How to Evaluate a Nonprofit

The IRS Form 990 is the annual information return that most tax-exempt organizations are required to file. It is publicly available and contains everything from executive compensation to program descriptions to detailed financial breakdowns. If you only do one thing to evaluate a nonprofit, read its 990 [1].

Which form an organization files depends on its size. Organizations with gross receipts under $50,000 file the 990-N (e-Postcard), which contains almost no information. Those with gross receipts under $200,000 and total assets under $500,000 file the shorter 990-EZ. Everyone else — including all organizations with gross receipts of $200,000 or more, or total assets of $500,000 or more — files the full Form 990 [2].

Financial metrics derived from the 990 are the most common way to evaluate a nonprofit. They are useful, but each has limitations. The key is to look at several metrics together and compare them to organizations of similar size, mission, and geography — not to apply universal benchmarks blindly.

In 2013, the CEOs of Charity Navigator, GuideStar (now Candid), and BBB Wise Giving Alliance took the unusual step of publishing a joint open letter urging donors to stop using overhead ratios as the primary measure of nonprofit performance. The letter warned that fixating on low overhead actually harms the organizations donors want to help [5].

Research published in the Stanford Social Innovation Review documented a "nonprofit starvation cycle" — a self-reinforcing pattern where unrealistic funder expectations push organizations to cut infrastructure spending and misreport overhead costs. The study found that more than one-third of nonprofits reported zero fundraising costs (a virtual impossibility) and 75–85% incorrectly reported grant-related expenses [6].

Financial metrics tell you where the money goes. Governance tells you whether anyone is watching. Strong governance structures — an independent board, clear policies, and regular oversight — are leading indicators of organizational health. Part VI of the 990 discloses most of this information [1].

Executive compensation is another governance indicator. Pay should be reasonable relative to the organization's size, mission, and geography. The IRS provides a safe harbor process — the rebuttable presumption of reasonableness — that protects organizations following specific comparability procedures [8]. If compensation looks unusually high or low compared to peer organizations, dig deeper.

Several organizations rate charities using standardized methodologies. Each evaluates different dimensions and has different coverage. Use them as one input in your evaluation, not the only one.

Charity Navigator also operates an alert system with four severity levels — from "Review Before Proceeding" (media reports of concern) up to "Giving Not Recommended" (confirmed fraud or loss of tax-exempt status) [10]. Always check whether an organization has active alerts before giving.

A nonprofit can have perfect financials and still be ineffective. Conversely, an organization with a higher overhead ratio might be delivering transformative impact. The best evaluation combines quantitative metrics with qualitative assessment.

Independent Sector's 33 Principles for Good Governance and Ethical Practice offer a comprehensive framework for evaluating nonprofit governance across legal compliance, public disclosure, effective governance, financial oversight, and responsible fundraising [12].