In employment, a golden parachute is a compensation payment that is guaranteed to a key employee of an organization should the organization undergo a change of hands in ownership or control.
The golden parachute is agreed upon in advanced and a legally binding contract is written out.
It is part of the key employee compensation that is used to keep the best staff in an organization, especially for high positions.
Such benefits are usually awarded to the very top management of various organizational institutions.
The benefits could take the form of share options, bonuses, or severance pay.
There are various aspects of taxes that affect the processing of golden parachutes.
For starters, the golden parachute is not a deductible expense for the corporation providing it.
The IRS does not see the cost as a fair expense for corporations and therefore, the corporation will have to pay the expense after paying their taxes.
For the person receiving the golden parachute, the payment is entered as regular income and subject to the normal taxation rates.
Besides this taxation, the golden parachute, also referred to as the excess parachute payment, is subject to a non-deductible 20% excise tax.
However, to protect the person receiving the golden parachute from being hit by the excise tax, most corporations take up the burden of the excise tax for the employee.
In other words, the corporation calculates the tax for the golden parachute agreed upon and lumps it into the payment so that the tax portion is provided for by the corporation.
Naturally, the organizations are willing to take this extra step to ensure that their senior staff remains happy.
Under IRS regulations that govern the taxation of golden parachutes, these rules determine and define a golden parachute (referred to as the "excess" parachute payment by the IRS) if it meets the following guidelines:

• The parachute payment is for the purpose of compensation
• The benefit for the compensation accrues to a high-salaried employee, an officer of the organization, or to a shareholder of an organization within the year in which the control or ownership of the organization changed hands.
  
• The benefit depends on when the ownership or control of the whole organization or of a significant part of the organization changes.
  
• The benefit must have a present value that is more than 3 times what the individual entitled to the benefit earns on average for the 5 most recent tax years.
  

If the benefit that accrues qualifies under the above rules, the IRS requires that the applying taxation guidelines are followed.
The excise tax is charged on the excess amount over the average annual pay of the individual.
The IRS will also not allow a deduction for the corporation on the same applying excess amount.