5 Questions to Ask Before Giving to a Nonprofit

Most people get into the holiday spirit by opening their wallets and giving to local charities.

Many nonprofits depend on and base their budgets on the gifts they receive during the holiday season. For individuals, holiday giving is an opportunity to donate to a cause they care about while securing a last-minute tax break.

But how do you know if your money really goes to the charity’s mission? Nonprofits are not scrutinized as much by the IRS, but their 990 tax forms can be the first clues as to how well an organization manages its money.

Before you sign over the check, don’t be afraid to research the charity. If you don’t know if you should give, answer these five questions:

1. Is the charity tax-exempt?

If you know nothing about the organization, verify that it is a registered 501(c)(3) — a public charity nonprofit — with the Internal Revenue Service. You can use websites such as charitynavigator.org for reviews and guidestar.org for their 990 tax forms. Nonprofits are required to fill out these tax forms each year.

2. How much of the charity’s budget is spent on services?

Allow some wiggle room here. Experienced, efficient organizations should spend 75 percent or more of their money on programming. New charities should spend about 60 percent. New groups and those that work on less popular issues may have to spend more on fundraising and administrative costs.

To find the giving rate requires some math. First, look at the nonprofit’s 990 form for its total program service expenses. Divide that number by the line item for total expenses and then multiply by 100.

Yet even then, the tax forms will not always accurately reflect how much is spent on the charity’s mission. Small organizations often can't afford an accountant to fill out the form. The IRS does not audit nonprofits as much as other organizations, so errors sometimes can go unchecked for years. Also, many of the form’s line items are open to interpretation. Some groups consider salaries part of their program services expenses, while others may leave them out.

Remember, the 990s aren’t perfect. But they are the only public documents that nonprofits must fill out. If you have a question about a group’s 990, call the organization. No matter the reason, the organization’s executives should be able to pinpoint the charity’s challenges and goals with finances.

3. How much is the executive director’s salary?

Not all who work for a charity are paid, but those who do should have salaries listed in the 990.

Keep everything in context. If a nonprofit’s budget is $100,000 and the executive director makes $75,000, you have reason for concern.

According to the IRS, a nonprofit’s chief executive officer should receive a “reasonable” compensation. But the tax code remains vague on how much is unacceptable.

The IRS only requires nonprofits to report salaries of executives making more than $100,000. In the nonprofits used in this report, many of the organizations provided salary information of CEOs making much less.

4. Are board members compensated?

Nonprofit board members should participate for the public good, not for a salary. It’s not illegal if they are paid, but it's considered a red flag.

Board members are listed on the 990s with any reportable compensation or benefits. In the groups polled in this report, no board members were paid.

5. How does the charity make a difference?

Have you visited the organization? Met the executives? Talked to someone who benefited from its programs? Doing so can provide powerful insights on how the charity meets its goals and benefits the community.