Golden parachute payments: withholding and the 20% excise tax

What counts as a golden parachute payment

Publication 15-A (2026) defines a golden parachute payment, in general, as a payment made under a contract between a corporation and key personnel. Under the agreement the corporation pays certain amounts to those people if there is a change in ownership or control of the corporation. Two separate questions follow. How is the money taxed and withheld as pay? And is it a parachute payment under section 280G, which carries the excise tax and the lost deduction? The answers differ, and mixing them up is the most common error.

Withholding: these are still wages

Whatever the section 280G answer, payments to employees under golden parachute contracts are subject to social security, Medicare and FUTA taxes and to federal income tax withholding, according to the publication. They are reported on Form W-2 (see the General Instructions for Forms W-2 and W-3). For a recipient who is not an employee, the publication sends you to the Instructions for Forms 1099-MISC and 1099-NEC. So the ordinary payroll machinery runs first; the excise tax is an additional layer for an employee recipient.

The four-part test for a parachute payment

Under section 280G a payment is a parachute payment only if all four of the following are true, in the publication’s words. The payment is in the nature of compensation. It is to, or for the benefit of, a disqualified individual: anyone who, at any time in the 12 months ending on the date of the change, was an employee or independent contractor and was a shareholder, an officer or a highly compensated individual of that corporation. It is contingent on a change in ownership, effective control, or ownership of a substantial portion of the assets. And its aggregate present value is at least three times the individual’s base amount.

The base amount is the average annual compensation for service includible in the individual’s gross income over the most recent 5 tax years. The three-times threshold is a cliff. A payment worth 2.9 times the base amount is not a parachute payment under this test; one worth 3.0 times is, and the whole excess over one times the base amount is exposed.

The publication’s example, reproduced

An officer receives a golden parachute payment of $400,000. Their average compensation over the previous 5 years was $100,000. The payment is more than three times the base amount, so it is a parachute payment. The excess parachute payment is $300,000 ($400,000 minus $100,000). The corporation cannot deduct that $300,000 and must withhold the excise tax of $60,000 (20% of $300,000). Enter 400,000 and 100,000 in the calculator above to reproduce it.

Try 290,000 against the same $100,000 base amount. The threshold is $300,000, so the calculator reports no parachute payment, and the whole payment is ordinary wages with ordinary withholding. The difference between $290,000 and $400,000 in outcome is the cliff at work.

Who pays what

Three consequences land on different parties. The corporation loses its deduction for the excess parachute payment. The recipient owes a 20% nondeductible excise tax on the excess. And if the recipient is an employee, the corporation must withhold that excise tax. The excise tax is separate from income tax: it is owed on top of whatever income tax applies to the payment as ordinary pay.

Exemptions and limits of this page

The publication notes that payments by most small business corporations and payments under certain qualified plans are exempt from the golden parachute rules, and refers to sections 280G(b)(5) and (6). That matters in practice, because many private companies are exempt. It also refers to Regulations section 1.280G-1 for the detailed rules, including how present value and the base amount are determined. The calculator takes your base amount and present value as given and applies only the 3x test, the excess and the 20% rate.

Sources

• IRS Publication 15-A, Employer’s Supplemental Tax Guide (2026): section 5, Wages and Other Compensation: Golden Parachute Payments. Read November 2, 2026.

Edition read: Publication 15-A (2026), for use in 2026. Rates, wage bases and dollar limits on this page are the 2026 figures printed in that edition; check the current publication and the IRS employment tax pages for your tax year. This page summarizes the publication and does not replace it.