How to Run Back of the Envelope Parachute Payment (280G) Calculations

A parachute payment, in everyday terms, is money (or property) paid to an executive when a company is sold — to help them “land softly.”

In tax-speak, however, parachute payments are more complicated.

Here’s the story: In the 1980s, after public outcry over executives being paid too much, Congress passed Sections 280G and 4999 of the Internal Revenue Code. These provisions were meant to protect shareholders — or at least give the appearance of doing so. Under the rules, if an executive receives compensation above a certain threshold at the time of a change in control, two things happen:

1. The executive pays an extra 20% excise tax on a portion of the compensation.
2. The payor (target or buyer) loses the tax deduction on that same portion of compensation.

The government’s message was essentially: “Don’t worry, shareholders — if an executive is looting the company at an exit event, we’ll take our cut of the loot.”

I’m joking… sort of. But that’s really how the law works.

A Practical Way to Gauge a 280G Problem

These rules are complex, but here’s how to run a back-of-the-envelope parachute payment calculation in three steps. (With the caveat: You’ll generally still want to have a professional perform a real 280G analysis. And if the target is a private company, penalties can be avoided if more than 75% of the voting power held by disinterested shareholders approve the payments.)

Step 1. Do the Rules Apply to You?

Section 280G applies if the target company is a C corporation with any of the following:

• Multiple classes of stock,
• Entity shareholders, or
• More than 100 shareholders.

If that’s the case, you’re potentially subject to 280G if, within the 12 months before closing, you:

• Provided services to the target, and
• Were one of the following:
• An officer,
• A >1% shareholder (including vested options), or
• In the top 1% of paid employees.

Step 2. Find Your Safe Harbor Amount

Your safe harbor is the maximum you can receive (contingent on the change in control) without triggering the 20% penalty.

Here’s how to calculate it:

1. Take your average W-2 Box 1 income from the company over the last 5 years (include 1099 income if applicable).
2. Multiply that average by 3.
3. Subtract $1.

Example:

Average = $200,000 → Safe Harbor = $599,999.

If compensation contingent on the deal exceeds that number, the 20% excise tax applies.

For instance, if this executive receives $600,000 contingent on the transaction, the penalty would be:

• ($600,000 – $200,000) × 20% = $80,000 (in addition to regular taxes).

Step 3. What Counts Against the Safe Harbor?

The tax rules are intentionally broad. The following amounts generally count as parachute payments:

• Full value of equity granted in the 12 months before closing.
• Value of equity accelerating at closing (even if granted earlier).
• Any bonuses paid in the 12 months before closing.
• Transaction bonuses.
• Potential severance.
• Certain compensation from your buyer offer letter (e.g., increased base salary, new bonuses, equity, or severance promises).

Add these up and compare against your safe harbor. If you’re over, you may have a 280G issue.

The good news: The purchase price you receive for vested equity you’ve held more than one year does not count against the safe harbor.

Key Takeaways

• If the target is a C corporation and you are an officer, >1% shareholder, or in the top 1% of paid employees, the 280G rules can apply.
• Safe harbor = 3× your past 5-year average compensation – $1.
• If your parachute payments might exceed that, you’ll need a full Section 280G analysis. (Buyers often require one regardless.)

Mike Baker frequently performs tax code Section 280G calculations and assists with the stockholder approval process. He brings decades of experience in tax and employee benefits & compensation. For additional information, please contact mike@mbakertaxlaw.com.