Key Tax Dates May 2021

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

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 (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 2021 the lookback period is July 1, 2019, through June 30, 2020), then the withheld payroll taxes are deposited semiweekly.

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

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

May 10, 2021: 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 17, 2021: Tax returns, individual contributions, and various forms

Individual tax returns—Form 1040

Federal income tax and self-employment tax returns by individuals for calendar year 2020 are due by this date. The federal tax filing deadline postponement to May 17, 2021, only applies to individual federal income tax returns (including tax on self-employment income), not state tax payments or deposits or payments of any other type of federal tax. Taxpayers also will need to file income tax returns in 42 states plus the District of Columbia.

State filing and payment deadlines vary and are not always the same as the federal filing deadline. The IRS urges taxpayers to check with their state tax agency for details.

Individual contributions

In extending the deadline to file Form 1040 returns to May 17, the IRS is automatically postponing to the same date the time for individuals to make 2020 contributions to their individual retirement arrangements (IRAs and Roth IRAs), health savings accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Coverdell education savings accounts (Coverdell ESAs).

This postponement also automatically postpones to May 17, 2021, the time for reporting and payment of the 10 percent additional tax on amounts includible in gross income from 2020 distributions from IRAs or workplace-based retirement plans.

Information returns—Form 990

An annual information return (Form 990) for tax-exempt organizations is due by this date for 2020. 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 2020.

Certificate of racial nondiscrimination—Form 5578

Annual certification (for calendar year 2020) 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.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Image: Geoff Livingston | Getty

Assessing US Supreme Court Rulings on Pandemic Restrictions

What the Supreme Court’s rulings on pandemic restrictions mean for churches and in-person gatherings.

Richard R. Hammar, Attorney, CPA, and Matthew Branaugh, Attorney

The novel COVID-19 virus presented numerous medical, social, and political challenges as it spread across the United States in 2020.

It also posed many legal questions. As state and health officials sought to slow the virus, many mandated temporary lockdowns and prohibited people from assembling in public places, including those who desired to gather for worship, prayer, and fellowship at church events and services. Some churches complied. Others resisted. Legal challenges brought by churches quickly emerged.

Those challenges reached conflicting results in various federal courts around the country, setting the stage for the US Supreme Court to eventually weigh in. In May of 2020, a deeply divided Court said California’s restrictions remained constitutionally permissible for at least the time being. In Chief Justice John Roberts’s concurring opinion with the decision, he cautioned state leaders about the protections afforded to religious exercise.

In subsequent decisions, the Court’s posture shifted. A majority of justices began seeing the state restrictions as an uneven treatment of churches—and thus unconstitutional—whether in the prohibition of gathering for worship services or through various occupancy limits for those activities.
Read Richard Hammar’s coverage of the US Supreme Court’s May 2020, July 2020, and November 2020 decisions regarding pandemic restrictions and religious liberty.

The Court’s majority became especially focused on the way state governments issued executive orders. As written, the orders sounded neutral and generally applicable to the public. But when actually applied, the majority found the religious activities were substantially burdened more than comparable businesses and secular organizations—and often without the government able to justify such treatment.

What this means for churches

The COVID-19 pandemic will be remembered for many things. Among them will be the precedents set by the Supreme Court with respect to the treatment of churches when government-related laws or orders arise during a crisis.

Consider the following three points:
  • First, at least six justices of the Supreme Court have concluded that churches cannot be treated less favorably during a pandemic than comparable secular organizations.
  • Second, “comparable secular organizations” include those that have similar numbers in attendance for similar periods of time each week and with similar physical interactions among attendees.
  • Third, a state can impose restrictions on gatherings that treat churches no less favorably than comparable secular organizations. To illustrate, a ban on gatherings in excess of 100 persons that applies uniformly to every religious and secular organization would likely not run afoul of the First Amendment guarantee of religious freedom.

Lastly, one other key point should be noted. The COVID-19 pandemic still poses numerous legal and risk liabilities to churches, especially when laws or orders restricting in-person activities are in place. Church leaders that continue hosting in-person worship services in violation of state or local restrictions that treat churches no less favorably than comparable secular organizations must understand that, in doing so, they are exposing their churches and board members to potential legal risks should one or more persons become infected with the COVID-19 virus as a result of attending church. These risks include:
  • Potential personal liability of church board members if their decision to ignore government mandates and recommendations is deemed to constitute gross negligence. Most states have enacted laws limiting the personal liability of church officers and directors. The most common type of statute immunizes uncompensated directors and officers from legal liability for their ordinary negligence committed within the scope of their official duties. These statutes generally provide no protection for “willful and wanton” conduct or “gross negligence”—the same standard typically used as a basis for punitive damages (see below). A decision by a church board to continue holding worship services in disregard of government restrictions may constitute gross negligence, subjecting board members who participated in the decision to personal legal liability.
  • Reckless inattention to risks can lead to punitive damages, and such damages ordinarily are not covered by a church’s liability insurance policy. This means that a jury award of punitive damages represents a potentially uninsured risk. As a result, church leaders should understand the basis for punitive damages, and avoid behavior that might be viewed as grossly negligent. A decision by a church’s leadership to continue holding worship services in disregard of neutral government restrictions may constitute gross negligence, subjecting the church to punitive damages.

A closer look at the Supreme Court’s pandemic-related cases involving churches and religious organizations

This case-by-case review, listed in chronological order, shows the progression of the Supreme Court’s decisions involving legal challenges brought by churches and religious organizations against pandemic-related restrictions set by state government leaders.

South Bay United Pentecostal Church et al. v. Newsom

Date: May 29, 2020

Can government treat churches less favorably than comparable secular organizations? No.

Ruling: A 5-4 decision denying a church’s request to block California’s restrictions on religious services.

Chief Justice John Roberts, in a concurring opinion, noted:

Similar or more severe restrictions apply to comparable secular gatherings, including lectures, concerts, movie showings, spectator sports, and theatrical performances, where large groups of people gather in close proximity for extended periods of time” while more lenient treatment was given to “dissimilar activities, such as operating grocery stores, banks, and laundromats, in which people neither congregate in large groups nor remain in close proximity for extended periods.

Calvary Chapel v. Sisolak

Date: July 24, 2020

Can government treat churches less favorably than comparable secular organizations? Unclear.

Ruling: A 5-4 decision declining to lift Nevada’s 50-person limit on religious services.

The majority’s one-sentence ruling did not respond to the claim of unequal treatment of churches.

Roman Catholic Diocese of Brooklyn, New York v. Cuomo

Date: November 25, 2020

Can government treat churches less favorably than comparable secular organizations? No.

Ruling: A 5-4 decision blocking New York from enforcing 10- and 25-person occupancy limits on religious services, pending the case’s appeal to the US Court of Appeals for the Second Circuit. Justice Gorsuch, in a concurring opinion, noted:

Government is not free to disregard the First Amendment in times of crisis. At a minimum, that Amendment prohibits government officials from treating religious exercises worse than comparable secular activities unless they are pursuing a compelling interest and using the least restrictive means available.

High Plains Harvest Church v. Polis

Date: December 15, 2020

Can government treat churches less favorably than comparable secular organizations? No.

Ruling: An unsigned, one-paragraph order requiring a lower federal court to reconsider its own previous ruling denying a church’s request to block Colorado’s 50-person occupancy limits at houses of worship. Three justices dissented.

Colorado issued a public health order capping attendance at “houses of worship” to 50 people in designated geographic zones, without regard to the size of the building and despite allowing numerous secular businesses to operate without any capacity restrictions.

A federal district court ruled the state’s restriction was permissible, and the church asked the Supreme Court to review that holding. In response, the Supreme Court remanded the case to the federal court to reconsider its decision, in light of the Supreme Court’s ruling three weeks earlier in Roman Catholic Diocese of Brooklyn, New York v. Cuomo.

Danville Christian Academy v. Beshear

Date: December 17, 2020

Can government treat churches less favorably than comparable secular organizations? Not applicable.

Ruling: An unsigned decision denying a private religious school’s request for an injunction barring enforcement of the Kentucky governor’s executive order requiring all public and private schools, including religious schools, to close until after the holiday break. Two justices dissented.

The private religious school argued the order treated schools (including religious schools) worse than restaurants, bars, and gyms, which remained open. A federal district court granted the injunction, but a federal appeals court suspended the injunction pending an appeal. The Supreme Court declined to rule on the substance of the school’s claim on the ground that it would be pointless to do so since the order expired in just a few days.

Justice Alito, in a dissenting opinion, noted, “As I understand this Court’s order, it is based primarily on timing. . . . The Court is therefore reluctant to grant relief that, at this point, would have little practical effect.”

South Bay United Pentecostal Church et al. v. Newsom

Date: February 5, 2021

Can government treat churches less favorably than comparable secular organizations? No.

Ruling: Multiple-part decision, with the California church’s requests to bar enforcement of certain state orders partially granted and partially denied. Three justices dissented with the decision to grant partial relief to the church.

The Supreme Court granted an injunction prohibiting California from banning indoor worship services, pending the disposition of the church’s petition for a writ of certiorari. But the Court denied the church’s application for an injunction that would have barred the state from (1) imposing a 25-percent capacity limitation on indoor worship services, and (2) prohibiting singing and chanting during indoor services.

At least six justices concluded that churches cannot be treated less favorably during a pandemic than comparable secular organizations.

Justice Gorsuch, in a concurring opinion, noted:

[T]he State allows most retail operations to proceed indoors with 25% occupancy, and other businesses to operate at 50% occupancy or more. Apparently, California is the only State in the country that has gone so far as to ban all indoor religious services. When a State so obviously targets religion for differential treatment, our job becomes that much clearer. . . . Regulations like these violate the First Amendment unless the State can show they are the least restrictive means of achieving a compelling government interest.

Added Justice Barrett in a concurring opinion: “Of course, if a chorister can sing in a Hollywood studio but not in her church, California’s regulations cannot be viewed as [permissible].”

Ritesh Tandon et al. v. Newsom

Date: April 9, 2021

Can government treat churches less favorably than comparable secular organizations? No.

Ruling: A 5-4 decision barring California from enforcing restrictions on in-home religious activities involving other households.

A pastor asked the US Court of Appeals for the Ninth Circuit to stop California from enforcing restrictions on private religious activities, including the hosting of in-home Bible studies and communal worship with more than three households in attendance. The Ninth Circuit denied the pastor’s request. The Supreme Court ruled the Ninth Circuit erred, explaining:

First, California treats some comparable secular activities more favorably than at-home religious exercise, permitting hair salons, retail stores, personal care services, movie theaters, private suites at sporting events and concerts, and indoor restaurants to bring together more than three households at a time. . . .

Second, the Ninth Circuit did not conclude that those activities pose a lesser risk of transmission than [the pastor’s] proposed religious exercise at home. The Ninth Circuit erroneously rejected these comparators simply because this Court’s previous decisions involved public buildings as opposed to private buildings.

Third, instead of requiring the State to explain why it could not safely permit at-home worshipers to gather in larger numbers while using precautions used in secular activities, the Ninth Circuit erroneously declared that such measures might not “translate readily” to the home. The State cannot “assume the worst when people go to worship but assume the best when people go to work.”

And fourth, although California officials changed the challenged policy shortly after this application was filed, the previous restrictions remain in place until April 15th, and officials with a track record of “moving the goalposts” retain authority to reinstate those heightened restrictions at any time.

The Court noted that this is the fifth time it had “summarily rejected the Ninth Circuit’s analysis of California’s COVID restrictions on religious exercise.”

Learn more about religious freedom protections available to churches and ministries through Church Law & Tax’s 50-State Religious Freedom Laws Report, a downloadable resource by Matthew Branaugh, attorney and content editor, and Richard Hammar, attorney and senior editor.

Richard R. Hammar, senior editor of Church Law & Tax, is an attorney, CPA, and author specializing in legal and tax issues for churches and clergy.

Matthew Branaugh is attorney and editor for Church Law & Tax at Christianity Today.
Image: langdu | Getty

Ten Steps to Consider When Embezzlement Is Suspected

How to respond when the unthinkable becomes a reality.

Richard R. Hammar, Attorney, CPA
Bio

Many churches have experienced one or more incidents of embezzlement. In some cases, the amounts are substantial. Church leaders often do not know how to respond to such incidents. Here are ten steps that can help.

1. Tax liability for embezzler

Embezzled funds constitute taxable income to the embezzler. The embezzler has a legal duty to report the full amount of the embezzled funds as taxable income.

This is true whether or not the employer reports it on the employee’s W-2 or 1099.

If funds were embezzled in prior years, the employee needs to file amended tax returns to report the illegal income. This is because the embezzlement occurs in the year the funds are misappropriated.

IRS Publication 525 states: “Illegal income, such as stolen or embezzled funds, must be included in your income on line 21 of Form 1040, or on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) if from your self-employment activity.”

2. Employer not required to report funds on employee’s W-2

Federal law does not require employers to report embezzled funds on an employee’s W-2, or on a Form 1099. This makes sense, since in most cases an employer will not know how much was stolen. How can an employer report an amount that is undetermined?

Embezzlers are not of much help because they usually confess to stealing much less than they stole.

Therefore, W-2s or 1099’s filed on the embezzler’s behalf usually underrepresent what stolen.

3. Embezzled funds can be added to employee’s W-2 if actual amount is determined

In rare cases, an employer may be able to find how much was stolen and who stole it.

In such a case, the full amount may be added to the employee’s W-2. It can also be reported on a Form 1099 as miscellaneous income. Do not use this option if you are not certain of how much was stolen and who stole it.

4. Churches reporting funds may be exposed to tax liability if the amount isn’t accurate

In most cases, employers do not know the actual amount of embezzled funds. The embezzler’s “confession” is unreliable, if not worthless. Reporting inaccurate estimates on a W-2 or 1099 will be misleading.

Important point: don’t report embezzled funds an a W-2 or 1099 without proof of guilt. Doing so may expose the church to liability, including for filing a fraudulent Form 1099.

5. Church will not be penalized for failing to file a W-2 if actual amount of embezzled funds is not known

Employers that cannot determine how much was stolen and who stole it won’t be penalized for failing to file a corrected W-2 or 1099..

Employers that are certain of the identity of the embezzler, and the amount stolen, may be subject to a penalty under section 6721 of the tax code for failure to report the amount on the employee’s W-2 or 1099. This penalty is $50, or up to the greater of $100 or 10 percent of the unreported amount in the case of an intentional disregard of the filing requirement.

For employers that are certain how much was stolen, and who intentionally fail to report it, this penalty can be substantial. To illustrate, let’s say that church leaders know, with certainty, that a particular employee embezzled $100,000, but they choose to forgive the person and not report the stolen funds as taxable income. Since this represents an intentional disregard of the filing requirement, the church is subject to a penalty of up to 10 percent of the unreported amount, or $10,000. But note that there is no penalty if the failure to report is due to reasonable cause, such as uncertainty as to how much was embezzled, or the identity of the embezzler.

6. Churches can file a Form 3949-A to report suspected embezzlement

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.

In many cases, filing Form 3949-A with the IRS is a church’s best option when embezzlement is suspected.

7. The crime of embezzlement is complete the moment the embezzler converts the money to his or her own use

In some cases, employees who embezzle funds will agree to pay them back, when confronted, if the church agrees not to report the embezzlement to the police or the IRS. 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.

Intent to ‘pay it back’ is not a defense

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. Most church employees who embezzle funds plan on repaying the church fully before anyone suspects what has happened. One can only imagine how many such schemes actually work without anyone knowing about it. 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. As one court has noted:

The act of embezzlement is complete the moment the official converts the money to his own use even though he then has the intent to restore it. Few embezzlements are committed except with the full belief upon the part of the guilty person that he can and will restore the property before the day of accounting occurs. There is where the danger lies and the statute prohibiting embezzlement is passed in order to protect the public against such venturesome enterprises by people who have money in their control.

In short, it does not matter that someone intended to pay back embezzled funds. 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.

8. Attempting to recharacterize embezzled funds as a loan

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.

9. Audits promote accountability against weak internal controls

Embezzlement almost always occurs because of weak internal controls. Internal controls are procedures that reduce the risk of misappropriation in the handling of cash and other assets.

Consider a professional CPA firm

One of the big advantages of having a CPA firm audit your church’s financial statements and procedures annually is that the CPAs will look for weaknesses in your internal controls, thereby substantially reducing the risk of embezzlement. In short, an audit promotes an environment of accountability in which opportunities for embezzlement (and therefore the risk of embezzlement) are reduced. And, the CPAs who conduct the audit will provide the church leadership with a “management letter” that points out weaknesses and inefficiencies in the church’s accounting and financial procedures. This information can be invaluable to church leaders. Yes, the cost of an audit can be substantial, but many consider it a reasonable investment to promote financial integrity.

Something else to consider:
  • Only a certified public accountant (CPA) can “audit” a church’s financial statements and records. In most states it is unlawful for anyone other than a licensed CPA to use the term “audit” in examining an entity’s financial statements and records and issuing an opinion as to their compliance with generally accepted accounting principles.
  • In some cases, churches are required to have an audit. Here are three common ways that this occurs: (1) A church’s bylaws or other governing document requires an annual audit. (2) Churches that issue securities as part of a fundraising program must have audited financial statements that are included in the “prospectus” or offering circular that is provided to investors and potential investors. (3) In some cases, a bank may require that a church have an audit in order to qualify for a loan.
  • Churches can control the cost of an audit by obtaining competitive bids. Also, by staying with the same CPA firm, most churches will realize a savings in the second and succeeding years since the CPA will not have to spend time becoming familiar with the church’s financial and accounting procedures.

Cases of embezzlement raise a number of complex legal and tax issues. Our recommendation is that you retain an attorney to assist you in responding to these issues.

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

Key Tax Dates April 2021

Important notice for filing returns, key quarterly deadlines, 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 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 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 2021 the lookback period is July 1, 2019, through June 30, 2020), then the withheld payroll taxes are deposited semiweekly with a bank.

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.
Get Instant Access to the 2021 Church and Clergy Tax Guide by Richard R. Hammar when you order it in PDF format.

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).

April 15, 2021: Tax returns, Form 4361, and quarterly payments

Individual tax returns

Important notice. The IRS has announced that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021. This relief does not apply to estimated tax payments that are due on April 15, 2021. These payments are still due on April 15.

Individual taxpayers do not need to file any forms or call the IRS to qualify for this automatic federal tax filing and payment relief. Individual taxpayers who need additional time to file beyond the May 17 deadline can request a filing extension until Oct. 15 by filing Form 4868 through their tax professional, tax software, or using Free File on IRS.gov.

Filing Form 4868 gives taxpayers until October 15 to file their 2020 tax return but does not grant an extension of time to pay taxes due. Taxpayers should pay their federal income tax due by May 17, 2021, to avoid interest and penalties.

The federal tax filing deadline postponement to May 17, 2021, only applies to individual federal income returns and tax (including tax on self-employment income) payments otherwise due April 15, 2021, not state tax payments or deposits or payments of any other type of federal tax.

Taxpayers also will need to file income tax returns in 42 states plus the District of Columbia. State filing and payment deadlines vary and are not always the same as the federal filing deadline. The IRS urges taxpayers to check with their state tax agencies for those details.

Exemption from Social Security coverage—Form 4361

Last day to file an exemption from Social Security coverage (Form 4361) for most eligible clergy who began performing ministerial services in 2019 (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 2021 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, 2021, for churches on a calendar year basis. Deposit quarterly tax payments electronically using EFTPS.

April 29, 2021: Nonminister employee exemption—Form 8274

Churches hiring their first nonminister employee between January 1 and March 31, 2021, 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, 2021: 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) must file an employer’s quarterly federal tax return (Form 941) for the first calendar quarter of 2021 by this date.

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, 2021.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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Avoiding Unexpected Surprises with Church Compensation

Asking and answering key questions about housing, love gifts, sabbatical plans, expense reimbursements, and other situations that churches face.

Elaine L. Sommerville, CPA
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Getting compensation right for ministers and staff is a constant challenge for church leaders. Budgets are typically tight, often leaving salary amounts lower than desired. Many congregations consequently turn to special compensation arrangements to help ease the sting, hoping their efforts still honor their staffs and retain them for years to come.

But which of these perks to offer, and how to offer them, can lead to unexpected and painful surprises for both churches and employees if they’re incorrectly handled. Problems especially surface with housing, love gifts, sabbatical plans, and expense reimbursements.

That’s why Church Law & Tax and ChurchSalary are pleased to feature CPA Elaine Sommerville, one of its senior editorial advisors and author of its newly released Church Compensation, Second Edition. During this conversation, hosted by Content Editor Matthew Branaugh, Sommerville navigates the common—and not-so-common—surprises created by special compensation situations, using her decades of church experience to address them.

Key Topics:
  • Housing allowance
  • Love gifts
  • Sabbatical plans
  • Business expense reimbursements

Download the webinar slides and take notes while you watch.
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Elaine L. Sommerville is licensed as a certified public accountant by the State of Texas. She has worked in public accounting since 1985.
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Are Group Health Sharing Plan Costs Eligible for FSA Reimbursement?

A Church Law & Tax member asks “What is eligible for FSA reimbursements?” The answer depends, based on current guidance from the IRS.

Elaine L. Sommerville, CPA
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Q: Our church has several employees who opt out of group health insurance and instead elect to participate in a group “health sharing plan.” It is my understanding that any out-of-pocket health expenses incurred by an employee are eligible for a Flexible Spending Account (FSA), provided they are included on the Internal Revenue Service’s (IRS) list of eligible reimbursed expenses.

Could you please clarify if the monthly “subscription” or “membership” cost for a health sharing plan paid by these employees could be covered as an FSA reimbursement?

And, more generally speaking, are there any situations in which a church pays the membership fee for a health sharing plan as a part of any tax-free fringe benefit plan?

“Medical insurance” does not include membership fees or subscription costs to a faith-based health sharing plan.

In general, since a fee or subscription is not included in the definition of a medical expense, it is not an eligible expense for “health plans” provided to employees. As such, the payments for these plans are not eligible medical expenses available for reimbursement from an FSA.

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We tell clients that employer-paid health sharing plan membership fees or subscription costs are taxable to employees.

A potential exception to the above advice is when churches create a “self-insured” health plan. Sometimes the church will use the health sharing arrangement to fund the benefits it owes under its self-insured health plan.

Affordable Care Act (ACA) compliance requires the church to have an unlimited liability for health benefits under the self-insured plan. Attorneys for health sharing plans sometimes recommend this approach. That’s because it is a way to incorporate health sharing plans into the church’s group health plan.

According to some health sharing plans, a church’s payment of the membership fee is not taxable to the employee. This is because the church’s self-insured plan is the sole beneficiary under the health sharing plan.

For this strategy to work, however, the church must draft and adopt a comprehensive health benefit plan. The comprehensive plan must meet all the requirements for a self-insured health plan under the ACA. The church should retain an experienced benefits attorney to consult on and draft such a plan.

In June of 2020, the IRS issued a proposed rule changing the above advice. The new rule proposed regulations defining “insurance” for purposes of medical expenses to include heath sharing plan arrangements.

People submitted comments and the IRS scheduled a public hearing, but they never published the regulations. Therefore, the long-standing advice described above remains current until the IRS publishes the proposed regulations. With the current moratorium on new regulations, it is doubtful this will occur in the near future.

In summary, we tell churches to tax the membership fees or subscription costs of health sharing plans to employees.

This is unless the church has a qualifying self-insured health plan covering the costs.

Elaine L. Sommerville is licensed as a certified public accountant by the State of Texas. She has worked in public accounting since 1985.
Video

Learn More about Sexual Harassment Prevention Training for Your Church

Church Law & Tax’s Matthew Branaugh interviews attorney and advisor-at-large Theresa Sidebotham about her firm’s Telios Teaches program.

The Editors
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Church Law & Tax has teamed up with advisor-at-large Theresa Sidebotham, an attorney and the founder of Telios Teaches. Sidebotham created a sexual harassment prevention training program tailored specifically for churches and nonprofits.

This online training is available on an individual or group basis. This affliate link, Telios Teaches, provides details on how you can start training your staff. (Please note: Church Law & Tax receives a commission for purchases made through this link, at no additional cost to you.)

Key Tax Dates March 2021

Monthly and semiweekly requirements for depositing payroll taxes.

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 2021 the lookback period is July 1, 2019, through June 30, 2020), then withheld payroll taxes are deposited monthly.
Get Instant Access to the 2021 Church and Clergy Tax Guide by Richard R. Hammar when you order it in PDF format.

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

If your church 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 with a bank.
Click to download PDF for easy reference.

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).
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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Best Practices for Recording Church Events and Activities

From worship services to children’s programs and business meetings, a sound policy ensures legal compliance.

Sally Wagenmaker and Micah Chetta

Shouting “Amen” at a computer screen may have seemed unusual 12 months ago, but COVID-19 has changed many churches’ approach to Sunday worship, Bible studies, prayer gatherings, governance meetings, and staff meetings.

Moving these events to online platforms like Zoom, Facebook Live, or YouTube has been critical for delivering teaching and maintaining fellowship as best as possible. Likewise, many ministry employees and volunteers now work and serve remotely as the new norm, with videoconferences substituting for in-person meetings and program activities.

To what extent may churches and other ministries record their activities, particularly if the recordings contain people’s images, names, and potentially sensitive information? Is doing so always legal or does legality depend on specific locations and situations? What constitutes best practices for handling live online events, video recordings, as well as related audio recordings and photographs?

As with many COVID-related issues, ministries may have answered these questions on an ad hoc basis in the early weeks and months of the pandemic, perhaps even quickly pulling together ministry practices for photo and video usage.

Now is an excellent time to more carefully address such important matters through developing, adopting, and implementing a formal and legally compliant video and audio recording policy. Such a policy should define when video and audio recordings may be made, identify appropriate safeguards related to consent and personal privacy, and address related considerations like intellectual property ownership and usage. Optimally, the policy should apply to both program activities and the ministry work environment.

What to consider when creating a policy

This sample policy is generally applicable to churches and other ministries. Legal review by the church’s attorney is helpful, too, particularly to address state-specific legal requirements and for optimal legal compliance and risk management.

The accompanying PDF sample policy spells out a suggested scope, applicable requirements, and compliance aspects. In considering such a policy, ministry leaders should evaluate and address the following policy goals.

Define permitted recordings and photography

What will be the scope of permitted recordings? The policy should state the permissible circumstances for video, audio recordings, and photography taken during worship services and ministry activities. These parameters provide clear limits for a church when conducting online activities. For example, a church that livestreams its worship services may want to retain all control and discretion by allowing only authorized church personnel to record the services.

Tip. A church may determine that personally shared prayer requests or confession-oriented statements will remain within a small group’s online discussion, with no additional posting allowed (and including requests or statements made both orally or through “chat” communications).

Tip. A ministry may decide that only worship services may be recorded and no other activities (e.g., staff meetings, board meetings, small groups or Bible studies, and children’s ministry) due to related privacy and confidentiality concerns.

The policy should address consent for video and audio recording for those present at the service or activity. How will consent be obtained—expressly through a written waiver and release form, implied by each person’s participation, via website login protocols, or perhaps all three? An announcement at the outset of a worship service, whether oral or written, could be quite important for garnering implied consent. Adding specific waiver language to children’s program consent forms could be effective too. (See the sample waiver language PDF—which can be adapted for both a child and an adult.)
The sample language for a waiver is generally applicable to churches and other ministries. Legal review by the church’s attorney is helpful, too, particularly to address state-specific legal requirements and for optimal legal compliance and risk management.

Caution. It is a crime under certain state and federal laws to surreptitiously make video or audio recordings—that is, to do so while avoiding detection, such as when a person eavesdrops and records a conversation or meeting. Ministry leaders should avoid any secretively made recordings, whether actual or perceived.

Honor privacy

People have legal rights of privacy to varying degrees regarding their names, likeness, and image. Privacy interests otherwise warrant respect, in practical terms. Consequently, ministry leaders and those who make video and audio recordings should conscientiously avoid recording material (or using recorded material) that could be perceived as invasive or too personal. For example, attendees at a worship service or other live online event may or may not want to let it be known that they (or their children) were present.

To reduce potential privacy issues, avoid any camera panning on the congregation, and do not publish any attendee lists. Give people an opportunity to not be seen or heard—such as through focusing only on the main speaker, giving attendees the opportunity to sit in an area that will not be shown in the video, and making clear that unauthorized recordings are not allowed. Do not allow unauthorized photos either, such as posted through the ministry’s website without proper protocols.

Tip: Make these applicable policy restrictions overt and clear, such as through a verbal announcement (e.g., “no recording allowed”) or written information as part of the ministry activity (e.g., “The Church service is starting in two minutes. Reminder: no individual recording or screenshots are allowed.”)

Should staff meetings or other employment-related situations be recorded? This could be quite a useful tool, such as for employees who miss a training or other meeting. However, ministry leaders should be very careful about what gets recorded, considering questions like the following: Could such activities be unduly embarrassing, personal, or otherwise not appropriate for recording? Would workers become less candid, knowing that their words will be recorded? How long will or should recorded staff meetings be retained?

In thinking through these challenges, ministry leaders may determine that it is best to just utilize a blanket prohibition against any employment-related recordings. On the other hand, perhaps a limited-purpose policy may be best, such as to record sensitive discussions (e.g., an employee disciplinary conference)—but only upon express consent given by all participants. Such consent could be given at the meeting’s outset, such as with the following introduction: “This meeting is being recorded. Do you consent?”)

What about board and committee meetings?

It may be helpful to record board meetings, other leadership meetings, or even church membership meetings, such as in case of any disagreement over what happened or to help a secretary prepare minutes. Such recording should never become a substitute for written minutes, but rather only serve as an aid.

Additionally, as with staff matters, recording a board meeting may have a “chilling” effect inhibiting robust discussion. Imprudent or inappropriate disclosure could also be quite damaging, such as if confidential information is divulged, and therefore potentially actionable as a legal claim. For these reasons, it may be best to prohibit recording these types of activities, with accompanying announcements as mentioned above and with related prohibitions for “chat” communications.

Policies promotes understanding

Recording ministry programs and other matters could carry a plethora of benefits. But doing so also raises legal risks and practical concerns. If a ministry is going to record any activities, then make sure the ministry leaders likewise address consent, appropriate context, proper usage (including intellectual property rights), record retention, and how to address violations. An ideal way to handle all such matters is through a written policy that promotes clear understanding, provides follow-through steps, and encourages legal compliance and best practices. And then follow the policy!

Sally Wagenmaker, an advisor at large for Church Law & Tax, is a founder and partner of Wagenmaker & Oberly, a law firm serving churches and nonprofits nationwide. Micah Chetta is an associate attorney with Wagenmaker & Oberly.
Image: AdobeStock/Ka

The Top 5 Reasons Churches and Religious Organizations End Up in Court

How to keep your church from becoming another statistic.

The Editors
Bio

Last Reviewed: February 14, 2025

Since the early 1980s, attorney and CPA Richard Hammar, the cofounder and senior editor of Church Law & Tax, has read thousands of cases involving churches, religious organizations, and educational institutions.

When he does, he determines the relevance of the cases to local congregations. Many of these court decisions become the basis of articles and Legal Developments he writes for church leaders. Along with this work, he has also carefully categorized all of the court decisions—whether he writes about them or not—primarily in an effort to discern broader unfolding legal trends affecting churches.

Identifying these patterns provides a powerful point of information: by categorizing the top legal threats and then publishing about them in an understandable way, Hammar believes church leaders are better equipped to talk about potential challenges they face and how they can take action.

Through this long-standing work, it is now possible to authoritatively identify the Top 5 legal issues most likely to generate litigation targeting churches and religious organizations.

The infographic included with this article summarizes the Top 5, based on Hammar’s many years of research, providing a quick, user-friendly way to help leaders understand the trends, discuss them with staff and board members, and prioritize the efforts necessary to minimize potential pitfalls. (Download a PDF of the infographic to share with your team.)

Fortunately, church leaders can take an active role to minimize potential problems and decrease the chances of ending up in court.

One good first step is to read the articles and collections of articles listed with the Top 5 reasons described below. Another good step is to share this infographic with fellow leaders and use it as a launching point for discussions and planning.

Make child safety a priority

More than 25 years ago, Hammar was one of the first people in the country to address the growing threat of child abuse in churches. Regrettably, the threat has been—and remains—the number one reason churches end up in court each year. In response, Hammar developed Reducing the Risk: A Child Sexual Abuse Awareness Training Program.

Along with Reducing the Risk, any church of any size can get a comprehensive view of the problem, and the solutions needed to combat it, through Hammar’s 14-step plan outlined in his article “Minimizing the Risks of Child Molestation in Churches.”

For additional reading, check out this article collection. Plus, ChurchLawAndTax.com offers the exclusive resource 50-State Child Abuse Reporting Laws Survey for Clergy and Church Leaders, which features a full review of each state’s legal requirements and processes for reporting actual and suspected cases of abuse.

Know who owns the church’s property—and what can be done with it

Property disputes often lead to litigation, whether between a church and a denomination, a church and a municipality, a church and a private party—or even a church and its own congregants. These conflicts most often involve disputes over ownership, covenants, eminent domain, or adverse possession.

Chapter 7 of Hammar’s Pastor, Church, & Law offers insights into these types of property disputes and how courts have responded over the years.

Dealing with everyday dangers

Personal injuries are another common source of litigation for churches each year. A case is usually brought by a person who alleges that he or she was injured either while visiting church property, participating in a church-sanctioned activity, or both. Common examples of claims include unsafe conditions on church property, the negligent operation of a vehicle in the course of church business, or the inadequate supervision of a church activity that results in an injury.

The injured party brings a lawsuit in the civil courts. The party must prove several elements in order to win, but the legal standard required for a party to prevail is not as difficult as the one used in criminal trials. This makes personal injury cases a particular source of trouble for churches.

Generally speaking, even if a church is found liable in a personal injury case, board members and staff members are not also personally liable. However, personal liability can arise under certain circumstances. Chapter 6 of Hammar’s Pastor, Church & Law further explains personal injuries and the potential resulting liability for a church, its board members, and its staff members.

Don’t get zoned out

Municipalities, such as cities, towns, and counties, are authorized by their state governments to set zoning laws that dictate the types of buildings (and building uses) allowed in specific geographic areas. Disputes involving churches frequently arise in two ways: one, when a church located in a residential area conducts activities potentially in conflict with neighboring homeowners; or two, when churches wish to occupy or construct a building in a commercial zone that the municipality prefers to preserve for a business and the tax-generating activities it produces.

The First Amendment of the US Constitution and similar provisions in state constitutions provide protections for churches when these types of conflicts arise. Similarly, the Religious Land Use and Institutionalized Persons Act (RLUIPA) offers additional protections. Hammar explains these protections further in the zoning law section of Pastor, Church & Law’s Chapter 7.

Know what’s covered by insurance—and how

Disputes between churches and insurance companies most commonly develop in one of two ways.

One way is coverage exclusions. A coverage exclusion is a loss not covered under a general liability policy. Often, additional special coverage must be obtained in advance by a church in order for a future claim to be covered by the insurer. One common issue that is not typically covered in a general liability policy is a claim alleging sexual misconduct by a church employee or volunteer.

The other way is the duty to notify. Insurance policies typically contain strict language regarding how quickly a church must notify the insurer of a possible claim, and when a church fails to do so within the prescribed timetable, the insurer can reject the claim. Leaders must read the fine print of their policies, and also should consult with their insurance agent or broker to make certain they understand deadlines for notifying (as well as the types of situations that start the clock for those deadlines).

Check out this quick overview of the types of insurance a church should consider with action items you can take today.
The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.

Key Tax Dates February 2021

Key forms, including W-2s, 1099-NECs, Form 941s, and more, come due this month.

Richard R. Hammar, Attorney, CPA
Bio

Semiweekly requirements

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

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

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.

February 1, 2021: Tax forms due

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 2020 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 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 February 1, 2021.

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 2020 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 2020 1099-INT form to any person paid $600 or more in interest during 2020 by this date (a $10 rule applies in some cases).

February 10, 2021: 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 February 1 if all taxes for the fourth calendar quarter (of 2020) have been deposited in full and on time.

February 28, 2021: 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, 2021.

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.
For complete information, consult the 2021 Church & Clergy Tax Guide by Richard R. Hammar, JD, CPA.

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, 2021, 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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Add These Two Provisions to Your Church Bylaws Today

These key provisions for church bylaws allows for legally sound, virtual church meetings.

Frank Sommerville, Attorney, CPA
Bio

In 2020, the United States experienced a pandemic that shut down the country and limited physical gatherings. These lockdowns prohibited in-person meetings, including religious organization’s board and committee meetings. Churches with congregational governance could not conduct an in-person business meeting. Suddenly, the religious organization could not follow its usual governance model.
For more on electronic meetings, see Online Worship and Meetings.Find detailed information on church bylaws in Richard Hammar’s Legal Library.

Farsighted religious organizations planned for this pandemic by including the following in their governing documents: 1) they authorized “electronic meetings”; 2) assuming the state nonprofit corporation law allows for electronic meetings, the bylaws included conference calls, video conferencing, electronic message boards, and electronic voting via the internet.

Two key emergency provisions

Churches that have not already done so would be wise to add the following two provisions to their own bylaws, to the extent allowed by their state’s law.

Meeting by electronic means

The corporation may hold a meeting by any electronic medium in which all persons participating in the meeting can speak and hear each other. The notice of a meeting by electronic means must state the meeting will be held by electronic means (including the directions to participate) and all other matters required to be included in the notice. Participation of a person in an electronic meeting constitutes the presence of that person at the meeting.

Action by consent without meeting

Any action required or permitted to be taken by the members, board of directors or committees may be taken without a meeting and with the same force and effect as an in-person meeting. Members, members of the board of directors, and committees must return the consents to the secretary. Such consent may be given individually or collectively to the secretary in writing, fax, via a secure website, or electronic mail. The action is adopted if the requisite number of consents is submitted to the secretary to approve the action, assuming all members, all directors, or committee members voted.

Emergency authorization by state statute

Frequently, state nonprofit corporation statutes authorize the religious organization to include provisions in the bylaws that become effective in an emergency. The state law will define when an emergency exists and what actions may be authorized during the emergency. A disaster declared by the President frequently allows the emergency provisions to become effective and remain effective as long as the emergency exists. Here is a sample under Texas law:

Emergency Powers. An “emergency” exists for this section if the Board of Directors’ quorum cannot readily be obtained because of some catastrophic event. If an emergency exists, the Board of Directors may: (i) modify lines of succession to accommodate the incapacity of any Director, officer, employee or agent; and (ii) relocate the principal office, designate alternative principal offices or regional office, or authorize officers to do so. During an emergency, a notice of a meeting of the Board of Directors only needs to be given to those Directors whom it is practicable, including Internet website, email, publication, or radio. One or more Corporation officers present at a meeting of the Board of Directors may be deemed Directors for the meeting, in order of rank and within the same rank and order of seniority, as necessary to achieve a quorum. Corporate action taken in good faith during an emergency binds the Corporation and may not be the basis for imposing liability on any Director, officer, employee, or agent of the Corporation on the ground that the action was not authorized. The Board of Directors may also adopt emergency bylaws, subject to amendments or repeal by the full Board of Directors, which may include provisions necessary for managing the Corporation during an emergency including; (i) procedures for calling a meeting of the Board of Directors; (ii) quorum requirements for the meeting; and (iii) designation of additional or substitute Directors. The emergency bylaws shall remain in effect during the emergency and shall be revoked after the Board of Directors has deemed that the emergency has ended.

Check to see if your state law contains such a statute.

Adopting the two provisions

Churches will need to research whether these provisions are authorized by their state’s nonprofit corporation statute. These provisions may need to be modified to fit the state law requirements. If authorized, churches will need to amend their bylaws in the manner prescribed by the existing bylaws or state nonprofit corporation statute.

For congregationally lead churches, the members usually must approve bylaws amendments in a properly noticed and called in-person meeting. For board governed churches without members, the board of directors must approve the bylaws amendments in a properly noticed and called in-person meeting.

In many states, a majority vote is required to amend the bylaws but some state laws and bylaws require a two-thirds vote to approve the bylaws amendments. If the government authorities are prohibiting in-person meetings, then the amendments will have to wait until an in-person meeting can be convened.
Frank Sommerville is a both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.

Key Tax Dates January 2021

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

Richard R. Hammar, Attorney, CPA
Bio

Semiweekly requirements

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

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

Monthly requirements

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

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

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

January 1, 2021: Payroll Taxes

Social Security and Medicare taxes

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

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

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

Self-employment taxes

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

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

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

Federal incomes taxes

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

January 15, 2021: Fourth quarter estimated taxes due

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

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

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

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

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

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

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

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

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

Confronting Harassment in the Church

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

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

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

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

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

Download the presentation slides here.
Image: James Loritz | Getty

The High Cost of Fraud

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

Richard R. Hammar, Attorney, CPA
Bio

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

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

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

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

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

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

What fraud costs

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

My observation

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

How fraud is detected

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

My observation

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

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

Lack of internal controls

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

My observation

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

High risk areas for small employers

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

Regarding preventing fraud in small businesses, the report said:

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

My observation

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

Men commit fraud in greater numbers than women

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

My observation

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

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

Red flag: Living beyond their means

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

My observation

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

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

Other red flags

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

My observation

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

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

How offenders hide fraud

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

My observation

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

Nonprofit offenders and amount of fraud

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

My observation

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

Top weaknesses in nonprofits

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

My observation

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

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

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

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

What about background checks?

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

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

My observation

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

Previous convictions or disciplinary actions

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

My observation

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

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

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

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

Should fraud be reported to law enforcement?

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

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

My observation

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

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

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

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

For more on this topic, see the embezzlement section in the Legal Library or my book Pastor, Church & Law.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Image: erhui1979 | Getty

How a Church Responded When a Trusted Minister Embezzled Funds

Experts weigh in during a panel discussion on what happened.

Lee A. Dean

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Download the presentation slides here.

Supreme Court Reaffirms and Expands Ministerial Exception

What the ruling means for churches and religious organizations.

Richard R. Hammar, Attorney, CPA
Bio

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

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

Case No. 1: Teacher Sues Over Age Discrimination

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

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

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

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

Case No. 2: Teacher Claims Disability Discrimination

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

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

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

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

Supreme Court’s Analysis

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

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

Key takeaway:

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

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

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

What This Means for Churches

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

1. Focus on Job Function, Not Titles

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

2. Possible Impact on Tax Law Definitions

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

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

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

3. Limited Guidance Beyond Employment Cases

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

The focus remains narrowly on employment discrimination.

Church Autonomy and the First Amendment

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

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

Final Thoughts

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

Supreme Court Endorses Some Aid to Parents of Religious School Students

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

Richard R. Hammar, Attorney, CPA
Bio

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

Montana’s scholarship program

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

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

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

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

The “no-aid” provision and “Rule 1”

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

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

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

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

Petitioners sue the Department of Revenue

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

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

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

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

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

The state supreme court reverses earlier ruling

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

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

The US Supreme Court declares Rule 1 unconstitutional

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

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

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

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

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

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

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

The Court continued:

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

What this means for churches with religious schools

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