Golden Parachute Payments

So-called golden parachute payments are made to employees or officers as a result of a change in corporate control or ownership. This type of payment is subject to all normal payroll tax withholdings. In addition, if the payment is more than three times a person's average annual compensation for the past five years, the employer must also withhold a 20 percent excise tax for the incremental amount exceeding this limit.

Example. The Golden Egg Company has laid one by being sold to a large international conglomerate. Under the terms of a golden parachute agreement, its president, Jason Fleece, is awarded a payment of $500,000. His average pay for the past five years was $125,000. Three times this amount, or $375,000, is the limit above which a 20 percent excise tax will be imposed. The amount subject to this tax is $125,000, so the company must deduct $25,000 from the total payment, in addition to all normal payroll taxes on the full $500,000 paid.