Why Facebook Is Paying These People's Tax Bills

Dan Caplinger
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The 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.

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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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