What Are RSUs? How Restricted Stock Units Are Taxed

A Restricted Stock Unit (RSU) is a promise from your employer to give you company stock at a future date, once you have met a vesting condition — usually staying employed for a set number of years. At the moment those shares are delivered, the IRS treats their full market value as ordinary income, taxed exactly like your salary. Understanding that single fact — ordinary income at vesting, not capital gains — is the foundation of every RSU tax decision you will make.

What RSUs actually are

When a company grants you RSUs, you do not receive shares immediately. Instead, you receive a contractual right to shares that will be delivered (vest) if certain conditions are met. The most common condition is time-based vesting: you must remain employed for a defined period, often four years, before the shares are yours. Some grants add a performance condition on top — the company must hit a revenue target, or the stock price must reach a threshold.

Before vesting, RSUs have no current value you can act on. You cannot sell them, pledge them as collateral, or receive dividends from them. The grant merely establishes what you will receive if conditions are met. After vesting, you own real shares of company stock that you can sell, hold, or otherwise manage like any investment.

RSUs are now the most common form of equity compensation at public technology, finance, and healthcare companies in the United States. They have largely replaced stock options in most large-company compensation packages because they retain value even if the stock price drops — unlike options, which become worthless if the stock trades below the strike price.

How RSU vesting schedules work

The two most common vesting structures are graded vesting and cliff vesting.

• Graded vesting delivers shares in equal tranches over the vesting period. A four-year graded schedule releases 25% of the grant each year. Some companies vest quarterly or monthly, so employees receive smaller, more frequent deliveries. This is the most common structure at public companies.
• Cliff vesting holds all shares until a single future date — then delivers them all at once. A one-year cliff means no shares until the anniversary of your grant, then 100% of that tranche vests. Cliff provisions are common at startups and are often combined with graded vesting (e.g., 25% at a one-year cliff, then monthly thereafter).

Many grants also carry a double-trigger provision: even if the time condition is met, shares will not vest unless a second event occurs, typically an acquisition or IPO. This is common at pre-IPO companies and protects both parties if the company never reaches a liquidity event.

How RSUs are taxed at vesting

This is the part that surprises most people the first time RSUs vest. The fair market value of the shares on the vesting date is treated as ordinary W-2 income — reported on your paycheck and your W-2 at year-end, right alongside your salary. It is subject to federal income tax at your marginal rate, Social Security and Medicare taxes (FICA), and state income tax if your state has one.

Your employer's payroll system or your brokerage typically handles the tax obligation by automatically selling a portion of your vesting shares and sending the proceeds to the IRS. This is called sell-to-cover or withhold-to-cover. You receive the remaining shares net of the withholding. If instead you prefer to pay the tax in cash and keep all shares, some employers offer a "pay cash" election — check with your equity administrator.

The 22% withholding problem

Here is where the practical pain lives. The IRS requires employers to withhold federal income tax on supplemental wages — bonuses, RSUs, commissions — at a flat 22% for cumulative supplemental income up to $1 million in a calendar year (and 37% above that threshold). This 22% rate is a statutory default, not a function of your actual tax bracket.

If you are in the 24%, 32%, 35%, or 37% federal bracket, your employer is withholding less than you actually owe. The gap accumulates silently through the year and surfaces as a tax bill — sometimes with an underpayment penalty — when you file in April.

The fix is straightforward once you know the gap exists. You can submit a revised W-4 to your employer requesting additional dollar withholding from each regular paycheck to cover the RSU shortfall. Alternatively, make IRS estimated quarterly payments (Form 1040-ES) to pre-pay the expected liability. Either approach prevents a large April bill and eliminates underpayment penalties.

The two tax events: vesting and sale

RSUs create two separate, distinct tax events — and conflating them is a common source of confusion.

After vesting, the vest-date share price becomes your cost basis. When you later sell the shares, you owe capital gains tax only on the price increase (or loss) from that basis — not on the full sale price. If the stock has risen since vesting, you owe tax on the gain. If you sell immediately at the vest price, there is zero gain and no second tax event.

Hold for more than one year after vesting and qualifying gains are taxed at long-term capital gains rates (0%, 15%, or 20% depending on your income). Hold for a year or less and gains are taxed as ordinary income. Most financial advisors recommend against holding concentrated company stock for extended periods — you are already economically exposed to your employer through your salary; concentrated equity doubles that exposure.

FICA taxes on RSUs

RSU income is subject to FICA in addition to income tax. Social Security tax (6.2%) applies up to the annual wage base ($176,100 for 2026). Medicare tax (1.45%) applies to all RSU income with no cap, plus the 0.9% Additional Medicare Tax on income above $200,000 for single filers or $250,000 for married filing jointly. These FICA amounts are withheld separately from the income tax withholding and are generally non-negotiable.

For high earners who have already hit the Social Security wage base through their regular salary, RSU vesting income earlier in the year still counts toward the cap — but RSUs vesting later in the year after the cap is exhausted will only incur Medicare taxes, not Social Security. This is worth knowing when planning large vest events that straddle calendar-year boundaries.

State income taxes

Most states tax RSU income as ordinary income at the vest date, using the same rule as the federal government. A few notable points:

• No-income-tax states (Texas, Florida, Washington, Nevada, and others): no state tax on RSU income at vesting.
• California: taxes RSU income at ordinary income rates up to 13.3% — one of the highest state rates in the country. California also has complex sourcing rules if you lived in California during any part of a vesting period but moved away before vesting; you may owe California tax on a prorated portion of the income.
• New York: taxes RSU income at state and city (if NYC) rates, which can add up to roughly 14.8% combined for New York City residents.

Multi-state vesting is a real complication if you move between states during a vesting period. Each state's rules differ, and an accountant familiar with equity compensation is worth consulting if you have lived in multiple states during a grant period.

RSUs vs. stock options: what is the difference?

Both RSUs and stock options are equity compensation, but their mechanics and tax treatment differ meaningfully.

• RSUs always have value as long as the stock has any price above zero. You receive actual shares at vesting. Tax is owed at vesting regardless of whether you sell.
• Non-qualified stock options (NQSOs) give you the right to purchase shares at a fixed strike price. They have value only if the current stock price exceeds the strike. Tax is owed at exercise on the "spread" (current price minus strike price), treated as ordinary income.
• Incentive stock options (ISOs) are only available to employees, have favorable tax treatment at exercise (no regular income tax), but can trigger the Alternative Minimum Tax (AMT) and carry strict holding-period requirements to qualify for long-term capital gains on the full gain.

For employees at established public companies, RSUs are simpler and carry less risk than options. Options can expire worthless; RSUs, once vested, are worth whatever the stock is worth at that moment.

Planning decisions when RSUs vest

The two most common questions employees face at each vest event are whether to sell immediately and what to do about taxes.

Sell immediately or hold? Selling immediately (known as "same-day sale") eliminates future capital gains complexity: you sell at the vest price, pay ordinary income tax on that income, and walk away with cash. Holding exposes you to both upside (stock price rises, generating long-term gain if held over a year) and downside (stock falls, and you have already paid income tax on a higher value). Concentration risk — having a large percentage of your net worth tied to one employer — is the primary argument for selling promptly and diversifying.

Cover the withholding gap. The moment shares vest, set aside the difference between your marginal rate and 22% on the vesting income. Put it in a high-yield savings account labeled "tax reserve" until you file. Do not invest it, spend it, or confuse it with discretionary money. This single habit prevents the most common RSU tax mistake.

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