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Big tax bills for Facebook staff

By Kay Bell · Bankrate.com
Thursday, May 10, 2012
Posted: 4 pm ET

If you're feeling a bit jealous of all those Facebook kids who are about to be millionaires, here's a bit of news that might offer some schadenfreude-esque solace.

All of the soon-to-be wealthy whippersnappers also are going to face substantial tax bills.

CNNMoney's admittedly very rough estimate is that the average tax hit will be $1.1 million per employee or almost half of their initial public offering, or IPO, wealth.

This unprecedented tax hit is because of the way Facebook structured its employee equity rewards.

Companies that provide part of worker compensation in stock usually parcel it out via stock grants or options that vest over time. That way, employees acquire their wealth via company shares on a staggered schedule over time.

Facebook, however, issued restricted stock units, or RSUs, that don't turn into actual stock until there is what is defined as a liquidity event. That event is Facebook's IPO.

That means in a one-month span at some point after Facebook's IPO, the company will issue around 277 million shares to settle its RSU obligations. If the shares are trading at high end of Facebook's IPO price range, around $35 per share, that will produce a stock bonanza of around $9.7 billion.

And that will create a concurrent bonanza for the Internal Revenue Service and California tax office since the company's headquarters and most of its current and many of its former employees are Golden State residents.

Top tax rates apply

The reason for the big tax bite? Restricted stock plans are not eligible for the less-costly capital gains tax treatment. The U.S. tax code considers RSUs as ordinary income worth their full market value when they vest.

So even though the income will be in stock form, the IRS position is that the rewards are part of regular compensation and should be taxed as such when rewarded and not when they are sold.

At the federal level, the new Facebook wealthy are looking at a 35 percent top income tax rate.

California collects a top tax rate of 9.3 percent plus a 1 percent surcharge, the Mental Health Services Tax, on taxable incomes of $1 million or more.

I'm sure that the taxes will take some of the shine off the Facebook millionaires' newfound wealth.

Maybe it will help them cope if they remember what one tax adviser once told me: "I'm happy to pay a lot of taxes because it means I've made even more money."

Nah. I'm not that Zen either. I'd want all the money I could keep out of tax collectors' hands, too!

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1 Comment
ngan
May 11, 2012 at 11:18 am

Not much of a solace. that's like applying the logic to lotto winners. If I get 2 million from the stock options and have to pay 5 million in taxes, i'm still a million dollars richer. where is the downside to that?