We investigate geologic controls on circulation in the shallow hydrothermal system of Masaya volcano, Nicaragua, and their relationship to surface diffuse degassing. On a local scale (∼250 m), relatively impermeable normal faults dipping at ∼60° control the flowpath of water vapor and other gases in the vadose zone. These shallow normal faults are identified by modeling of a NE-SW trending magnetic anomaly of up to 2300 nT that corresponds to a topographic offset. Elevated SP and CO2 to the NW of the faults and an absence of CO2 to the SE suggest that these faults are barriers to flow. TOUGH2 numerical models of fluid circulation show enhanced flow through the footwalls of the faults, and corresponding increased mass flow and temperature at the surface (diffuse degassing zones). On a larger scale, TOUGH2 modeling suggests that groundwater convection may be occurring in a 3–4 km radial fracture zone transecting the entire flank of the volcano. Hot water rising uniformly into the base of the model at 1 × 10−5 kg/m2s results in convection that focuses heat and fluid and can explain the three distinct diffuse degassing zones distributed along the fracture. Our data and models suggest that the unusually active surface degassing zones at Masaya volcano can result purely from uniform heat and fluid flux at depth that is complicated by groundwater convection and permeability variations in the upper few km. Therefore isolating the effects of subsurface geology is vital when trying to interpret diffuse degassing in light of volcanic activity.