Nonprofit Overhead Rate Calculator
Costs directly related to fulfilling your mission (e.g., supplies, program staff).
Administrative costs, accounting, legal fees, general operations.
Costs incurred to solicit contributions and grants.
Overhead Rate
0%
Program Expense Ratio
0%
Percentage of budget going directly to the mission
Financial Breakdown
Total Overhead Costs:
$0.00
Total Expenses:
$0.00
How to Calculate Overhead Rate for Nonprofits
Understanding your nonprofit's financial health is critical for transparency, donor trust, and operational sustainability. The Overhead Rate is a key metric used by charity watchdogs, grantmakers, and donors to assess how efficiently a nonprofit organization uses its resources. This calculator helps you determine your organization's overhead percentage based on the three functional expense categories defined by the IRS Form 990.
What is Nonprofit Overhead?
Nonprofit overhead refers to the expenses associated with running the organization that are not directly tied to delivering its specific services or mission. In accounting terms, total expenses are divided into three buckets:
- Program Service Expenses: The costs incurred to deliver the actual goods and services that fulfill the organization's mission (e.g., feeding the homeless, rescuing animals, conducting research).
- Management & General Expenses: Also known as administrative costs. These include executive salaries, board meeting costs, general legal services, and office management.
- Fundraising Expenses: The costs incurred to solicit donations, including campaign materials, event costs, and fundraiser salaries.
Overhead is calculated by combining Management & General Expenses with Fundraising Expenses.
The Overhead Rate Formula
There are different ways to calculate this metric, but the most common standard used by evaluators like Charity Navigator is the percentage of total expenses that goes toward overhead.
The formula used in this calculator is:
Overhead Rate = (Management Costs + Fundraising Costs) / Total Expenses
Conversely, the Program Expense Ratio is calculated as:
Program Ratio = Program Expenses / Total Expenses
Interpreting Your Results
While the "Overhead Myth" (the belief that lower overhead is always better) is being challenged, benchmarks remain relevant for donors.
- Less than 15%: Often considered highly efficient.
- 15% – 25%: Considered good to average for most sectors.
- Above 35%: May raise red flags for potential donors unless there is a strong explanation (e.g., a startup phase or highly complex compliance requirements).
It is important to note that spending too little on overhead can lead to the "Starvation Cycle," where an organization lacks the infrastructure to deliver its programs effectively.
Why Overhead Matters
Accurately calculating your overhead rate helps in:
- Grant Applications: Many foundations limit indirect cost coverage (e.g., capping it at 10% or 15%).
- Donor Transparency: Demonstrating fiscal responsibility builds trust.
- Internal Budgeting: Ensuring you aren't underinvesting in critical infrastructure like IT or staff training.
Frequently Asked Questions
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Q: What is a good overhead rate for a nonprofit?
A: A good overhead rate typically falls between 15% and 25%. However, the Better Business Bureau's Wise Giving Alliance suggests that at least 65% of total expenses should be spent on program activities, meaning overhead should not exceed 35%.
A: A good overhead rate typically falls between 15% and 25%. However, the Better Business Bureau's Wise Giving Alliance suggests that at least 65% of total expenses should be spent on program activities, meaning overhead should not exceed 35%.
Q: Does a lower overhead rate always mean a better charity?
A: No. Extremely low overhead (under 10%) can sometimes indicate underinvestment in staff, infrastructure, or safety, which may hinder the organization's long-term impact. This is often referred to as the "Starvation Cycle."
A: No. Extremely low overhead (under 10%) can sometimes indicate underinvestment in staff, infrastructure, or safety, which may hinder the organization's long-term impact. This is often referred to as the "Starvation Cycle."
Q: Are fundraising costs included in overhead?
A: Yes, fundraising expenses are considered indirect costs and are typically grouped with administrative expenses when calculating the total overhead rate.
A: Yes, fundraising expenses are considered indirect costs and are typically grouped with administrative expenses when calculating the total overhead rate.