RSU grants work as a conditional promise: your employer awards you a set number of restricted stock units, and once you satisfy the vesting conditions (almost always continued employment for a set period), the company delivers actual shares to your brokerage account. Nothing is yours at the moment of grant. The shares appear later, and the day they appear, their full market value is taxed as wages on your paycheck. Everything else about how RSU grants work follows from that gap between promise and delivery.
The Grant Itself
The process starts with a grant agreement, a contract that names the equity plan, specifies how many units you’re receiving, sets the grant date, and lays out the vesting rules. You typically have to formally accept the agreement, often through an online portal run by a third-party stock plan administrator, before the units count as awarded to you.1Securities and Exchange Commission. Form of Restricted Stock Unit Annual Grant Form Agreement
The grant date sets the clock for vesting, but it is not a taxable event. Each unit represents the right to receive one share at some future date. Until vesting, the units are a bookkeeping entry; you cannot sell them, transfer them, or borrow against them. The share price on the grant date is useful for tracking, but the number that eventually hits your W-2 is the value on the vesting date, not the grant date.
One boundary worth naming: restricted stock awards (RSAs) look similar but are different. With an RSA, actual shares are transferred to you on the grant date subject to forfeiture, which lets you file a Section 83(b) election within 30 days and lock in tax at the current low value. RSUs are explicitly excluded from Section 83(b) because no property has been transferred at grant.2Office of the Law Revision Counsel. 26 U.S. Code 83 – Property Transferred in Connection With Performance of Services With RSUs, you cannot accelerate the tax bill to lock in a low basis. Vesting is the earliest possible taxable event.
How Vesting Schedules Work
Vesting is the point where the paper promise becomes real shares. Most grants use a time-based schedule tied to continued employment. The most common structure has a one-year cliff: nothing vests during the first twelve months, then a chunk of units converts all at once on the first anniversary. After the cliff, the remaining units usually vest on a graded schedule, monthly or quarterly, over the next two or three years. Total vesting periods of three to four years are typical.
Some companies use performance-based vesting alongside or instead of time. Units may hinge on revenue targets, earnings-per-share thresholds, stock price milestones, or product launch deadlines set by the board. Miss the target, forfeit those units, regardless of how long you’ve been there. Hybrid arrangements with both time and performance conditions are increasingly common for senior employees.
Something people miss: many companies pause vesting during extended leaves of absence. Whether medical leave, parental leave, or a sabbatical stops your vesting clock depends on company policy and sometimes local law. Check the plan documents before assuming a scheduled vest will hold.
Private Company RSUs and the Liquidity Problem
At a publicly traded company, vested shares can be sold on the open market the same day they land in your account. Private companies don’t have that option, and that creates a problem: receiving shares triggers a tax bill on income you can’t easily convert to cash to pay the tax.
Most private companies solve this with double-trigger vesting. Two conditions must be met before shares are delivered. First, you complete the time-based vesting. Second, the company hits a qualifying liquidity event such as an IPO, an acquisition, or a company-sponsored secondary transaction. Until both triggers pull, the units stay unsettled even if you’ve served the full time. This keeps you from owing tax on shares you can’t sell.
Where a private company doesn’t use double-trigger vesting, Section 83(i) may let eligible rank-and-file employees defer income tax on settled RSU shares for up to five years after vesting.2Office of the Law Revision Counsel. 26 U.S. Code 83 – Property Transferred in Connection With Performance of Services The eligibility rules are narrow: the company must have granted equity to at least 80% of its U.S. employees during the calendar year, and current or former CEOs, CFOs, and the four highest-paid officers are excluded. The election must be made within 30 days of the first date the stock is transferable or no longer subject to forfeiture.3Internal Revenue Service. Guidance on the Application of Section 83(i)
Settlement: When Shares Hit Your Account
When the vesting date arrives and every condition is satisfied, the units settle. Your employer converts the bookkeeping entries into real shares of common stock and deposits them in your brokerage account, usually within a few business days. From that point the shares behave like any other common stock: voting rights, dividend eligibility if the company pays them, and full ability to sell.
How RSUs Are Taxed at Vesting
The grant is not taxed. Vesting is. On the day the shares are delivered, the fair market value of those shares is included in your gross income as ordinary compensation and reported on your W-2 alongside your salary.4Internal Revenue Service. U.S. Taxation of Stock-Based Compensation Received by Nonresident Aliens
That income is subject to the same payroll taxes as regular wages:
- Federal income tax, withheld at the flat supplemental wage rate discussed below.
- Social Security tax at 6.2% on earnings up to the 2026 wage base of $184,500. If your regular salary already crosses that threshold, the RSU income owes no additional Social Security tax.5Social Security Administration. What Is the Current Maximum Amount of Taxable Earnings for Social Security
- Medicare tax at 1.45% with no earnings cap, plus an additional 0.9% on earned income above $200,000 for single filers or $250,000 for married couples filing jointly.
- State income tax, which varies by state. Supplemental withholding rates run roughly from 1.5% to over 11%, and nine states have no income tax at all.
To cover the withholding, your employer will typically use one of two methods. Under sell-to-cover, the brokerage automatically sells enough of your newly vested shares to raise cash for the tax, then deposits the rest. Under net issuance, sometimes called share withholding, the company holds back a portion of the shares themselves and pays the tax from its own funds, delivering fewer shares to you. Either way, what lands in your account is your after-tax compensation.
The 22% Withholding Gap
Federal law requires employers to withhold income tax on RSU income at the flat supplemental wage rate of 22% for amounts up to $1 million, and 37% above $1 million.6Internal Revenue Service. Publication 15 (2026), Employer’s Tax Guide Your actual marginal rate may be 32%, 35%, or 37% depending on your total income. Consider a software engineer earning $200,000 in salary whose vest adds $80,000 in income. The top slice of that combined $280,000 sits at 32% or higher, yet only 22% was withheld on the RSU portion. That gap shows up as a lump sum owed at filing.
Two ways to close the gap. You can make quarterly estimated tax payments during the year. The IRS generally waives the underpayment penalty if you owe less than $1,000 at filing, or if your total payments covered at least 90% of the current year’s liability or 100% of the prior year’s (110% if your prior-year adjusted gross income exceeded $150,000).7Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty Alternatively, you can raise the withholding on your regular paychecks with a revised W-4, specifying additional withholding on Line 4(c). Doing nothing and hoping 22% covers it almost never does for mid-to-high earners.
Cost Basis and Capital Gains When You Sell
The fair market value on the vesting date becomes your cost basis for future capital gains calculations. You already paid income tax on that amount through payroll withholding, so only the change in value after vesting is subject to capital gains tax when you sell.
The holding period starts on the vesting date. Sell within one year, and any gain is short-term and taxed at your ordinary income rate. Hold longer than a year, and the gain qualifies for long-term capital gains rates, which for 2026 are 0%, 15%, or 20% depending on taxable income. Single filers pay 0% on long-term gains below $49,450 of taxable income, 15% up to $545,500, and 20% above that. If your modified adjusted gross income exceeds $200,000 single or $250,000 married filing jointly, you may also owe the 3.8% net investment income tax on the gain.8Internal Revenue Service. Topic No. 559, Net Investment Income Tax
The price can also drop. If you sell at a loss, the loss is deductible against other capital gains and up to $3,000 of ordinary income per year. But you’ve already paid ordinary income tax on the full vesting-day value, and that tax does not come back. Holding shares after vesting is a real market bet.
The Filing Mistake That Costs People Real Money
When you sell RSU shares, your broker reports the sale on Form 1099-B. The trap: brokers frequently show the cost basis as $0 or blank because their systems only track what you paid out of pocket, and you paid nothing. You did pay tax at vesting through W-2 income, but the 1099-B doesn’t reflect that. Enter the 1099-B data into your return without adjusting the basis and you’ll be taxed on the full sale proceeds as if the entire amount were gain, paying income tax on the same dollars twice.
The fix lives on the supplemental information form your broker sends alongside the 1099-B. That form shows the adjusted cost basis that accounts for the income you already reported. On Form 8949, enter the basis from the 1099-B in column (e), put adjustment code “B” in column (f), and enter the correction in column (g) as a negative number equal to the difference between the 1099-B basis and your actual adjusted basis.9Internal Revenue Service. Form 8949 Codes Most tax software will not import supplemental information automatically. Enter it manually. Skipping this step is how people accidentally overpay by thousands.
The Wash Sale Interaction With Future Vests
A wash sale occurs when you sell stock at a loss and acquire substantially identical stock within 30 days before or after the sale. The loss deduction is disallowed.10Office of the Law Revision Counsel. 26 U.S. Code 1091 – Loss From Wash Sales of Stock or Securities For RSU holders with ongoing grants, this creates a quiet problem: vesting counts as an acquisition. Sell company stock at a loss, and if new RSUs vest within that 61-day window, the IRS treats the vest as a purchase of substantially identical shares and the loss deduction disappears.
If you’re planning to sell shares at a loss, check the vesting calendar first. A vest scheduled within 30 days of the planned sale wipes out the tax benefit. Brokers don’t always flag wash sales triggered by RSU vests across different account types, so the tracking is on you.
What Happens to RSUs When You Leave
Unvested RSUs are almost universally forfeited when you leave, whether you quit or are terminated. The units return to the corporate equity pool because your right to receive shares was always tied to continued employment. Shares that have already vested and settled remain yours; those are your property.
If the company is acquired or merges, unvested units don’t automatically vanish. The outcome depends on the grant agreement and the deal terms. Common results include full or partial acceleration of vesting, conversion of the units into RSUs of the acquiring company on equivalent terms, or a cash payout at the acquisition price. Some agreements provide single-trigger acceleration (all unvested units vest when the deal closes), while others use double-trigger acceleration (units vest only if you’re also terminated without cause within a specified period after the deal). Read the grant agreement before assuming the best outcome.
A handful of situations may let you keep some unvested equity after departure. Some agreements include “good leaver” provisions that allow pro-rated vesting on retirement, long-term disability, or death. These are contractual, not required by law, and they vary widely. Negotiating continued or accelerated vesting into a separation agreement is sometimes possible, especially for senior employees, but it takes leverage and explicit employer agreement.
Even vested shares aren’t always permanently safe. Many RSU agreements contain clawback provisions letting the company reclaim the value of delivered shares under specific circumstances: financial restatements caused by executive misconduct, termination for cause, or violation of non-compete or confidentiality agreements. Enforceability of clawbacks varies significantly by state, with some jurisdictions far more protective of compensation already paid. If your agreement ties a clawback to restrictive covenants, leaving for a competitor could put previously received equity at risk.