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Why Facebook Is Paying These People's Tax Bills

FacebookThe coming Facebook IPO is making waves in the investment world, as everyone tries to figure out how to make money from the social-media craze. One group of lucky people, however, is almost certain to hit it rich -- and they're even getting an extra benefit no one would have expected.

Back in the late 1990s, during the first Internet boom, stories about rank-and-file employees becoming millionaires simply by virtue of working for the right company at the right time were common. Now, as social media companies enjoy a similar level of popularity, many of their lucky workers will enjoy the same success.

This time, though, some of those workers are getting even more of a windfall. According to a Reuters report, Facebook plans to pay the income taxes that employees will incur soon after the company goes public later this year.

In addition to their regular salaries, at least some Facebook workers received what are known as restricted stock units, which let employees participate in the profits from a rising stock price. Workers have to wait for these restricted stock units to vest, but with vesting slated to happen six months after Facebook's IPO, that's when the windfall -- and the corresponding tax bite -- will occur.

Picking up the tab for employee tax bills could cost Facebook billions of dollars, depending on how Facebook stock performs after it goes public. It's not a typical thing for companies to do, but it does avoid one problem that hit Internet company employees a decade ago.

From Rags to Riches and Back Again

When Internet stocks were soaring, many employees received stock options that became very valuable. Even if the employees chose not to sell any of their shares, they often got slapped with tax bills that required them to pay income taxes on those options.

In the early 2000s, when the bottom fell out of the tech-stock market, some employees found themselves owing big tax bills based on share prices that no longer matched up with the actual value of their stock and options.

The episode took many workers from rags to riches and then back to rags as a result of bad tax planning.

With Facebook taking care of the taxes for workers, there won't be any chance of employees getting burned like their peers from a decade ago.

Of course, investors in the company may not be so happy about Facebook spending billions of their money paying tax bills for workers. But with quality tech workers in high demand, anything that keeps talent from moving on to the next big thing should benefit Facebook in the long run.



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Luke H

Photo number 39 in the above Facebook photo essay is a photo of Twitter's iPad app and not, as indicated, a photo of Facebook's iPad app.

March 14 2012 at 3:06 PM Report abuse rate up rate down Reply
Patrick Lane

When restricuted stock units vest the employer is required to withhold a portion of the value employees receive and pay the IRS (similiar to withholding on your regular paycheck). The company also has to pay payroll taxes (social security, medicare etc..) on the value of the awards the employees receive. I don't think facebook is paying the tax for their employees....they're borrowing cash b/c the amount they need to remit to the IRS is more cash then they have on hand.

This story is misleading....

March 14 2012 at 10:24 AM Report abuse rate up rate down Reply
peter

Technically, is not FaceBook's payment of the employee-stockholder's tax, a gift?... and therefore taxable?... in much the same way as when you do a short sale on a house, the portion of the loan forgiven by the lender is taxed..

It would seem to me that the stock should be taxed when income is realized.... that is when the stock is sold for whatever price.

March 13 2012 at 12:45 PM Report abuse rate up rate down Reply
Daniel Reeves

------> Because #markzuckerberg is a Billionaire, "He Can Afford It." Duhh, Lol.!! <--------

March 13 2012 at 11:02 AM Report abuse rate up rate down Reply
Daniel Reeves

------> Because #markzuckerberg is a Billionaire, "He Can Afford It." Duhh, Lol.!! <--------

March 13 2012 at 10:26 AM Report abuse rate up rate down Reply
Gregory Lee

Blah,blah,blah. Wish website/ online/ seller- store,etc. user would stop using facebook and their ad/banner in and on their website. Needed to be direct only in Facebook site only. like a phonebook instead exposing and having any kind of Cookies,Mal-ware of them in on websites. Don't like them and sure don't trusted them. There is something very fishy and doing something breaking somewhere about them.

March 13 2012 at 8:21 AM Report abuse rate up rate down Reply
Gregory Lee

Blah,blah,blah. Wish website/ online/ seller- store,etc. user would stop using facebook and their ad/banner in and on their website. Needed to be direct only in Facebook site only. like a phonebook instead exposing and having any kind of Cookies,Mal-ware of them in on websites. Don't like them and sure don't trusted them. There is something very fishy and doing something breaking somewhere about them.

March 13 2012 at 8:21 AM Report abuse rate up rate down Reply
stripedbass7

Im Tech duh, But would love to work for Facebook......

March 12 2012 at 4:10 PM Report abuse rate up rate down Reply