 5a or 5b is checked. If box 7 is checked, do not file Copy A with the IRS and do not furnish Copy B to the donor. You may furnish Copy C to the donor. The donor is required to obtain Copy C or a similar acknowledgment by the earlier of the due date (including extensions) of the donor’s income tax return for the year of the contribution or the date that the return is filed. If filing electronically, this form is due by March 31, 2022.

Filing 1095-C and 1094-C for applicable large employers and ACA compliance

Applicable large employers, generally employers with 50 or more full-time employees (including full-time equivalent employees) in the previous year, must file a Form 1095-C for each employee who was a full-time employee of the employer for any month of the previous calendar year by this date. Generally, the employer is required to furnish a copy of Form 1095-C (or a substitute form) to the employee.

The employer also files a Form 1094-C transmittal form with the IRS (including copies of each Form 1095-C). The purpose of this form is to ensure that applicable large employers are complying with the shared responsibility provisions of the ACA. Forms 1094-C and 1095-C must be issued by March 31, 2022, if issued electronically.

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

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IRS Bumps 2025 Business Use Mileage Rate to 70 Cents Per Mile

The IRS has once again increased the business use mileage rate. Moving, medical, and charitable rates remain unchanged.

The Editors

Last Reviewed: January 6, 2025

The Internal Revenue Service (IRS) has released the 2025 optional standard mileage rates. These rates are used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Effective January 1, 2025, the rates are:

70 cents per mile driven for business use (up 3 cents from the 2024 rate).
21 cents per mile driven for medical or moving purposes for certain members of the Armed Forces (no change from the 2024 rate).
14 cents per mile driven in service of charitable organizations (it takes an act of Congress to change this rate).

Note: The rates apply to electric and hybrid-electric automobiles, as well as gasoline and diesel-powered vehicles.

Don’t wait! Start 2025 on a good footing with a Church Law & Tax Advantage Membership and gain access to cohorts, webinars, product discounts, and more, including full access to trusted content from our trusted team of legal, tax, finance, HR and technology advisors.

For more on reimbursements of transportation expenses and other key tax guidance for churches and ministers, see the 2025 Church & Clergy Tax Guide.

Limitations created under Tax Cuts and Jobs Act of 2017

Under the Tax Cuts and Jobs Act of 2017, taxpayers cannot:

claim a miscellaneous itemized deduction for unreimbursed employee travel expenses and,
cannot claim a deduction for moving expenses, unless they are members of the Armed Forces on active duty moving under orders to a permanent change of station. See Moving Expenses for Members of the Armed Forces for more details

Taxpayers can calculate the actual costs of using their vehicle rather than using the standard mileage rates. Taxpayers can usually only use the standard mileage rate in the first year a car is available for business use. In later years, taxpayers can choose either the standard mileage rate or actual expenses.

Leased vehicles must use the standard mileage rate method for the entire lease period (including renewals). This applies if the standard mileage rate is chosen.

With tax season around the corner, you may be thinking of using a tax preparation software package. But beware, not all packages fit the unique needs of ministers. Click here to learn more.

What does the business mileage rate increase mean for churches?

Increased amounts of reimbursement represent increased budget expenses, and that means adjusting budgets in ways that affect other ministry spending.

Conversely, eliminating or reducing reimbursements shifts the burden to pastors and employees using personal vehicles for church-related business.

Note: Unreimbursed employee business expenses are not deductible under the Tax Cuts and Jobs Act of 2017 (the “Act”). As a result, pastors and employees with unreimbursed mileage cannot seek tax relief on next year’s federal income tax returns. The act allows for a reinstatement of the deduction for unreimbursed employee business expenses after 2025.

You may also want read through this Q&A with CPA and Church Law & Tax Senior Editorial Advisor Michael Batts.

One final note:

Churches with an accountable reimbursement arrangement can reimburse eligible employees who use their vehicles for church-related business. Employees and pastors must properly track and document their business miles under these arrangements.

Unreimbursed employee business expenses are not deductible. Therefore, employees can no longer calculate a mileage deduction on their annual tax returns.

Key Tax Dates January 2022

Note deadlines for payroll taxes, fourth quarter estimated payment, and various forms.

Richard R. Hammar, Attorney, CPA

Bio

Monthly requirements

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

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

Semiweekly requirements

January 1, 2022: Payroll Taxes

Social Security and Medicare taxes

Employees and employers each pay Social Security and Medicare taxes equal to 7.65 percent of an employee’s wages. The tax rate does not change in 2022.

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

For 2022, the maximum wages subject to Social Security taxes (the 6.2 percent amount) is $147,000. Stated differently, employees who receive wages in excess of $147,000 in 2022 pay the full 7.65 percent tax rate for wages up to $147,000, and the Medicare tax rate of 1.45 percent on all earnings above $147,000. Employers pay an identical amount. The Medicare tax rate for certain high-income taxpayers increases by an additional 0.9 percent.

Self-employment taxes

The self-employment tax rate (15.3 percent) does not change in 2022. The 15.3 percent tax rate consists of two components: (1) a Medicare hospital insurance tax of 2.9 percent, and (2) an “old age, survivor and disability” (Social Security) tax of 12.4 percent. There is no maximum amount of self-employment earnings subject to the Medicare tax. The tax is imposed on all net earnings regardless of amount.

For 2022, the maximum earnings subject to the Social Security portion of self-employment taxes (the 12.4 percent amount) is $147,000. Stated differently, persons who receive compensation in excess of $147,000 in 2022 pay the combined 15.3 percent tax rate for net self-employment earnings up to $147,000, and only the Medicare tax rate of 2.9 percent on earnings above $147,000. The Medicare tax rate for certain high-income taxpayers increases by an additional 0.9 percent.

These rules directly impact ministers, who are considered self-employed for Social Security with respect to their ministerial services. Ministers should take these rules into account in computing their quarterly estimated tax payments.

Federal incomes taxes

Beginning on this date, churches having nonminister employees (or a minister who has elected voluntary withholding) should begin withholding federal income taxes from employee wages.

To know how much federal income tax to withhold from employees’ wages, employers should have a Form W-4 on file for each employee. Employees should file an updated Form W-4 for 2022, especially if they owed taxes or received a large refund when filing their previous tax return.

Employees should use the IRS Tax Withholding Estimator to determine accurate withholding.

January 15, 2022: Fourth quarter estimated taxes due

Ministers (who have not elected voluntary withholding) and self-employed workers must file their fourth quarterly estimated federal tax payment for 2021 by this date (a similar rule applies in many states to payments of estimated state taxes).

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

January 31, 2022: Tax forms due

File Form 941

Churches having nonminister employees (or one or more ministers who report their federal income taxes as employees and who have elected voluntary withholding) must file an employer’s quarterly federal tax return (Form 941) for the fourth calendar quarter of 2021 by this date. Enclose a check in the total amount of all withheld taxes (withheld income taxes, withheld Social Security and Medicare taxes paid by the employee, and the employer’s share of Social Security and Medicare taxes) if less than $2,500 on December 31, 2021.

Copies of W-2s for employees

Churches must furnish Copies B, C, and 2 of Form W-2 (“wage and tax statement”) to each person who was an employee during 2021 by this date. This requirement applies to clergy who report their federal income taxes as employees rather than as self-employed, even though they are not subject to mandatory income tax (or FICA) withholding. Nonminister church employees must also receive a W-2.

Filing W-2s and W-3s with the Social Security Administration

Churches must send Copy A of Forms W-2, along with Form W-3, to the Social Security Administration by this date. If you file electronically, the due date is also January 31, 2022.

Copies of 1099-NEC for self-employed persons

Churches must issue Copy B of Form 1099-NEC (“nonemployee compensation”) to any self-employed person to whom the church paid nonemployee compensation of $600 or more in 2021 by this date.

This form (rather than a W-2) should be provided to clergy who report their federal income taxes as self-employed, since the Tax Court and the IRS have both ruled that a worker who receives a W-2 rather than a 1099-NEC is presumed to be an employee rather than self-employed.

Other persons to whom churches may be required to issue a Form 1099-NEC include evangelists, guest speakers, contractors, and part-time custodians.

Filing 1099-NEC and 1096 with the IRS

Churches must send Copy A of Forms 1099-NEC, along with Form 1096, to the IRS by this date.

Distributing 1099-INT

Churches must distribute a 2021 1099-INT form to any person paid $600 or more in interest during 2021 by this date (a $10 rule applies in some cases).

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

Key Tax Dates December 2021

Housing allowance designations, year-end transactions, 2021 donations, and more.

Richard R. Hammar, Attorney, CPA

Bio

Monthly requirements

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

Note, however, that if withheld taxes are less than $2,500 at the end of any calendar quarter (March 31, June 30, September 30, or December 31), the church need not deposit the taxes. Instead, it can pay the total withheld taxes directly to the IRS with its quarterly Form 941. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes.

Semiweekly requirements

If your church or organization reported withheld taxes of more than $50,000 during the most recent lookback period (for 2021, the lookback period is July 1, 2019, through June 30, 2020), then the withheld payroll taxes are deposited semiweekly.

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

December 15, 2021: Complete year-end transactions and make UBIT payments

Year-end transactions

Complete all year-end transactions to be sure that they are reportable on your income tax return.

Payment for unrelated business income tax liability

A church must make quarterly estimated tax payments if it expects an unrelated business income tax (UBIT) liability for the year to be $500 or more. Use IRS Form 990-W to figure your estimated taxes. For 2021, quarterly estimated tax payments of one-fourth of the total tax liability are due by April 15, June 15, September 15, and December 15, 2021, for churches on a calendar-year basis. Deposit quarterly tax payments using Electronic Federal Tax Payment System (EFTPS).

December 31, 2021: Housing and Parsonage allowance designations, donations for 2021, and more

Housing allowance

Churches must designate a portion of each minister’s compensation as a housing allowance by this date in order for ministers who own or rent their homes to receive the full benefit of a housing allowance exclusion for calendar year 2022.

The designation should be adopted during a regular or special meeting of the church board and should be contained in the written minutes of the meeting.

Parsonage allowance

Churches should designate a parsonage allowance for any minister who lives in a parsonage and who is expected to pay some of the expenses of maintaining the parsonage (e.g., utilities, furnishings, repairs, improvements, yard care).

Checks for 2021 donations

Donors must deliver checks on or by this date to claim a charitable contribution deduction for 2021. Checks that are placed in the church offering during the first worship service in 2022 will not qualify for a charitable contribution deduction in 2021, even if the check is predated to 2021 or was written in 2021. However, checks that are written, mailed, and postmarked in 2021 will be deductible in 2021 even though they are not received by a church until 2022.

Marital status

An employee’s marital status on this date determines his or her filing status for the year.

Reclassifying someone as an employee

If you have a minister or lay worker who is treated as self-employed for federal income tax reporting purposes, but who you would like to reclassify as an employee, the ideal time to make the change is on January 1, 2022.

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

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Fraud in the Church: What We Learned from 700 Church Leaders

Discover the results of our 2021 church fraud survey and the best practices for reducing vulnerabilities.

CPA Vonna Laue and Content Editor Matthew Branaugh

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A new nationwide survey of more than 700 church leaders conducted by Church Law & Tax shows nearly one-third serve in congregations that have suffered from some form of financial misconduct. Churches of all sizes, ages, and locations are susceptible, according to the survey’s findings—and fraud prevention experts say the vulnerabilities that perpetrators commonly exploit are ones easily remedied. The survey also revealed surprising patterns regarding the types of people who are most prone to steal from their churches.

CPA Vonna Laue and attorney and Church Law & Tax content editor Matthew Branaugh co-led the research project. In this free, one-hour webinar, Laue and Branaugh sit down to discuss:

the purpose of the survey,
the results that stood out most,
and the best practices leaders can implement now to reduce their church’s vulnerabilities.

Download the slides below to follow along and take notes as you watch.

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NEW! Safeguarding Your Church’s Finances:

Explore this multi-session video course for pastors, board members, staff, and volunteers on the basics of fraud prevention. LEARN MORE!

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Can Churches Bar Service Animals?

Before your church considers barring service animals, it is good to understand the legal and ministerial dimensions.

Richard R. Hammar, Attorney, CPA

Bio

Responding to a churchgoer who wants to bring a service or support animal to church may not be a new challenge.

A fresco in the ancient Roman city of Herculaneum is one of the world’s earliest references to service animals. The fresco shows a guide dog helping a blind man cross a busy street. Since this fresco dates back to the late first century A.D. in a city not far from Rome and its fledgling Christian church, it is not unreasonable to assume that the church encountered the occasional presence of a service animal.

Lead Your Church With Confidence—Become a Church Law & Tax Member Today.

The New Testament does not mention service animals. But there are several points that may be helpful to modern church leaders when considering whether to bar service animals.

Background: You cannot discriminate in places of public accommodation

Title III of the federal Americans with Disabilities Act (ADA) prohibits discrimination based on disability by places of public accommodation.

ADA Title III Technical Assistance Manual categorizes the 12 different types of public accommodations organizations.

Churches—and religious schools controlled by religious organizations—are not among them.

Actually, the ADA explicitly affirms this exemption by specifying that the public accommodations provisions “shall not apply to … religious organizations or entities controlled by religious organizations, including places of worship.”

As a result, most religious organizations are excluded from the prohibition of discrimination in places of public accommodation. The House Report detailing congressional committee discussions prior to the law’s passage notes that “places of worship and schools controlled by religious organizations are among those organizations and entities which fall within this exemption.”

The House Report also says “activities conducted by a religious organization or an entity controlled by a religious organization on its own property, which are open to nonmembers of that organization or entity are included in this exemption.”

More from the ADA Title III Technical Assistance Manual:

III-1.5000 Religious entities. Religious entities are exempt from the requirements of Title III of the ADA. A religious entity, however, would be subject to the employment obligations of Title I if it has enough employees to meet the requirements for coverage.

III-1.5100 Definition. A religious entity is a religious organization or an entity controlled by a religious organization, including a place of worship.

If an organization has a lay board, is it automatically ineligible for the religious exemption? No. The exemption is intended to have broad application. For example, a parochial school that teaches religious doctrine and is sponsored by a religious order could be exempt, even if it has a lay board.

III-1.5200 Scope of exemption. The exemption covers all of the activities of a religious entity, whether religious or secular.

ILLUSTRATION: A religious congregation operates a daycare center and a private elementary school for [the congregation’s] members and nonmembers alike. Even though the congregation is operating facilities that would otherwise be places of public accommodation, its operations are exempt from Title III requirements.

What if the congregation rents to a private day care center or elementary school? Is the tenant organization also exempt?

No. The private entity that rents the congregation’s facilities to operate a place of public accommodation is not exempt, unless it is also a religious entity. If it is not a religious entity, then its activities would be covered by Title III. The congregation, however, would remain exempt, even if its tenant is covered. That is, the obligations of a landlord for a place of public accommodation do not apply if the landlord is a religious entity.

If a nonreligious entity operates a community theater or other place of public accommodation in donated space on the congregation’s premises, is the nonreligious entity covered by Title III?

No. A nonreligious entity running a place of public accommodation in space donated by a religious entity is exempt from Title III’s requirements. The nonreligious tenant entity is subject to Title III only if a lease exists under which rent or other consideration is paid.

Note that while schools and daycare centers are both on the list of 12 categories subject to the ADA, they are exempt if “controlled by a religious organization.”

Example. A church operates a school and preschool as ministries of the church. Both the school and preschool are subject to the church’s control. The church’s governing board serves as the board for the school and preschool, and it exercises plenary control over all their activities, including personnel, finances, and curriculum. The school and preschool operate under the church’s corporate and tax-exempt status.

The school and preschool are “controlled by a religious organization,” and therefore are exempt from the ban on discrimination by places of public accommodation. Among other things, this means that the school and preschool are not required to allow service dogs.

Example. For many years, a church has operated a private school. Recently, church leaders decided to separately incorporate the school to insulate the church from the school’s liabilities. The school selects its own board and operates independently of church control. The school no longer is “controlled by a religious organization” and therefore is subject to the ADA’s public accommodations provisions.

Note. While religious organizations are not subject to the ADA’s public accommodation provisions, they may be subject to similar provisions under state or local law.

Applying the ADA requirements to service animals

The ADA requires covered entities that provide goods or services to the public to make “reasonable modifications” in their policies, practices, or procedures when necessary to accommodate people with disabilities. This requirement applies to service animals. As noted above, religious organizations are exempt from Title III of the ADA, and so they are not subject to any requirement under Title III of the ADA pertaining to service animals.

Key Point. Whether or not a church is required to allow service animals in church services or at church-sponsored activities, leaders should still have a basic understanding so they can make both informed and compassionate decisions.

What is a service animal?

The ADA defines a service animal as a dog trained to do work or tasks for a disabled person. The disabled person can train the dog. The task(s) performed by the dog must be directly related to the person’s disability.

The dog must be able to assist the person with a disability.

For example, a person with diabetes may have a dog trained to alert him when his blood sugar reaches high or low levels.

A depressed person may have a dog trained to remind them to take their medication.

Or, someone prone to seizures may have a dog trained to detect an oncoming seizure.

What about animals providing “emotional support?”

A fairly common misunderstanding is that a comfort pet is a service animal.

However, service animals are working animals, not pets.

Animals whose sole function is to provide comfort or emotional support do not qualify as service animals under the ADA.

The ADA does not view emotional support, therapy, comfort, or companion animals as service animals. However, some state and local governments do allow such animals in public places. Review local and state laws to find out.

How to determine if a dog is a service animal

In situations where it is not obvious that the dog is a service animal, church staff may ask only two specific questions:

Is the dog serving someone with a disability?
is the dog doing work or performing a task?

Caution. Churches are not allowed to request any documentation for the dog, require that the dog demonstrate its task, or inquire about the nature of the person’s disability.

The ADA does not require service animals to wear a vest, ID tag, or specific harness.

When can a church exclude service animals?

Someone asked the DOJ: “Are churches, temples, synagogues, mosques, and other places of worship required to allow individuals to bring their service animals into the facility?” Its response: “No. Religious institutions and organizations are specifically exempt from the ADA. However, there may be state laws that apply to religious organizations.”

Applying the Americans with Disabilities Act to a congregational setting

Animal’s Owner: Unpaid volunteer workers (i.e., some teachers, musicians, ushers), and/or church members.

Application: ADA Title I does not apply since there is no employment relationship.

ADA Title III states that the public accommodations provisions “shall not apply to . . . religious organizations or entities controlled by religious organizations, including places of worship.”

Be sure to check state and local disability laws.

Remember this: If admitting service animals would fundamentally alter the nature of a service or program, service animals may be prohibited under the federal ADA.

Further, if a service animal is out of control and the handler does not take effective action to control it, or if it is not housebroken, the church may request that the animal be removed from the premises.

The ADA requires that service animals be always under the control of the handler. In most instances, the handler will be the individual with a disability or a third party who accompanies the individual with a disability.

The service animal must be harnessed, leashed, or tethered while in public places unless these devices interfere with the service animal’s work or the person’s disability prevents use of these devices. In that case, the person must use voice, signal, or other effective means to maintain control of the animal.

For example, a person who uses a wheelchair may use a long, retractable leash to allow her service animal to pick up or retrieve items. She may not allow the dog to wander away from her and must maintain control of the dog, even if it is retrieving an item at a distance from her.

Under control also means that a service animal should not be allowed to bark repeatedly in a lecture hall, theater, library, or any other quiet place. However, if a dog barks just once, or barks because someone has provoked it, this would not mean that the dog is out of control.

To help guide your church’s decision-making regarding a service animal’s presence, consider the following examples.

Example. A church’s volunteer worship leader recently began bringing his pet dog to church as a support or comfort animal. Several members who find the presence of the dog a distraction complain to the pastor. Can the pastor ask the volunteer to discontinue bringing his dog?

Yes, for two reasons.

First, Title III of the ADA specifies that the public accommodations provisions “shall not apply to . . . religious organizations or entities controlled by religious organizations, including places of worship.”

Second, the volunteer’s dog is not a “service animal” protected by the ADA unless it has been trained to do work or perform tasks for an individual with a disability. The tasks performed by the dog must be directly related to the person’s disability.

Example. A church member begins bringing her large dog to church services. The dog sits up on the pew next to the owner. Several members find the presence of the dog a distraction and complain to the pastor. Can the pastor ask the member to discontinue bringing her dog?

Yes. See the analysis in the previous example.

Example. A church member begins bringing his miniature horse to church with him in order to provide comfort. The horse sits up on the pew next to the owner. Can the church ask the member to discontinue bringing his horse?

Yes. See the analysis in the previous example.

Also, see the “Miniature Horses” section in the ADA revised requirements for service animals.

Example. A church places a “no pets” sign at all of its entrances. Since religious organizations are not subject to the ADA’s public accommodation provisions, the sign is permissible. Note, however, that the church may be subject to similar provisions under state or local law.

Example. A church with 10 employees has an employee who suffers from anxiety. This employee has asked for permission to bring a service animal to work with her. This question implicates the ban on employment discrimination based on disability under Title I of the ADA. Employment discrimination under the ADA is addressed below.

Caution. It is important to remember that while religious organizations are not subject to the ADA’s public accommodation provisions, they may be subject to similar provisions under state or local law. More details below.

Churches may need to comply with state and local laws

While religious organizations are not subject to the ADA’s provisions regarding public accommodations, including service animals, they must still carefully evaluate whether they are subject to similar provisions mandated under state or local laws—and, if such laws exist, whether they provide any religious exemptions under them.

It is highly recommended church leaders consult with a local ADA attorney who understands local and state public state public accommodations laws, and religious organizations.

Can church employees bring service animals to work?

The ADA specifically permits religious organizations (including religious educational institutions) to “give preference in employment to individuals of a particular religion to perform work connected with the carrying on by organization of its activities.”

The ADA further provides that “a religious organization may require that all applicants and employees conform to the religious tenets of such organization.” 29 CFR 1630.16(a).

Note that Title I’s religious exemption is narrower than Title III’s blanket exemption of “religious organizations or entities controlled by religious organizations, including places of worship.”

Title I of the ADA prohibits private employers (among other entities) from discriminating against qualified individuals with disabilities in job application procedures, hiring, firing, advancement, compensation, job training, and other terms, conditions, and privileges of employment. The ADA covers employers with 15 or more employees.

An individual with a disability is a person who:

Has a physical or mental impairment that substantially limits one or more major life activities;

Has a record of such an impairment; or

Is regarded as having such an impairment.

A qualified employee or applicant with a disability is an individual who, with or without reasonable accommodation, can perform the essential functions of the job in question. Reasonable accommodation may include, but is not limited to:

Making existing facilities used by employees readily accessible to and usable by persons with disabilities

Job restructuring, modifying work schedules, reassigning to a vacant position

Acquiring or modifying equipment or devices, adjusting or modifying examinations, training materials, or policies, and providing qualified readers or interpreters

If a reasonable accommodation of a known disability of a qualified applicant or employee does not impose an “undo hardship” on the employer’s business operation, the employer must do it.

Reasonable accommodations are adjustments or modifications provided by an employer to enable people with disabilities to enjoy equal employment opportunities.

Accommodations vary depending upon the needs of the individual applicant or employee. Not all people with disabilities (or even all people with the same disability) will require the same accommodation.

Service animals may be considered “reasonable accommodation”

The DOJ has stated that service animals may be a reasonable accommodation of some employee disabilities. (See this FAQ.)

Employers that agree to allow service animals can put limits in place to protect other employees and company property.

Applying Americans with Disabilities Act to paid church employees

Animal’s Owner: Paid employees

Application: The ADA’s employment discrimination provisions (Title I) only apply to employers that have 15 or more employees.

Covered employers must provide reasonable accommodations. Sometimes, these may include service animals that help an employee or job applicant do the essential functions of the job.

However, note: (1) The ADA permits religious organizations (including religious educational institutions) to “give preference in employment to individuals of a particular religion to perform work connected with the carrying on by organization of its activities,” and (2) the ADA provides that “a religious organization may require that all applicants and employees conform to the religious tenets of such organization.”

Be sure to check state and local disability laws.

Employers do not have to sacrifice quality or production standards to make an accommodation.

Employers do not have to provide personal use items, such as glasses or hearing aids.

An employer does not have to provide a reasonable accommodation unless an individual with a disability has asked for one. Sometimes, a medical condition may cause a performance or conduct problem. If that is the case, the employer may ask whether the the employee needs a reasonable accommodation.

Unlike Title III, there is no requirement in Title I (see below) that an employer grant the request of an employee for a service animal. Instead, such a request triggers an “interactive process.” This process involves discussing the employee’s needs and possible accommodations that will not impose an undue hardship on the employer.

Note. Where more than one accommodation would work, the employer may choose the one that is less costly or that is easier to provide.

Note. Employers must recognize that they now have an affirmative duty to make reasonable accommodations to the known physical or mental limitations of an otherwise qualified individual with a disability who is a job applicant or employee, unless they can demonstrate that the accommodation would impose an undue hardship on the operation of their business.

Determining if Title I of the ADA applies

When does—and doesn’t—Title I of the ADA apply to a church and its employees? Consider these examples.

Example. A church with 10 employees has an employee with a disability. This employee has asked for permission to bring a service animal to work.

This question implicates the ban on employment discrimination based on disability under Title I of the ADA. However, Title I only applies to employers having 15 or more employees, and so it does not apply to the church in this example.

Most states, however, have enacted legislation banning discrimination in employment based on disability, and many of these laws apply to employers with fewer than 15 employees.

Example. A church with 20 employees has an employee with a disability. This employee has asked for permission to bring a service animal to work with her to manage her symptoms. This question implicates the ban on employment discrimination based on disability under Title I of the ADA.

Title I applies to employers having 15 or more employees, and so it applies to the church in this example. The employee’s request for accommodation triggers an “interactive process” in which the employee and church informally discuss what accommodations the church could adopt (including allowing the employee to bring a service animal to work) that would render her capable of performing the essential functions of her job without undue hardship to her employer.

Example. A church with 20 employees terminates its pastor, who became disabled in recent years.

The pastor sues, claiming that his termination constituted discrimination based on disability since the church refused to provide reasonable accommodations to enable him to perform the essential functions of his job. One of the specific accommodations the pastor requested was a Seeing Eye dog. The court declined to offer this accommodation based on the “ministerial exception.”

In Hosanna-Tabor Evangelical Lutheran Church and School v. E.E.O.C., 132 S.Ct. 694 (2012), the United States Supreme Court unanimously recognized the so-called “ministerial exception” barring civil court review of employment disputes between churches and ministers. The case involved a claim by a “called” teacher at a church-related school in Michigan that the school committed unlawful disability discrimination in terminating her employment. This case effectively bars claims of disability discrimination by ministers against their employing church.

Seek legal assistance

Church leaders should seek legal counsel when responding to requests by employees, job applicants, church members, and visitors.

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

Key Tax Dates November 2021

Deadlines for quarterly federal tax return and employer exemption.

Richard R. Hammar, Attorney, CPA

Bio

Monthly requirements

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

Note, however, that if withheld taxes are less than $2,500 at the end of any calendar quarter (March 31, June 30, September 30, or December 31), the church need not deposit the taxes. Instead, it can pay the total withheld taxes directly to the IRS with its quarterly Form 941. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes.

Semiweekly requirements

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

November 1, 2021: File Form 941 and Form 8247

Quarterly federal tax return (Form 941) with payment

Enclose a check in the total amount of all withheld taxes (withheld income taxes, withheld FICA taxes paid by the employee, and the employer’s share of FICA taxes) if less than $2,500 on September 30, 2021.

Employer exemption (Form 8247)

Churches hiring their first nonminister employee between July 1 and September 30 may exempt themselves from the employer’s share of FICA (Social Security) taxes by filing Form 8274 by this date. (Nonminister employees are thereafter treated as self-employed for Social Security purposes).

The exemption is only available to churches that are opposed on the basis of religious principles to paying the employer’s share of FICA taxes.

November 10, 2021: File Form 941 if third quarter taxes deposited in full, on time

Churches having nonminister employees (or one or more ministers who report their federal income taxes as employees and who have elected voluntary withholding) may file their employer’s quarterly federal tax return (Form 941) by this date instead of November 1 if all taxes for the third calendar quarter have been deposited in full and on time.

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

Video

A VIRTUAL ROUNDTABLE

Introduction: Religious Land Use & The Church

A five-part series on an often overlooked law that can benefit churches.

The Editors

Bio

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This virtual roundtable, featuring attorneys Midgett Parker, John Mauck, Noel Sterrett, and Eric Treene, explores why every church should understand the ins and outs of the Religious Land Use and Institutionalized Persons Act of 2000 (RLUIPA).

This federal law provides powerful protections to houses of worship. Even if your congregation has yet to encounter obstacles from local government officials, zoning boards, or neighborhood associations, it should understand what RLUIPA is and how it works.

The virtual roundtable is conveniently set up in five segments for church leaders to watch, either individually or as a board, committee, or leadership team. It includes a companion PDF guide containing practical, helpful information. It also includes two video case studies featuring church leaders who successfully used RLUIPA to navigate challenges they faced.

Church Law & Tax members can access the full series here: Religious Land Use & The Church: A Virtual Roundtable.

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

Image: sittipong phokawattana | Getty

What if Your Church Receives a Large Donation of Virtual Currency?

So your church just received a large donation of virtual currency. What next? What are the tax implications?

Mike Batts and Michele Wales

Last Reviewed: May 8, 2025

Whatever you may think about virtual currencies, one reality is that a significant number of people have invested in them. A sizable portion of those investors have seen their investments increase in value dramatically (despite extreme volatility). And a growing number of investors holding virtual currencies that have appreciated in value are considering donating some of their holdings to their church or favorite charitable organization.

Get a Helpful Overview of Virtual Currency

Mike Batts defines virtual currency, explains why this form of currency is relevant, and offers insights for preparing your church to receive it.

Charitable organizations, including churches, must be prepared in the event an investor wishes to donate a sizable amount of virtual currency.

Logistical aspects of accepting a donation of virtual currency

In order to accept any donation of virtual currency, a church must take certain steps. The church can establish its own “wallet” (the term used in the virtual currency arena for an account)—either directly or with an exchange like Coinbase (not an endorsement). Establishing and maintaining its own virtual currency wallet is the most challenging approach for most churches.

Alternatively, the church can work with a donor-advised fund sponsoring organization to accept such gifts and convert them to cash for the benefit of the church. Or the church can utilize third-party donation processors like The Giving Block or Engiven (not endorsements) that allow the church to add a virtual currency giving button to its website. The processor receives the virtual currency donation on behalf of the church, converts it to cash, and transfers the funds to the church’s bank account—all for a fee, of course.

Each approach has its own challenges and risks. Regardless of the approach a church may take to accepting virtual currency donations, the church should keep data security and internal controls top of mind.

Virtual currencies are considered noncash property

The Internal Revenue Service (IRS) considers virtual currencies to be noncash property. So, if a taxpayer buys units of a virtual currency and later sells them at a gain, the taxpayer will be subject to tax on the gain pursuant to the rules for taxing capital gains.

The advantage of donating appreciated virtual currency over selling and donating the sales proceeds

If a taxpayer donates the appreciated virtual currency directly to a qualified charity, he or she will not be taxed on the appreciation in value. And the even better news: neither will the charity! That is because capital gains of 501(c)(3) public charities (which include churches) are not typically subject to federal income tax. The amount deductible by the donor will vary depending on the facts, but if the donor holds the virtual currency for more than a year prior to donating it, he or she may be entitled to a deduction of the full fair market value of the virtual currency contributed, with no tax on the gain!

When a virtual currency donation is valued by the donor at more than $5,000

Churches and other nonprofits need to understand the rules for substantiating a charitable contribution deduction of virtual currency valued by the donor at more than $5,000. Keep the following points in mind.

The IRS is a stickler

Federal income tax law requirements for substantiating charitable contribution deductions are strict, especially for noncash contributions. A donor who plans to take a charitable contribution deduction on his or her tax return should carefully follow the substantiation requirements.

The IRS frequently limits charitable deductions or denies them altogether where it finds that the donor (and his or her tax preparer) have not closely followed the law. Courts generally back the IRS in strictly applying the charitable contribution substantiation rules to donors

The $5,000 threshold

This article focuses on contributions of virtual currency. The rules described here generally apply to contributions of noncash items (other than publicly traded securities) valued by the donor at more than $5,000, and for which a charitable contribution deduction will be claimed.

The $5,000 threshold can be met if a single noncash item valued by the donor at more than $5,000 is donated, or if a group of similar items (for example, books) with a combined value of more than $5,000 is donated during the year. The similar items do not all have to be donated at the same time, or even to the same organization, for the $5,000 threshold to be triggered.

Special rules apply to contributions of automobiles, boats, and airplanes—a subject outside the scope of this article.

Substantiation requirements

In order to properly substantiate the deduction on the donor’s tax return of a noncash contribution in excess of the $5,000 threshold, the donor must:

Obtain a qualified appraisal,
Obtain a contemporaneous written acknowledgment from the charitable organization,
Prepare and submit Form 8283 with his or her tax return, and
Maintain specific records.

Each of these requirements is described further below.

1. Obtain a qualified appraisal

For purposes of determining the fair market value of virtual currency donated to a charitable organization and valued by the donor at more than $5,000, the IRS requires donors to obtain a written qualified appraisal.

The donor is responsible for obtaining a qualified written appraisal prepared by a qualified appraiser. A qualified appraiser for this purpose is an individual who has earned an appraisal designation from a recognized professional appraiser organization for demonstrated competency in valuing the type of property being appraised, or that has met certain minimum education and experience requirements.

Further, the appraiser generally cannot be the donor, the charity receiving the donation, or an employee or agent of the donor or charity.

A qualified appraisal must be prepared in accordance with generally accepted appraisal standards and must include certain information, including: a description of the type and condition of the property; the valuation effective date; the fair market value of the contributed property on the valuation date; the method and basis of valuation; the terms of any agreement between the donor and the charity regarding the future use or sale of the donated property; identifying information regarding the qualified appraiser and the appraiser’s qualifications; and a statement that the appraisal was prepared for income tax purposes.

The qualified appraisal must be made, signed, and dated no earlier than 60 days prior to the date the appraised property was donated, and no later than the due date of the taxpayer’s return (including extensions) for the year of the donation. Further, the appraisal fee generally cannot be based on a percentage of the appraised value of the property.

Charitable Solutions, LLC (not an endorsement) is one firm that provides appraisals for virtual currency.

2. Obtain a contemporaneous written acknowledgment

It is important to note that a donor must obtain a written acknowledgment from the charity for all cash and property contributions of $250 or more, including those for which an appraisal must also be obtained.

The acknowledgment must be obtained by the earlier of the date on which the donor files his or her income tax return for the year in which the contribution was made or the due date (including extensions) of the return.

The acknowledgment should include the legal name of the charity, the name of the donor, the date and amount of the contribution, a description (but not the value) of any noncash contributions, and a statement (if true) that no goods or services were received by the donor in exchange for the donation.

If the donor received anything from the charity in return for the donation (other than certain de minimis items), the acknowledgment must include a “good faith estimate” of the value of the goods and services the donor received and a disclosure indicating that the donor may only deduct as a charitable contribution the excess of the amount donated over the fair market value of the items or services received in exchange for the donation.

3. Prepare and submit Form 8283 with the donor’s tax return

In addition to the above requirements, a donor of noncash property valued at over $5,000 must complete Section B of Form 8283 and submit it with the donor’s income tax return for the year in which the contribution was made. Section B of the Form 8283 must be signed by both the qualified appraiser and the charitable organization that received the donation. Both the appraiser and the charitable organization must also provide their address and tax identification number.

Additionally, the following information must be reported in Section B of the Form 8283: a description of the donated property; a brief summary of the overall physical condition of the property (if the donated property is tangible personal property); the appraised fair market value of the property; the date and manner of acquisition by the donor of the property; the cost or adjusted basis of the donated property; the amount claimed by the donor as a charitable contribution deduction; and the date of the contribution.

Generally, the qualified appraisal itself is not required to be submitted with the donor’s tax return unless the value of the property contributed exceeds $500,000.

Note. Completing Form 8283—even one signed by the recipient charity—does not eliminate the donor’s requirement to obtain a contemporaneous written acknowledgement as described above.

4. Maintain records

The donor is required to maintain certain records in connection with the charitable contribution deduction taken on the return. Generally, these records must include the contemporaneous written acknowledgment obtained from the charity, as well as the information included in Section B of Form 8283 outlined above. A copy of the qualified appraisal should also be retained by the donor.

For additional information on individuals contributions of noncash property valued by a donor at more than $5,000, see chapter 8 of Richard Hammar’s annual Church & Clergy Tax Guide.

Strict requirements

Charitable donations of virtual currency are on the rise. Until and unless the IRS or Congress simplifies the substantiation rules for such donations, strict substantiation and documentation requirements apply for charitable deductions related to such donations, particularly those valued at greater than $5,000. Donors and their tax preparers must carefully follow the rules in order to avoid challenges by the IRS of deductions for charitable donations of virtual currency.

This information was adapted from an article that originally appeared in the Batts Morrison Wales & Lee Nonprofit OnPoint e-newsletter. Used with permission. We’ve used a combination of AI and human review to make this content easier to read and understand.

Mike Batts, CPA, is the managing partner of Batts Morrison Wales & Lee (BMWL) and a senior editorial advisor for Church Law & Tax. Michele Wales, CPA, is a partner and the national director for tax services at BMWL. BMWL is an accounting firm dedicated exclusively to serving churches and nonprofit organizations nationwide.

Video

On-Demand Webinar

The Basics of Running a Legally Sound Church Business Meeting

Attorneys Richard Hammar and Sarah E. Merkle discuss best practices for implementing and following parliamentary procedures.

Attorneys Richard R. Hammar and Sarah E. Merkle

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Churches should select and implement a specific body of parliamentary procedure in order to efficiently consider business and properly make legally sound decisions.

Yet some churches have not adopted procedures, while others do not recall what they have adopted—and still others know the procedures they adopted, but do not know if they correctly follow them. This uncertainty leaves many congregations open to the possibilities of disorganized meetings, haphazard decision-making—and possible legal scrutiny down the road.

In this webinar featuring attorneys Richard Hammar and Sarah Merkle—two well-respected voices on the topics of church governance and business meetings—participants will learn more about:

the processes of adopting procedures;
the various types of procedures available to adopt (including Hammar’s analysis of the new 12th edition of Robert’s Rules of Order Newly Revised);
the best practices for implementing and following those procedures;
and more.

Download the presentation slides to follow along and take notes as you watch.

Reporting Financial Crime as a Matter of Stewardship

Reporting financial crime in your church is a matter of stewardship, yet many church leaders report not doing so, or even knowing how.

Richard R. Hammar, Attorney, CPA

Bio

Reporting financial crime is a matter of stewardship, yet nearly 70 percent of churches that have experienced fraud chose not to report it to the police, according to a 2021 survey of more than 700 church leaders.

Included in This Series

The spring 2021 study on financial misconduct surveyed 706 church leaders.

About one-third of leaders said financial misconduct had taken place in their churches. Among those churches that experienced fraud, only a third filed a report with law enforcement.

In my own experience, the vast majority of churches that know or believe financial misconduct occurred are reluctant to contact law enforcement.

These leaders told me they would rather handle the matter internally. Church Law & Tax’s nationwide survey confirms this.

Additionally, nearly half of the respondents said their church boards have not discussed how they would respond to suspected fraud.

Why leaders do not report financial crimes

In the survey, leaders most frequently gave these explanations as to why they did not contact authorities:

We were able to recover the money without having to take legal action (27.7 percent).
We wanted to work on restoration with the individual(s) (26.5 percent).
We did not want to make it public to protect the church’s reputation (20.5 percent).
The church chose to forgive rather than report to the authorities (19.3 percent).
We did not want to make it public to protect the individual(s) (16.9 percent).
Legal action would go against the church’s ministry philosophy (7.2 percent).

(Note: Respondents were asked to check all that apply.)

When I speak with church leaders, their hesitations for contacting law enforcement often arise because the suspected embezzler is almost always a trusted member or employee, and church leaders are reluctant to accuse such a person without irrefutable evidence of guilt.

Seldom does such evidence exist. The pastor may confront the person about the suspicion, but the individual will often deny any wrongdoing—even if guilty. This only increases the frustration of church officials who do not know how to proceed.

Thinking of not reporting a financial crime?

Caution 1: The fraud is often far greater than the church realizes. A failure to report a financial crime may hide the true depth and extent of the crime committed. CPA Vonna Laue’s experience certainly affirms this. “Each time I have been brought into a ministry’s financial fraud situation, the amount of loss grew as more information was uncovered,” said Laue, a Church Law & Tax senior editorial advisor who advised this nationwide survey project. “It was always more than the perpetrator indicated and sometimes even they were surprised by the total.”

Caution 2: It does not matter whether the embezzler intended to pay back the embezzled funds someday. This intent in no way justifies or excuses the crime. The crime is complete when the funds are converted to one’s own use—whether or not there was an intent to pay them back.

Of course, an offender’s repayment may make it less likely that a prosecutor will prosecute the case. And even if the embezzler is prosecuted, this evidence may lessen the punishment. But the courts have consistently ruled that an actual return of embezzled property does not purge the offense of its criminal nature or absolve the embezzler from punishment for his or her wrongdoing. Also, note that church officials seldom know if all embezzled funds are being returned. They are relying almost entirely on the word of the thief.

Caution 3: Whether a church opts to notify law enforcement or not, there are tax law obligations with the Internal Revenue Service (IRS) that must be fulfilled.

Responding to suspected cases of fraud

Church leaders often learn of suspected financial misconduct because discrepancies or irregularities arise or someone submits a tip.

Top Six Red Flags

The survey indentified these signs that someone might be committing fraud:

1. Excessive control or unwillingness to have others cover his/her job duties

2. Repeated lying/deception

3. Family problems

4. Living beyond his/her means

5. Other moral or spiritual failures.

6. High levels of debt (e.g., credit card, student loans)

Along with these red flags, consider the following scenarios that point to the possibility that fraud might be taking place:

Giving is always higher when the person who usually does the counting is on vacation or ill during a weekend service.
A church bookkeeper lives a higher standard of living than is realistic given her or her income.
Church offerings have remained constant, or increased slightly, despite that attendance has steadily increased.
A church official with sole signature authority on the church checking account has purchased a number of expensive items from unknown companies without any documentation to prove what was purchased and why.

Safeguarding Your Church’s Finances—a multi-session video course for pastors, board members, staff, and volunteers on the basics of fraud prevention. LEARN MORE!

When unusual activity gets detected, or a tip is received, church leaders should take these steps in response:

1. Carefully gather information before reporting a financial crime

When evidence of actual or suspected financial misconduct surfaces, the pastor and/or church leaders should gather as much information as possible. Compile all documents and records that point to the possible irregularities and inconsistencies. The church should contact its attorney. It also should strongly consider hiring a qualified CPA firm or Certified Fraud Examiner (CFE) to conduct a more thorough investigation.

Note. Some churches have used CFEs to detect embezzlement and estimate the amount of loss. But note that CFEs are not required to be CPAs, and many have far less familiarity with accounting records than a CPA. The ideal professional would be a CPA who is also a CFE. For more information on CFEs, and to find one nearby, go to the website of the Association of Certified Fraud Examiners.

A deeper investigation offers the best way to quickly determine if the irregularities and inconsistencies are a product of human error or misconduct, and the amounts of money lost. If the cause is error, then the church can address the problem while avoiding making any erroneous and harmful accusations. If the cause is misconduct, then the church knows it must take appropriate next steps in whether to report a financial crime.

2. Sit down with the suspected perpetrator

If sufficient information points to a suspected perpetrator, at least two church leaders, and possibly the church’s attorney and the CPA or CFE (if one is hired) should meet with the person. Provide some general descriptions about the irregularities or inconsistencies that have arisen and ask the person what they can tell you about them. Take careful notes, including any questions or comments the person makes.

If the person confesses and asks how things will be handled, explain the criminal nature of the offense. Also explain the legal requirements to contact the IRS (see more below).

Caution. Always keep in mind that embezzlement is a criminal offense. Depending on the amount of funds or property taken, it may be a felony that can result in a sentence in the state penitentiary.

If the person confesses, evaluate with the church’s attorney the possible ways the person can possibly repay the stolen funds—but know that such a step does not absolve the person of his or her crime, nor does it eliminate potential consequences with the IRS. Also know upfront that such agreements by embezzlers to repay funds often are not honored.

3. Contact authorities

If there is a confession, or if the evidence clearly indicates the person stole church funds, church leaders must consider turning the matter over to the police or local prosecutor and the IRS. These are very difficult decisions, since doing them may result in the prosecution, penalization, and possible incarceration of a member of the congregation.

Note. Embezzlers never report their illegally obtained “income” on their tax returns. Nor do they suspect that failure to do so may subject them to criminal tax evasion charges. In fact, in some cases. it is actually more likely that the IRS will prosecute the embezzler for tax evasion than the local prosecutor will prosecute for the crime of embezzlement. Along with contacting local authorities, your church also should contact the IRS regarding the matter.

Before you “forgive and forget”

In some cases, a person confesses to the misconduct. Often, this is to prevent the church from turning the case over to the police or the IRS. Perpetrators believe they will receive “better treatment” from their own church than from the government. In many cases, they are correct.

Lead Your Church With Confidence—Become a Church Law & Tax Member Today.

It often is astonishing how quickly church members will rally in support of the embezzler once he or she confesses—no matter how much money was stolen from the church. This is especially true when the perpetrator used the stolen funds for a “noble” purpose, such as medical bills for a sick child.

Many church members demand forgiveness for the perpeator. The idea of turning the perpetrator over to the authorities is both shocking and repulsive. But is it this simple? Should church leaders join in the outpouring of sympathy? If the embezzler confesses, should church leaders leave it at that?

These are questions that each church will have to answer for itself, depending on the circumstances of each case.

Before forgiving the embezzler and dropping the matter, though, church leaders should consider the following.

Embezzlement is a crime breaches a sacred trust

The church should insist, at a minimum, that the embezzler must:

disclose how much money was embezzled,
make full restitution by paying back all embezzled funds within a specified period of time, and
immediately and permanently be removed from any position within the church involving access to church funds.

Closely scrutinize and question the amount of funds the embezzler claims to have taken. Remember, you are relying on the word of an admitted thief. That is why it is important to involve the church’s attorney, as well as a CPA or CFE, when suspicions first arise.

The embezzler must return the stolen money within a specific time or sign a promissory note agreeing to pay back the funds within a specific time.

Caution. An attorney should be consulted before the church has any discussions about an agreement with the embezzler about paying back stolen funds.

The church faces tax consequences for not reporting financial crime to IRS

The church needs to tell the embezzler that the stolen money is taxable income. Therefore, failure to agree to either of the above alternatives will force the church to issue him or her a 1099 (or a corrected W-2 if the embezzler is an employee) reporting the embezzled funds as taxable income.

If funds were embezzled in prior years, then the employee will need to file amended tax returns for each of those years to report the illegal income since embezzlement occurs in the year the funds are misappropriated.

Failure to report taxable income will subject the church to a potential penalty (up to $10,000) for aiding and abetting in the substantial understatement of taxable income under section 6701 of the tax code.

Note. If an employer is able to determine the actual amount of embezzled funds as well as the perpetrator’s identity, the full amount may be added to the employee’s W-2, or it can be reported on a Form 1099 as miscellaneous income. But remember, do not use this option unless you are certain that you know the amount that was stolen as well as the thief’s identity.

If the full amount of the embezzlement is not known with certainty, then church leaders have the option of filing a Form 3949-A (“Information Referral”) with the IRS. Form 3949-A is a form that allows employers to report suspected illegal activity, including embezzlement, to the IRS. The IRS will launch an investigation based on the information provided on the Form 3949-A. If the employee in fact has embezzled funds and not reported them as taxable income, the IRS may assess criminal sanctions for failure to report taxable income.

Caution. If the embezzler agrees to pay back the stolen money and does so, does this convert the embezzled funds into a loan, thereby relieving the employee and the church of any obligation to report the funds as taxable income in the year the embezzlement occurred? The answer is no.

Most people who embezzle funds insist that they intended to pay the money back and were simply “borrowing” the funds temporarily. An intent to pay back embezzled funds is not a defense to the crime of embezzlement.

The courts are not persuaded by the claims of embezzlers that they intended to fully pay back the funds they misappropriated. The crime is complete when the embezzler misappropriates the church’s funds to his or her own personal use.

There is yet another problem with attempting to recharacterize embezzled funds as a loan. If the church enters into a loan agreement with the embezzler, this may require congregational approval. Many church bylaws require congregational authorization of any indebtedness, and this would include any attempt to reclassify embezzled funds as a loan. Of course, this would have the collateral consequence of apprising the congregation of what has happened.

Reporting financial crime may be a matter of fiduciary responsibility and good stewardship

Viewing the offender with mercy does not mean forgiving the debt and ignoring the crime. Churches are public charities that exist to serve religious purposes.

Donors give money in support of those purposes.

Forgiving and ignoring embezzlement may not serve those purposes.

The church should care about other churches

As Church Law & Tax’s findings also reveal, the average tenure of embezzlers tended to be less than 10 years, and oftentimes measured less than 5 years.

Letting an offender off the hook and sending them on their way exposes other churches to the same behavior. No record of the offender’s activities will be available—and that means even a church that follows healthy screening and selection steps (including criminal background checks) will be unable to detect this person’s past offenses.

As Laue, the CPA who advised the survey project, also notes: “We have a responsibility to protect Kingdom resources, whether they are ours or someone else’s, and we can’t do that if we don’t take the necessary steps to make others aware of the fraudulent activity.”

The bottom line: Churches should report financial misconduct as an act of stewardship for the global church.

Case Study: A Repeat Embezzler. A church administrator embezzled over $350,000 from his church. He wrote unauthorized checks to himself and others from the church’s accounts, and used the church’s credit card on over 300 occasions to purchase personal items. Police officers were called and he made a full confession.

The church secured a $1 million civil judgment against him. He was prosecuted and convicted on four felony counts including forgery and theft, and he was sentenced to 32 years in prison based on “aggravated circumstances” (the large amount of money that had been stolen, the care and planning that went into the crimes and their concealment, the fact that a great number of checks were stolen and unauthorized credit card charges made, and breach of trust).

Several years earlier, the administrator embezzled a large amount from a prior church employer. However, that church chose not to initiate criminal charges, believing that he had learned his lesson.

This case study is taken from the “Embezzlement” section of the Legal Library.

Answers to other key questions about reporting financial crimes

Find detailed answers to the following questions about embezzlement in the Legal Library:

How does embezzlement occur?
How does a pastor handle someone who confesses to embezzlement during a confidential counseling session?
Can a church require a suspected embezzler to take a polygraph test?
How can a church avoid making false accusations?
How should a church discuss embezzlement with the congregation?

And as both the study and my own experience show, a most-troubling aspect of financial misconduct in churches is the unfortunate reality that many pastors and other leaders choose to handle fraud or suspected fraud internally—meaning they avoid involving a CPA or CFE, the IRS, and law enforcement. But the failure to report can be problematic for the reasons I have detailed in this article.

For the sake of practicing good financial stewardship, it is my hope and prayer that churches will carefully consider the advice I offer in this article. Most importantly, my hope is that churches will seek do all they can to prevent financial misconduct from happening in the first place through implementing a system of sound internal control.

Attorney Matthew J. Branaugh, content editor for Church Law & Tax, contributed to this article.

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

Image: AdobeStock/Pixel-Shot

Loved and Trusted: What Shocks Us Most About Fraud Perpetrators

A closer look at the men and women who steal from churches—and the red flags leaders should watch for.

Matthew Branaugh, Attorney and Editor

Bio

Church Law & Tax’s nationwide survey of congregations and the financial misconduct they experience paints four portraits of the types of individuals who most commonly steal from their churches.

What’s most shocking?

The positions of trust the men and women who commit these crimes carry.

Included in This Series

Part 1: Every Church Is at Risk for Fraud. Here’s Why.

Part 2: Loved and Trusted: What Shocks Us Most About Fraud Perpetrators

Part 3: Reporting Financial Crime as a Matter of Stewardship

The study revealed that common perpetrators included middle-aged men who served as treasurers or board members, sometimes for upwards of 10 years; men and women in their 30s and 40s who worked in their roles as administrators and treasurers for less than 5 years; and male pastors in their 40s.

And then there’s the group of perpetrators that may be the most surprising of all: men and women, typically 60 or older, who held their positions for 20 years or more. The crimes committed by these individuals “were disproportionately expensive” compared with other offenders, according to Arbor Research Group, the firm Church Law & Tax commissioned to survey church leaders nationwide.

“Just as fraud can happen in any sized church, fraudsters can be any age, any gender, and perform any function in the church,” said Rollie Dimos, a Certified Fraud Examiner (CFE) who reviewed the survey results ahead of publication and provided comment. “That’s why it is so important to put financial processes in place to actually protect our church team members from being tempted to steal God’s money. Internal controls are like guardrails that help keep people honest and accountable.”

Portraits of the perpetrators

The national survey fielded responses from 706 leaders and revealed nearly 30 percent served in churches that had experienced some form of financial misconduct. Nearly half said the crimes occurred within the past 10 years (see “Every Church Is at Risk for Fraud. Here’s Why”).

Those who suffered from some form of fraud answered questions exploring the acts committed and the people responsible for them. Through those responses, Arbor was able to classify the four classes of perpetrators, shedding more light on the common traits they possess.

Class 1

Arbor characterized this group as “middle-aged, non-pastoral male leaders with some experience in their roles.” These men frequently served as treasurers, board members, or in non-pastoral leadership roles.

Class 2

This group constituted “older, experienced men or women in leadership,” Arbor noted. They often served in their roles—which varied—for 20 years or more. A quarter of these cases resulted in losses of $250,000 or more, while half caused losses ranging anywhere from $10,000 to $250,000.

“The worst-case scenario for a church is to have fraud committed by long-tenured leaders in the church,” said Nathan Salsbery, a CFE and a partner and executive vice president for nonprofit CPA firm CapinCrouse who also previewed the survey results. “And if those leaders had unmonitored access to the cash coming in, the cash going out, and the accounting records, the financial losses can be staggering.”

More on Those Who Embezzle

Find additional examples of people steal from churches and how they do so—along with the consequences of such theft and ways to prevent and respond to it—see the “Embezzlement” section of Church Law & Tax’s Legal Library.

Class 3

This class featured the highest number of perpetrators, Arbor said. It, too, was evenly represented by men and women, but their ages ranged from 30 to 49 and their average tenures were 5 years or less. Among these individuals, about one-third worked as administrators, while 20 percent served as treasurers. Overall, 20 percent were unpaid volunteers.

Class 4

This group was comprised entirely of male pastors “typically 40 to 49 years of age and in their role 1 to 5 years,” Arbor noted. The thought of a pastor betraying his congregation in this way exacts significant tangible and intangible damage, Salsbery noted. “Lack of healthy accountability for senior leadership is one of the most significant risks to a church,” he said.

Red flags to monitor

The top “red flag” identified among the fraud cases disclosed in the survey—representing 32 percent—was “excessive control or unwillingness to have others cover his/her job duties,” according to the results. In fact, 47 percent of the cases weren’t discovered until another person performed the perpetrator’s duties for one reason or another.

The second-highest red flag was “repeated lying or deception,” followed by “family problems,” “living beyond his/her means,” and “other moral or spiritual failures.”

Lower on the list were “medical issues in family,” “expressed lack of job satisfaction,” and “loss of spouse’s job.”

When asked about red flags, a sizable portion of respondents selected “Other.” Asked to clarify, the bulk of the respondents said there either were no red flags, the person wasn’t caught and the fraud was later detected, or the red flags weren’t exhibited within the church and only learned of later.

In his comments about red flags, Dimos noted the “fraud triangle”—the illustration often used to describe financial misconduct. It forms a triangle with these three points: pressure (or incentive), rationalization, and opportunity.

“As church leaders, we can’t control what financial pressure someone may experience, like a family medical issue, nor can we stop people from rationalizing that it is okay to steal from the church,” he said. “But church leaders can create processes that prevent someone from having the opportunity to abuse funds.”

Red flags are consistent in other sectors

Interestingly, Church Law & Tax’s survey results closely tracked with the 2020 Report to the Nations by the Association of Certified Fraud Examiners (ACFE), Salsbery said. In particular, with greater positions of authority and tenure came greater degrees of losses for the organizations, he added.

The ACFE report showed the median losses for employee-caused fraud measured $21,000, then jumped to $95,000 for managers and supervisors, and $250,000 for executive-level positions.

“This correlation of higher fraud losses for long-tenured, experienced leaders makes sense. Given their influential leadership roles, they usually have more access to the assets of the church and have had that access for a long time,” Salsbery said. “The first two questions I ask ministries when I conduct [fraud investigations] is: (1) How long was the person in the role? and (2) What access did they have to bank accounts, other assets, and financial activities of the church during that time?”

Given the frequency and consistency of the red flags, whether in secular settings or church settings, leaders are actually positioned well to help protect their churches, noted Vonna Laue, a CPA and senior editorial advisor for Church Law & Tax who co-led the survey project.

“The red flags have not changed over the years in any study you review, and they are the same across entities from churches to Fortune 500 companies,” Laue said.

Leaders need “an awareness of the red flags,” she added, and give careful consideration when those serving in financial roles exhibit “at-risk behaviors.”

NEW! Safeguarding Your Church’s Finances—a multi-session video course for pastors, board members, staff, and volunteers on the basics of fraud prevention. LEARN MORE!

Matthew Branaugh is an attorney and editor for Church Law & Tax.

Key Tax Dates October 2021

Deadline for church employees with six-month extensions for filing 2020 tax returns.

Richard R. Hammar, Attorney, CPA

Bio

Monthly requirements

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

Note, however, that if withheld taxes are less than $2,500 at the end of any calendar quarter (March 31, June 30, September 30, or December 31), the church need not deposit the taxes. Instead, it can pay the total withheld taxes directly to the IRS with its quarterly Form 941. Withheld taxes include federal income taxes withheld from the employee’s wages, the employee’s share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes.

Semiweekly requirements

If your church or organization reported withheld taxes of more than $50,000 during the most recent lookback period (for 2021 the lookback period is July 1, 2019, through June 30, 2020), then the withheld payroll taxes are deposited semiweekly.

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

October 15, 2021: Tax returns due for church employees with extensions

Last day to file a 2020 federal income tax return for taxpayers who obtained an automatic six-month extension by filing a Form 4868 by April 15, 2021.

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

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Monthly requirements

Semiweekly requirements

May 10, 2022: Employer’s quarterly federal tax return—Form 941

May 16, 2022: File forms 990, 990-T, and 5578

Information return—Form 990

Unrelated business income tax return—Form 990-T

Certificate of racial nondiscrimination—Form 5578

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Monthly requirements

Semiweekly requirements

April 18, 2022: Tax returns, amended returns, extension, exemption from Social Security, and quarterly payment

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Amended federal income tax returns

Extension for file tax returns

Exemption from Social Security coverage

Quarterly estimated tax payments for certain employees and churches

April 29, 2022: Employer exemption

April 30, 2022: Employer’s quarterly federal tax returns

Monthly requirements

Semiweekly requirements

Monthly requirements

Semiweekly requirements

February 10, 2022: Employer’s quarterly federal tax return due

February 28, 2022: IRS forms due

Limitations created under Tax Cuts and Jobs Act of 2017

What does the business mileage rate increase mean for churches?

Monthly requirements

Semiweekly requirements

January 1, 2022: Payroll Taxes

Social Security and Medicare taxes

Self-employment taxes

Federal incomes taxes

January 15, 2022: Fourth quarter estimated taxes due

January 31, 2022: Tax forms due

File Form 941

Copies of W-2s for employees

Filing W-2s and W-3s with the Social Security Administration

Copies of 1099-NEC for self-employed persons

Filing 1099-NEC and 1096 with the IRS

Distributing 1099-INT

Semiweekly requirements

December 15, 2021: Complete year-end transactions and make UBIT payments

Year-end transactions

Payment for unrelated business income tax liability

December 31, 2021: Housing and Parsonage allowance designations, donations for 2021, and more

Housing allowance

Parsonage allowance

Checks for 2021 donations

Marital status