As an exception to the private foundation self-dealing rules, family members may be paid reasonable compensation for reasonable and necessary services to the foundation.
The Internal Revenue Service says that reasonable compensation “is only such amount as would ordinarily be paid for like services by like enterprises under like circumstances.”
No formula is available that yields the “right” number for compensation. As you assess the appropriate comparisons to compensation paid to others for similar work, you should consider the foundation’s asset size, dollar amount of annual grants, methods of grantmaking, services provided, time spent, qualifications of the service provider, and compensation the family member has been offered or receives for other comparable services.
For salary and benefits benchmarking data, see Exponent Philanthropy’s Foundation Operations and Management Report.
The services must also be reasonable and necessary to carrying out the tax-exempt purposes of the foundation. Under this test, the work must further the foundation’s charitable purposes, the family member must be qualified to perform those services, and the extent of services must be reasonable for this particular foundation.
Some advantages to hiring family members as staff are that the individual will likely be more aware of family values, history, and the goals of the foundation. This may enable the family member to be more confident in expressing the foundation’s identity to potential grantees and the public. A family member will most likely already have ongoing relationships with board members and maybe even grantees. And, a family member may be more likely to have a long-term commitment to the foundation.
On the other hand, it may be difficult to find a family member with the skills and expertise necessary to run the foundation. Depending upon the person and family, it may also be challenging for the family member to remain objective when it comes to family dynamics and relationships. And, although his/her views may be congruent with the family’s, they may not offer much freshness or diversity of perspective.
To assist you in your hiring process, we encourage you to download our publication Hiring Great Staff.
Still have questions?
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