Jul 1, 2026
When an employee leaves a business, the company pays for the departure. In fact, the Society for Human Resource Management (SHRM) estimates that the costs of replacing a worker can range between 50% and 200% of the employee’s salary. This includes direct and indirect costs like severance pay, recruitment, onboarding, training, lost productivity and temporary staffing.
In light of this high price, it’s not surprising that some companies take creative approaches to try to deter top performers from leaving. For example, some businesses may even offer forgivable loans to attract and keep talent. But how exactly do these work and are they a good idea for employees to accept?
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Let’s pretend we have a worker named Liam whose company sent him a promissory note for a $250,000 forgivable loan. It is a 10-year loan at 4.87% interest, but for each year that Liam stays with the company, a portion is forgiven. The balance is wiped clean after a decade. If Liam leaves early, he must repay the remaining amount due.
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While this seems like a great deal, there are both tax and career implications to consider.
Forgivable loans have big tax consequences
The first key thing Liam needs to know is that, even if the loan does end up forgiven in full by his employer, it’s not really free to Liam because, depending how it is structured, it could come with a huge tax bill.
“If the paperwork for the $250,000 loan is not done properly and the money is just given to you for staying at the company the IRS can consider the whole $250,000 as compensation in the first year,” explained George Dimov, CPA and founder and CEO of Dimov Tax, to Moneywise. “This means you have to pay taxes on the $250,000 loan right away.”
In this case, Liam’s company did do the paperwork right, with an official promissory note and a stated interest charged.
But that doesn’t mean Liam just avoids any obligations to the IRS. “The forgiven part of the $250,000 loan is taxed as wages for that year,” Dimov said. “You also have to pay payroll taxes on the forgiven part of the $250,000 loan. This all goes on your W-2.”
So, if Liam accepts the money, he must plan to cover the taxes due on the forgiven debt. Of course, the problem is that he’s received the money upfront but the tax bill hits each year as the balance is forgiven. He’ll need to set aside some of the funds to prepare for that.
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Forgivable loans could also have career consequences
Aside from the tax bill, there’s also the issue of what accepting this loan could mean for Liam’s career going forward.
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“This type of ‘incentive’ is what we call ‘Golden Handcuffs,’” Peter A. Berzin, founder and CEO of PeopleE3, told Moneywise. “They are very shiny and play on your current situation to keep you longer. Once you put them on and sign that contract, every opportunity that comes near you over 10 years, and they will, are not accessible to you without serious repercussions.”
Berzin pointed out that the $250,000 loan is essentially just $25,000 per year over the next decade to potentially reject much bigger opportunities that come along.
He also said that the fact that the company is offering it may not be a good sign. “Great companies do not need to pay someone to stay. They need to have such core values, mission statement and culture where that alone will keep employees from leaving.”
Of course, Liam could accept the money but not touch it for a long time. He’d have the principal balance sitting there to pay taxes and to pay back any remaining balance if he decides to leave the business. But he’ll have to make sure he doesn’t let the potential for the $250,000 in forgiveness affect his career choices.
If he’s not confident he will be able to do that, the best and clearest path is just to turn down the loan offer.
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Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
