The world's largest online social network company, which has lost more than 50 percent of its market value since going public in May, said on Tuesday its total shares outstanding will be reduced by roughly 101 million shares as a result of the move.
Shares of Facebook rose 1.8 percent in after hours trading to $18.05.
Facebook will cover the stock compensation tax bill with existing cash and with borrowing from its credit facilities, the company said in a regulatory filing.
"The fact that they are using cash is a good thing. It feels like a mini buyback in a way because you're in essence reducing your share count by 101 million shares," said Susquehanna Financial Group analyst Herman Leung.
Facebook has suffered a painful debut on the public markets, as investors have fretted about its slowing revenue growth and a large pool of additional shares set to hit the market as "lock-up" restrictions on employees selling shares expire.
"Coming out and showing that they're being a little more active in supporting the stock is good for investors," said Baird & Co analyst Colin Sebastian.
"These are the kinds of things they can do until the figure out how to better monetize the sites, to help alleviate some of the pressure on the stock," he said.
While Facebook, with 955 million users, is challenging entrenched Web companies such as Google Inc
Earlier on Tuesday, analyst Scott Devitt of Morgan Stanley, which acted as the lead underwriter for Facebook's IPO, cut his price target for Facebook to $32 a share from the IPO price of $38. JP Morgan, which also underwrote the IPO, cut its price target to $30 from $45 on Tuesday.
Shares of Facebook set a new low of $17.55 Tuesday, before closing at $17.73 on Nasdaq.
Chief Executive Mark Zuckerberg will not sell any shares in Facebook for at least 12 months, while directors Marc Andreessen and Donald Graham will sell some shares to cover their tax obligations, according to the filing. Other than the tax-related sales, Facebook said Andreessen and Graham have no plans to sell any shares held by them personally.
Facebook said it has waived a "market stand-off provision" that prohibited employees from selling shares until November 14. As a result, employees will now be able to sell their vested shares on October 29 - four trading days after it reports third-quarter financial results on October 23.
About 234 million shares held by employees will be eligible for sale in the public market on October 29, it added.
Allowing employees to sell sooner could win Facebook some points from staff who have been unable to cash out any equity as the stock has steadily declined even as other insiders and early investors have sold, said Pivotal Research Group analyst Brian Wieser.
And the move could help make the massive share lock-up expirations less disruptive to the stock, by breaking up some of the big portions of shares set to become available for trading, he said.
"That helps with the digestion of these shares," said Wieser.
More than 1 billion Facebook shares held by employees, insiders and early investors are set to become available for trading by year's end.
Facebook estimated in the filing that it will owe roughly $1.9 billion in tax obligations as a result of the vested restricted stock units that its employees have been compensated with, assuming a 45 percent tax rate and based on Thursday's closing price of $19.09.
"We currently do not expect to conduct any offering of our equity securities near the initial RSU settlement date to fund this obligation," Facebook wrote in the 8-K filing on Tuesday. Facebook also said it did not expect to conduct any offering in connection with the expiration of the lock-up restrictions in the fourth quarter.