Restricted Stock Units (RSUs) are a common form of equity compensation, especially in the tech and startup sectors. If you’re based in California—particularly in the Bay Area—RSUs may play a significant role in your overall compensation package. At Flex Tax and Consulting Group, we regularly advise clients in San Francisco, Castro Valley, and throughout the Bay Area on how to strategically manage their RSUs and equity-based income.
Below are seven key aspects every California employee or executive should understand about RSUs.
1. RSUs vs. Restricted Stock
RSUs differ from restricted stock. While the names sound similar, they are fundamentally different. RSUs are a promise to deliver shares in the future, while restricted stock grants involve the immediate transfer of shares with forfeiture conditions. The tax treatment and planning opportunities are also distinct. This article focuses exclusively on RSUs.
2. Vesting Schedules
RSUs are not considered yours until they vest. Common vesting structures include:
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Cliff vesting: 100% of RSUs vest after a set period.
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Graded vesting: RSUs vest gradually (e.g., 25% per year over four years).
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Double-trigger vesting: Common in private companies; RSUs vest only after both a time-based condition and a liquidity event (e.g., IPO) are met.
Some RSUs are also tied to company performance metrics. You should also understand what happens to unvested and vested RSUs when you leave the company—sometimes it’s worth staying longer to secure more value.
3. Delivery and Tax Timing
RSUs are taxed as ordinary income upon delivery of the shares—not at the time of grant or vesting. Most plans deliver shares automatically upon vesting, but some allow you to defer delivery. Deferring share delivery can give you more control over when you recognize income and pay taxes, depending on your tax planning strategy.
4. Tax Withholding
RSUs are treated as supplemental income for tax purposes. Here’s what to expect:
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Social Security and Medicare are typically withheld at the time of vesting.
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Federal income tax is usually withheld at a flat 22% (or 37% for supplemental income above $1 million).
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California residents may face combined withholding of up to 40% or more, including state tax.
If your effective tax rate is higher than 22%, you may face a shortfall in withholding. To avoid penalties, you can:
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Adjust your W-4 to increase withholding.
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Make quarterly estimated tax payments.
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Confirm whether your employer uses the flat rate or your W-4 for RSU withholding.
Understanding how your employer handles RSU withholding is critical—many high-earning California residents are underwithheld without realizing it.
5. Trading Restrictions
To prevent insider trading, RSU holders may be subject to:
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Blackout periods: When trading is prohibited.
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Trading windows: Periods when you are allowed to trade.
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Lock-up periods: Typically imposed after a company goes public, often lasting 90–180 days. Even fully vested RSUs cannot be sold until the lock-up ends.
These restrictions are especially relevant for employees at companies nearing or recently completing an IPO.
6. Dividends and Dividend Equivalents
RSUs do not provide voting rights or dividends before they vest. However, some companies offer dividend equivalents—either in cash or additional shares—paid out upon vesting. These are typically reported on your W-2 or 1099-DIV, and you should verify where they are reported to avoid double-counting the same income when filing taxes.
7. Beneficiary Designations
Some RSU plans allow you to name a beneficiary, which can help avoid probate and streamline estate planning. If your plan does not explicitly allow it, consider suggesting your employer add this feature. It can become important if RSUs are still vesting or delivery is delayed at the time of death.
Final Thoughts
RSU plans vary significantly across companies. Each plan may include unique provisions, from performance-based vesting to post-termination rules. Always read your RSU plan documents carefully, discuss them with your HR team, and seek professional guidance.
At Flex Tax and Consulting Group, we work closely with employees, executives, and startup founders across San Francisco, Castro Valley, and the Bay Area to help them navigate the tax implications and planning opportunities tied to RSUs.
Schedule a Personalized RSU Consultation
Whether you’re approaching an IPO, evaluating your vesting timeline, or worried about underpayment penalties, strategic tax planning around your RSUs can make a significant financial difference.
Schedule a consultation with our team to review your equity compensation and tailor your RSU tax strategy based on your income and location.
