Can a religious institution discriminate based upon religion when hiring?

This is not a simple question that can be answered in a short email, especially since the law on this issue may still be evolving.  You should consult an Iowa attorney who specializes in employment law.  Frankly, I don't think it is wise for a layman to try to draft an employment manual without consulting an attorney. That being said, the answer may depend on what the person is hired for, and how big the enterprise is.  Obviously, the church, if it is recognized as a legitimate religious institution, can discriminate on the basis of religion when hiring clergy, but it may be a more difficult issue if the church also operates non-religious affiliates, such as a gift shop or second hand clothing store, and then it may depend on whether these organizations are separate entities, and whether they qualify for not for profit status.