Today, employees of Facebook, investors, and the world eagerly waited while, 28 year old founder of Facebook, Mark Zuckerberg, rang the opening bell for the Nasdaq, the day after investors raced to get their shares of the once considered “start-up”. Facebook raised $16 billion in the third largest initial public offering in history that valued Facebook at $104 billion. But just why are the employees so ecstatic?
Well, I would be excited too. Many of the employees became instant millionaires as a result of Facebook going public since as part of the company’s incentive plan, they were given Restricted Stock Units.
What Does This Mean for Overnight Millionaires and Their Taxes?
If you are ever so lucky to receive Restricted Stock Units, they are a promise to grant shares of stock, which are granted on a vesting schedule or meeting of certain milestones by you or company. When vesting occurs, the value of the stock is included in your income as ordinary income and the employer is required to withhold taxes as soon as the RSU is vested whether you sell your shares or not. If you later sell the shares, the change in value is a capital gain or capital loss.
Employee Stock Purchase Plans, on the other hand, are shares that you buy at a discount so you don’t have to pay taxes until you sell the stock. When you sell the stock, the discount you received when you bought the stock is generally considered additional compensation to you and will be taxed as regular income. If you sell your stock in less than one year, your gains will be considered compensation and taxed as ordinary income. If however, you sell your shares after one year, your profit will be taxed at the lower capital gains rate.
If you are lucky enough to become an instant millionaire and you receive Restricted Stock Units you may be subject to higher taxes than under an Employee Stock Purchase Plan. Either way cha-ching. I really don’t think this would be a bad problem to have. Stock options give you a chance to make more than your salary and they also give you a sense of ownership in the company.
Have you ever received employee stock options? What type were they?