RSUs are taxed as pay when they vest
Restricted stock units are a promise of shares. Nothing is taxed when they are granted. When they vest, the value of the shares that day is treated as wages: it is added to your W-2, and it is subject to federal income tax, state income tax where you live, Social Security (up to the yearly wage base) and Medicare.
The math is simple: shares vested × market price on the vest date. If 120 shares vest at $412.30, you have $49,476 of taxable pay, whether or not you sell a single share.
Why withholding falls short
Employers usually withhold federal tax on vests at the flat 22% supplemental rate (37% on supplemental wages above $1 million in a year). That rate ignores your salary. If your total income puts you in the 32%, 35% or 37% bracket, every vest leaves a gap that shows up when you file.
| Example: $200,000 of RSUs vest | Federal tax |
|---|---|
| Withheld at 22% | $44,000 |
| Owed at a 35% marginal rate | $70,000 |
| Still due when you file | $26,000 |
States add their own gap. California, for example, withholds 10.23% on stock pay, but its top brackets run higher than that.
The underpayment penalty
Owing at filing time is not only a cash surprise. If too little was paid during the year, the IRS can add an underpayment penalty. You are generally protected if withholding and estimates cover at least 100% of last year’s tax (110% if last year’s adjusted gross income was over $150,000) or 90% of this year’s. More on that in estimated taxes for tech employees.
Three ways to close the gap
- Quarterly estimated payments on April 15, June 15, September 15 and January 15, sized to your vest schedule.
- Extra withholding on salary through a new W-4, which counts as if it were paid evenly through the year.
- A plan for the shares, so you know which to sell, when, and how much tax each sale creates.
Our RSU tax calculator gives a quick estimate of your gap.
When you sell the shares
Your cost basis in RSU shares is their value on the vest date, the amount already taxed as pay. Sell later for more and the difference is a capital gain: short-term if you held a year or less, long-term if you held longer. Sell for less and it is a capital loss.
Brokers often report that basis as $0 on Form 1099-B. If it is not corrected, you pay tax on the same income twice. We explain the fix in RSU cost basis on a 1099-B.
Private company RSUs
Many pre-IPO companies use double-trigger RSUs: they are taxed only when both the time-based vesting and a liquidity event, such as an IPO or acquisition, have happened. When that event comes, years of vesting can land in one tax year, which makes planning ahead even more valuable.