Sponges are among the most species-rich and ecologically important taxa on coral reefs, yet documenting their diversity is difficult due to the simplicity and plasticity of their morphological characters. Genetic attempts to identify species are hampered by the slow rate of mitochondrial sequence evolution characteristic of sponges and some other basal metazoans. Here we determine species boundaries of the Caribbean coral reef sponge genus Callyspongia using a multilocus, model-based approach. Based on sequence data from one mitochondrial (COI), one ribosomal (28S), and two single-copy nuclear protein-coding genes, we found evolutionarily distinct lineages were not concordant with current species designations in Callyspongia. While C. fallax, C. tenerrima, and C. plicifera were reciprocally monophyletic, four taxa with different morphologies (C. armigera, C. longissima, C. eschrichtii, and C. vaginalis) formed a monophyletic group and genetic distances among these taxa overlapped distances within them. A model-based method of species delimitation supported collapsing these four into a single evolutionary lineage. Variation in spicule size among these four taxa was partitioned geographically, not by current species designations, indicating that in Callyspongia, these key taxonomic characters are poor indicators of genetic differentiation. Taken together, our results suggest a complex relationship between morphology and species boundaries in sponges.