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, most importantly, how is RSU taxed at each stage, from the vesting date to the day you sell the shares.
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 is RSU taxed? Vesting vs. sale
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 fair market value (FMV) on the vesting date counts as wages and is taxed as ordinary income, just like your salary. For example, if 30 shares vest when the stock trades at $250, you have $7,500 of taxable income. This amount is included in your Form W-2 wages for the year, even if you never sell the shares.
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.
RSU tax example: from vesting to sale
Here is how the two taxes fit together. Say 100 RSUs vest when the stock price is $200. You have $20,000 of ordinary income, and your cost basis becomes $200 per share. What happens next depends on the sale price and how long you hold the shares:
| Scenario | Sale price | Taxable result at sale |
|---|---|---|
| Same-day sale | $200 | No gain or loss (only the $20,000 already taxed at vesting) |
| Sold 8 months later | $240 | $4,000 short-term capital gain, taxed at ordinary rates |
| Sold 18 months later | $260 | $6,000 long-term capital gain, taxed at lower federal rates |
| Sold after a drop | $180 | $2,000 capital loss |
The $20,000 taxed at vesting never goes away. Selling the shares only creates tax on the change in value after the vesting date. That is why getting the cost basis right on your return matters so much.
Can you make an 83(b) election on RSUs?
No. An 83(b) election lets you pay tax at grant on restricted stock awards (RSAs), where you receive actual shares up front. RSUs are only a promise to deliver shares later, so there is nothing to elect on until the shares are delivered at vesting. If your grant says “restricted stock” rather than “restricted stock units,” the rules are different, and the 30-day deadline to file an 83(b) election is strict.
Ways to manage the tax implications of RSUs
You can’t avoid tax on RSUs that vest, but planning can help you avoid surprises and make better decisions. Common steps include:
- Check your withholding early. Compare the 22% supplemental rate with your expected tax rates for the year. Adjust your Form W-4 or make estimated payments before the year ends.
- Decide whether to hold or sell. Holding RSUs vested shares is like buying company stock with your bonus. Ask whether you would buy that much company stock with cash.
- Watch concentration risk. If your salary and much of your savings depend on one company, a drop in the stock price hurts twice.
- Time sales with the holding period in mind. Shares held more than one year after vesting qualify for long-term capital gains rates at the federal level.
- Consider giving appreciated shares. Donating shares held more than one year to charity may let you deduct their value without paying tax on the gain, subject to IRS limits.
- Keep good records. Save vesting confirmations and supplemental broker statements so you can report the correct basis on Form 8949.
RSU tax FAQs
Are RSUs taxed twice?
Not on the same money. RSUs are taxed once as ordinary income when they vest, and any growth after vesting is taxed as a capital gain when you sell. Double tax happens only by mistake, usually when a zero cost basis is reported on Form 1099-B and not corrected.
Do I pay tax on unvested RSUs?
No. Unvested RSUs are not taxed. Tax starts on the vesting date, when the shares are delivered to you.
Should I sell my RSUs right away?
Selling right away usually creates little or no extra tax, because the sale price is close to your cost basis. Whether to sell is a personal decision that depends on your goals, other holdings and how much company stock you already own. A tax professional can help you weigh the options.
What happens to RSUs if you leave your company?
If you quit before the vesting period ends, 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.
Related RSU and equity compensation guides
- What is an RSU? 7 things to know
- RSU vs ESPP: selling shares without overpaying the IRS
- Got a CP2000 about stock sales? IRS notice and audit help
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.