Tax Excessive CEO Pay Act of 2025
The Tax Excessive CEO Pay Act of 2025 would raise a corporation’s tax rate if its CEO (or highest-paid employee) to median worker pay ratio exceeds 50-to-1. The base corporate tax rate of 21% would increase by 0.5 to 5 percentage points, depending on how high the pay ratio is, applying to tax years starting after December 31, 2025, with rules to prevent gaming the system.
Key Points
- 1Pay ratio over 50-to-1 triggers a higher tax rate, using a tiered penalty table (0.5 to 5 percentage points) on top of the 21% rate.
- 2Pay ratio is measured as a 5-year annualized average; if the highest paid employee isn’t the CEO, use that person’s compensation; large private firms have specific reporting rules.
- 3Requires reporting calculations for certain corporations and includes regulations to prevent avoidance or manipulation (e.g., via contractors).
The Tax Excessive CEO Pay Act of 2025 would add a new penalty to the corporate income tax for companies that have a large gap between top executive pay and pay for regular workers. If a company’s pay ratio (highest-paid employee to median worker) exceeds 50-to-1 in a given taxable year, the standard corporate tax rate of 21% would be increased by a “penalty” amount, as shown in a table that ranges from +0.5 to +5 percentage points based on how large the pay gap is. The act provides procedures for calculating the pay ratio (including using a 5-year average and, if applicable, the pay of the highest-paid employee even if that person isn’t the CEO). It also includes certain size-based reporting rules for companies not subject to SEC filings, specifies an effective date (tax years beginning after December 31, 2025), and directs the Treasury to issue regulations to prevent avoidance (for example, by using contractors to manipulate pay figures). In addition, it makes conforming amendments to several other tax code provisions to align them with the new 11(e) penalty.
Key Points
- 1New pay-ratio tax penalty: If a corporation’s ratio of compensation of the CEO or highest-paid employee to median worker compensation is greater than 50-to-1, the base 21% corporate tax rate is increased by a penalty ranging from 0.5 percentage points up to 5 percentage points, based on how high the ratio is.
- 2How pay ratio is calculated: The ratio uses the annualized average of specified compensation over the 5-year period ending the tax year, and if the highest-paid employee is not the CEO, the ratio uses that person’s compensation.
- 3Coverage and reporting rules: For corporations not subject to SEC filing requirements, there are special rules. Large private corporations with average annual gross receipts of at least $100 million over the prior 3 tax years would calculate and report the pay ratio using a Secretary-prescribed method; smaller private corporations under that receipts threshold are exempt from the pay-ratio rule.
- 4Effective date and anti-avoidance: The amendments apply to taxable years beginning after December 31, 2025. The bill also requires Treasury regulations to prevent avoidance, including schemes that shift workers to contractors to manipulate the pay ratio.
- 5Conforming tax-code changes: The bill adds references to 11(e) in several other code sections (related to deductions and reporting) to ensure consistency with the new pay-ratio penalty.