Restricted stock units (RSUs) are one of the most common ways companies share ownership with employees. If you work at a public company or a late-stage startup, you may already have them. This guide explains how restricted stock units work, how they are valued and how they are taxed.
Restricted stock units at a glance
- RSUs are a promise to give you company shares in the future.
- The word “restricted” refers to the vesting schedule. You must usually keep working at the company for a set time before you get the shares.
- You pay tax on the value of the shares when they vest.
- You may pay tax again when you sell the shares, if they have gained value.
How RSU vesting schedules work
Your grant agreement sets the vesting schedule. For example, say you receive 120 RSUs in January. Most schedules fall into one of three types:
- Cliff vesting. You get all the shares at once after a set period. With a three-year cliff, you would receive all 120 shares after three years.
- Graded vesting. You get equal portions on a regular schedule. With four-year graded vesting, you would receive 30 shares each year.
- Hybrid vesting. This combines the two. For instance, you might get 25% after one year and then equal monthly portions after that.
What are your restricted stock units worth?
To estimate the value of a grant, multiply the number of RSUs by the stock price. For example, 120 RSUs at $200 per share are worth about $24,000 before taxes. However, you don’t own them yet. Their real value depends on the stock price on each vesting date.
Unlike stock options, RSUs keep some value even if the stock price falls. For example, suppose 30 shares vest after one year:
| Stock price at vesting | $150 | $200 | $250 |
|---|---|---|---|
| Value of 30 vested shares | $4,500 | $6,000 | $7,500 |
In each case, the shares are still worth something. By contrast, a stock option can end up worthless if the price drops below the exercise price.
How restricted stock units are taxed
Different taxes apply at each stage of the RSU life cycle:
| Stage | Taxes that apply |
|---|---|
| Grant | Usually none |
| Vesting | Federal and state income tax, Social Security and Medicare |
| Sale | Capital gains tax on any growth after vesting |
Taxes at vesting
When your shares vest, their market value counts as wages. For example, if 30 shares vest when the stock trades at $250, you have $7,500 of taxable income. This amount appears on your W-2.
The IRS treats this income as “supplemental wages,” like a bonus. So your employer must withhold tax on the vesting date. Here are the usual withholding rates:
- Federal income tax: 22% on supplemental wages up to $1 million a year, and 37% above that.
- Social Security: 6.2%, up to the annual wage base.
- Medicare: 1.45%, plus an extra 0.9% on wages over $200,000.
- California income tax: 10.23% on stock compensation and bonuses.
- California SDI: State disability insurance also applies. Since 2024, it has no wage cap.
How your employer collects the tax
Companies use a few common methods to cover withholding:
- Net share settlement. The company keeps enough shares to cover the tax. Then you receive the rest.
- Sell to cover. The broker sells just enough shares to pay the tax. You keep the remaining shares.
- Same-day sale. The broker sells all the shares, pays the tax and deposits the rest in cash.
- Cash payment. You pay the tax with your own money and keep all the shares.
Why you may still owe tax
The 22% federal rate is often lower than a high earner’s actual tax rate. Similarly, California withholding may not cover the tax for top earners. As a result, many RSU holders owe more when they file. To avoid a surprise, you may need to make estimated tax payments.
Taxes when you sell RSU shares
Your cost basis in the shares equals their value on the vesting date. So when you sell, you only pay tax on any change in value after vesting.
- Short-term gains. If you held the shares one year or less, the gain is taxed at your regular income tax rate.
- Long-term gains. If you held them more than one year, federal rates are 0%, 15% or 20%. Higher earners may also owe the 3.8% net investment income tax.
California, however, taxes all capital gains as regular income. In addition, your employer doesn’t withhold tax when you sell. So you may need to make an estimated payment for the quarter of the sale. Federal estimated tax payments are generally due April 15, June 15, September 15 and January 15.
Tip: Your broker’s Form 1099-B may show a cost basis of zero for RSU shares. In that case, you need to adjust the basis on Form 8949. Otherwise, you could pay tax twice on the same income. For more detail, see IRS Publication 525.
What happens to RSUs if you leave your company?
If you quit, you usually forfeit any unvested RSUs. However, you keep the shares that already vested. Also, many companies speed up vesting in the event of death or disability. Check your RSU award agreement for the exact terms.
Get help with your restricted stock units
RSUs can create large tax bills and reporting errors. We help tech employees plan for vesting and report sales correctly. Learn more about our equity compensation guidance or book a free 15-minute call.