Employee Stock in Facebook and the Taxation of RSUs

The ups and (mostly) downs of Facebook's stock following its IPO have generated countless articles and commentaries, but another angle of the story is the taxation of the company's broad-based equity compensation plan. Facebook helped pioneer the use of restricted stock units (RSUs) in its 2005 stock plan. RSUs give employees the right to receive shares, but they do not receive the actual shares until certain conditions are met, an IPO being one of the triggers. By not having shares in the hands of employees, Facebook stayed under the 500-shareholder threshold to avoid becoming a de facto public company.

Following the IPO and a waiting period, employees will receive those shares, the full value of which will be subject to Social Security and Medicare tax and, for many employees, ordinary income tax as well. The result? Facebook is setting aside $4 billion to cover 2012 taxes on employee equity compensation, which translates to roughly 45% of the value of those awards for many employees.