Section 280G Golden Parachute: Excise Tax, Cutbacks, and Gross-Ups

The Section 280G golden parachute excise tax is a 20 percent federal tax you owe when compensation tied to a corporate change in control reaches or exceeds three times your average prior pay. It sits on top of regular income tax and payroll taxes, and the corporation paying you loses its deduction on the same excess amount. Together, the two penalties can push the federal tax cost on the excess portion past 60 percent before any state tax.¹

When the Rules Apply to You

Two things have to be true before Section 280G touches a payment. You have to be a “disqualified individual,” and a qualifying change in control has to actually happen. Miss either gate and the rules do not apply, no matter how large the payout.

Disqualified individuals are corporate officers, highly compensated employees, and shareholders who own more than one percent of the company’s stock (counting shares attributed through family or related entities).² Highly compensated means the top one percent of the workforce by pay or the top 250 highest-paid employees, whichever group is smaller. Officer status looks at actual authority during the year ending on the change-in-control date, not just titles.

A qualifying change in control comes in three flavors:

A person or group acquires more than 50 percent of the fair market value or voting power of the corporation’s stock.
A person or group acquires 20 percent or more of the voting power within 12 months, or a majority of the board is replaced by directors the incumbent board did not endorse.
A buyer acquires assets worth 40 percent or more of the corporation’s gross fair market value.²

What Counts as a Parachute Payment

A parachute payment is any compensation to a disqualified individual that is contingent on the change in control. The category is broad: cash severance, transaction bonuses, accelerated vesting of stock options or restricted stock, enhanced retirement benefits, and continued health coverage all count if the deal is what triggers the right to receive them or accelerates their timing.

Watch the one-year window. Treasury regulations presume that any payment under an agreement entered into within one year before a change in control is deal-contingent, and you carry the burden of showing otherwise.³ Compensation for services you actually perform after the change in control is generally excluded from the parachute count, but proving that allocation takes clear and convincing evidence.² Severance itself can never qualify as reasonable compensation for prior services, regardless of how the paperwork labels it.

How the Excess Is Calculated

The math starts with your “base amount,” which is your average annual taxable compensation over the five tax years ending before the change in control (or your actual employment period if shorter).² Everything else is measured against that number.

Add up the present value of all your parachute payments. If the total is less than three times your base amount, Section 280G does not apply. If it equals or exceeds three times the base, every parachute payment enters the excess calculation, and the excess parachute payment equals the total minus one times the base amount.²

That last detail is the cliff. Imagine your base amount is $200,000 and your total parachute payments come to $650,000. The three-times threshold is $600,000, so you cross it by only $50,000. But the excess subject to tax is $650,000 minus $200,000, which is $450,000. A $50,000 overshoot creates a $450,000 penalized amount. This is why planning around the threshold matters so much.

What the Tax Costs

On your side, the 20 percent excise tax under Section 4999 applies to the entire excess parachute payment.¹ That sits on top of regular federal income tax (up to 37 percent) and payroll taxes, so the combined federal bite on the excess portion typically runs somewhere between 57 and 59 percent before state tax. Your employer withholds the excise tax at the time of payment, in addition to normal income tax withholding. The payments also remain subject to Social Security and Medicare tax.⁴

On the company’s side, the deduction for the excess parachute payment disappears.² At a 21 percent corporate rate, losing the deduction on a $450,000 excess costs the corporation another $94,500. Add the executive’s excise tax to that, and the combined tax cost on the $450,000 excess in the earlier example exceeds $180,000 between the two parties.

Ways to Reduce or Avoid the Hit

Cutback (Best-Net) Provisions

A cutback clause automatically trims your payout to just below the three-times threshold when doing so leaves you better off after tax. Because dropping to 2.99 times the base avoids the 20 percent excise tax and preserves the corporate deduction, cutting a payment back often puts more cash in your pocket than a larger payment that trips the rules. Best-net provisions now appear in roughly 75 percent of change-in-control arrangements at major companies, up from about 17 percent in 2010.

Excise Tax Gross-Ups

A gross-up goes the other direction: the company pays you enough additional compensation to cover the excise tax, the income tax on that additional amount, and so on until you are made whole. The executive is fully protected, but the cost to the company is severe because none of the excess or the gross-up is deductible. Full gross-ups have fallen from around 60 percent of arrangements in 2013 to roughly 5 percent, largely because shareholder advisory firms recommend voting against pay plans that include them.

Allocating to Post-Closing Services or a Noncompete

If part of your payment genuinely reflects services you will render after closing, or the fair market value of a binding noncompete, that portion can be pulled out of the parachute total. The IRS examines these allocations closely, and you need an independent valuation and clear and convincing evidence to support them.² Done well, this can bring you back under the three-times line.

The Private-Company and S-Corp Exemptions

Two categories of corporations sit outside Section 280G entirely.² If the company qualifies as a small business corporation under Section 1361(b) (an S corporation) immediately before the change in control, none of its payments to disqualified individuals are treated as parachute payments, and no shareholder vote is required. If the company is a private C corporation with no stock traded on an established securities market immediately before the deal, its payments can be fully exempt as well, but only if shareholders holding more than 75 percent of the voting power approve them after receiving full disclosure of the material facts.³ Shares held directly or indirectly by the disqualified individual whose payment is being voted on do not count toward either the approval or the outstanding-share denominator. Public companies cannot use this exemption at all.

How It Appears on Your Tax Forms

Your employer reports the 20 percent excise tax withholding in Box 12 of your Form W-2 using Code K, and the withheld amount is also included in Box 2 along with your regular federal income tax withholding.⁵ On your personal return, the excise tax goes on Schedule 2 (Form 1040) under “Other Taxes,” on the line designated for golden parachute payments.⁶

A withholding example: parachute payments of $400,000 with a five-year average of $100,000 produce a $300,000 excess. The employer withholds $60,000 in excise tax (20 percent of $300,000) in addition to regular income tax withholding on the full $400,000.⁴

If You Work for a Nonprofit

Section 280G does not reach tax-exempt organizations. A different rule, Section 4960, imposes an excise tax on excess remuneration and excess parachute payments to the five highest-paid employees of a tax-exempt employer, tied to separation from employment rather than a corporate change in control.⁷ The rate matches the corporate tax rate (currently 21 percent) rather than the 20 percent under Section 4999, and the employer pays it, not the employee. If your employer is a nonprofit, those are the rules to look at instead.

1
Office of the Law Revision Counsel. 26 USC 4999 – Golden Parachute Payments
2
Office of the Law Revision Counsel. 26 USC 280G – Golden Parachute Payments
3
eCFR. 26 CFR 1.280G-1 – Golden Parachute Payments
4
Internal Revenue Service. Publication 15-A (2026), Employer’s Supplemental Tax Guide
5
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
6
Internal Revenue Service. Schedule 2 (Form 1040) Additional Taxes
7
Office of the Law Revision Counsel. 26 USC 4960 – Tax on Excess Tax-Exempt Organization Executive Compensation