Many instant millionaires are expected to be working for Facebook when the social networking behemoth distributes millions of shares to employees after its initial public offering next week.
The downside, according to a CNN Money report, is that Uncle Sam will be salivating nearby for its share of the windfall because of how Facebook decided to award stock to the employees when they were hired.
Many companies issue stock options to lure and keep valued employees, and those shares vest, or are realized, over time. Facebook, however, chose to issue “restricted stock units” that vest when there is a “liquidity event,” such as when it offers shares to the public May 18, CNN Money explains.
Facebook employees will get their shares five to six months after the IPO. Federal and state taxes, however, will be due at the same time because the Internal Revenue Service looks at RSUs as ordinary income. Employees will have to pay taxes even if they don’t sell the shares.
The tax bite will depend on the price of the shares – expected to be $28 to $35 – and the number of shares an employee is awarded:
A typical package for a software engineer joining the company in late 2009 included around 10,000 RSUs, according to a discussion thread on Silicon Valley chatter nexus Quora. Thanks to a 5-for-1 stock split in late 2010, that engineer would now be holding a marker for 50,000 shares, worth $1.8 million at the high end of Facebook’s range.
That could mean a bill of $810,000 for combined federal and state taxes if the worker, say, lives in Palo Alto, Calif., Facebook’s headquarters. Of course, the $1 million that’s left is nothing to sneeze at.
Facebook is already estimating that its employees will owe the IRS at least $4 billion, according to CNN Money. To satisfy the debt, Facebook will withhold a big chunk of its employees’ stock to pay the taxes.