Facebook employees are now $5.2 billion richer after cashing company stock

NEW YORK (CNNMoney) -- It's the day some Facebook employees have waited years for: Their paper wealth now has an official cash value, to the tune of $5.2 billion.

Before this week, those employees were rich only on paper. That's because Facebook used a special form of equity compensation called "restricted stock units" that become actual, tradeable stock only after a liquidity event -- in this case, Facebook's May 18 IPO.

Facebook's current and past employees hold about 225 million of those so-called RSUs. They will officially be converted into stock on Thursday, using Wednesday's closing price of $23.23.

The shares will remain locked up for a few days. On Monday, October 29, their owners can cash in by selling them on the stock market. Adding together the RSUs and other stocks and options that are also being unlocked, a total of 234 million shares will be newly eligible for sale that day.

The employees' RSUs are worth around $5.2 billion, based on Wednesday's closing price.

It's less than they might have expected earlier in the year, because Facebook shares have plummeted since May. Still, they caught a lucky break: Facebook's stock rose more than 19% on Wednesday after the company's earnings report the night before.

That was the biggest single-day gain since Facebook's May IPO. Wall Street responded well to Facebook's growing ad sales and efforts to monetize its growing pool of mobile users.

Facebook's employees won't take home every penny of their stock haul. They have to pay Uncle Sam first.

Unlike stock options, which traditionally carry a "strike" price at which recipients can purchase shares, restricted stock units are granted outright at zero cost to employees. The IRS taxes RSUs as ordinary income on their full market value as of the day they vest.

Employers are required to withhold taxes when they settle RSUs. For many at Facebook -- whose windfalls can easily reach into the millions -- that will mean paying taxes at the top income tax rate. That's 35% this year for federal taxes. California, where most Facebook employees live, levies an additional 10.3% tax on individual income over $1 million.

Facebook says the tax rates will average around 45%, so it plans to withhold 101 million of its employees' 225 million shares to cover the bill. Instead of selling those shares on the open market, Facebook will hang on to them and dip into its own cash stash to pay the estimated tax bill of nearly $2.3 billion. The maneuver essentially functions like a stock buyback and reduces Facebook's outstanding share count.

For Facebook's rank-and-file employees, Monday will be the first chance most have had to sell off some of their stock holdings and turn their paper wealth into actual cash. If a large number of them decide to sell immediately, the stock could suffer a drop.

That's what happened in August. Shares fell 6% on the day that some of Facebook's investors and earliest executives first had the chance to sell off their shares.