Restricted stock units, or RSUs, work like this: your employer promises you a set number of company shares, and you receive them once you satisfy a vesting requirement, typically staying employed for a defined period. You pay nothing to acquire the shares. On the day they vest, the full market value counts as ordinary wages and gets taxed like salary; anything the stock does afterward becomes a capital gain or loss when you sell. The mechanics are straightforward, but the tax withholding often falls short of what you actually owe, which is where most people run into trouble.
What the Grant Actually Gives You
When your company awards RSUs, you receive a grant agreement with the key terms. The grant date is the day the company officially makes the award. The agreement fixes the number of units, and each unit represents the right to one share of company stock in the future. That number doesn’t change if the stock price moves between the grant date and the day you receive shares.
The agreement will reference the fair market value of one share on the grant date. For a publicly traded company, that’s the closing price. For a private company, it comes from a formal independent appraisal. This initial number matters for record-keeping but does not set your tax bill. Your tax bill is based on the price when the shares vest, not the price on the grant date.
Until units vest, you don’t own any stock. You can’t sell, transfer, or vote them. The grant is a contractual promise, nothing more.
How Vesting Works
Vesting is the process of earning ownership. The schedule in your agreement controls when units convert into real shares.
Most grants use time-based vesting. The two common structures are cliff vesting and graded vesting. With a cliff, no units vest until a specific date, often the one-year anniversary of your grant. Leave before the cliff and you get nothing. Reach it, and the entire first tranche vests at once.1Investopedia. Understanding Cliff Vesting: Process, Types, and Benefits
Graded vesting spreads the award across multiple installments. A typical four-year schedule with a one-year cliff works like this: nothing vests during year one, 25% vests on the first anniversary, and the remaining 75% vests in equal portions monthly or quarterly over the following three years. Some companies skip the cliff and vest monthly from the start.
Performance-based vesting ties shares to company milestones instead of, or in addition to, the passage of time. Revenue targets and stock price thresholds are common triggers. Some grants require both: you have to stay employed and the company has to hit its numbers.
When Units Become Shares
Once RSUs vest, the company settles them by delivering actual shares to your brokerage account. Most companies settle on the vesting date itself, so the shares appear the same day. Federal tax rules under Section 409A require settlement within a limited window; otherwise the RSUs risk being reclassified as deferred compensation with additional tax consequences.2Office of the Law Revision Counsel. 26 US Code 83 – Property Transferred in Connection with Performance of Services
Some plans let the company pay the cash equivalent of the shares’ market value instead of delivering stock. Your grant agreement will say which method applies. Once settlement happens, you have full control: hold, sell, or transfer.
Taxes at Vesting
The full market value of your shares on the vesting date counts as ordinary income, just like your salary. If 500 RSUs vest when the stock is trading at $80 per share, you have $40,000 in additional taxable income for that year. That income is subject to federal income tax, state income tax (if your state has one), Social Security tax, and Medicare tax.2Office of the Law Revision Counsel. 26 US Code 83 – Property Transferred in Connection with Performance of Services
RSU income stacks on top of your salary and is taxed at your marginal rate. Federal rates in 2026 range from 10% to 37%, with the top rate applying above $640,601 for single filers and $768,701 for married couples filing jointly.3Internal Revenue Service. Federal Income Tax Rates and Brackets4Social Security Administration. Contribution and Benefit Base5Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates6Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
One item worth naming to avoid confusion: you cannot make a Section 83(b) election on RSUs. That election, which lets you pay tax early on restricted stock awards, requires transferred property. RSUs are a contractual promise until they vest, so there’s no property to elect on.
How Your Employer Withholds
The IRS classifies RSU income as supplemental wages. Your employer withholds federal income tax at a flat 22%, regardless of your actual bracket. If your total supplemental wages in a single year exceed $1 million, the rate on the excess jumps to 37%.7Internal Revenue Service. Publication 15, (Circular E), Employer’s Tax Guide
Companies handle the mechanics in one of three ways. The most common is sell to cover: the brokerage automatically sells enough of your newly vested shares to cover withholding and deposits the rest. Net shares works similarly, except the company holds back a portion of shares before delivering the remainder to you; you never see the withheld shares. A few companies allow cash payment, letting you pay tax out of pocket to keep all your shares.
Your RSU income appears on your W-2 in Box 1, combined with salary rather than broken out separately. Some employers note the RSU portion in Box 14, but that’s optional. Social Security wages appear in Box 3 (up to the wage base) and Medicare wages in Box 5.
The Withholding Gap
This is where employees get burned. The flat 22% almost certainly falls short of your actual tax rate if you’re earning enough to receive equity compensation. Someone in the 32% or 35% federal bracket with a large vest will be significantly underwithheld on federal tax alone. Add state income tax and the additional Medicare surtax and the shortfall widens.
Two ways to close the gap before filing: adjust your W-4 to increase withholding on your regular paycheck, or make quarterly estimated tax payments to the IRS. Either handles it before April rather than after.
Selling Shares After Vesting
Once shares hit your brokerage account, any future price change creates a capital gain or loss when you sell. Your cost basis is the fair market value of the shares on the day they vested, because you already paid ordinary income tax on that amount.
Hold the shares for more than one year after vesting and sell at a profit, and the gain qualifies for long-term capital gains rates. Most taxpayers pay 15%, with 0% for lower-income taxpayers and 20% for higher earners.8Internal Revenue Service. Topic No. 409, Capital Gains and Losses Sell within a year of vesting and any profit is taxed at your ordinary rate instead.
If the price drops and you sell at a loss, the capital loss offsets other capital gains. Losses in excess of gains can offset up to $3,000 of ordinary income per year, with the remainder carried forward.
Don’t Get Taxed Twice
The single most expensive mistake with RSUs happens on the tax return. When you sell shares, your brokerage sends Form 1099-B. Brokerages often report the cost basis as $0 or leave it blank, because IRS rules don’t require them to track the full adjusted basis for this type of compensation. If you or your tax software use that $0 figure, the entire sale proceeds get reported as gain, and you pay tax a second time on income you already paid ordinary tax on at vesting.
Fix this by entering the correct cost basis on Form 8949. The correct basis equals the fair market value of the shares on the vesting day, matching the income already in your W-2 wages. Your brokerage may provide a supplemental information form with adjusted figures; that form is not sent to the IRS, so you have to use it yourself. The IRS won’t catch the overpayment for you.
The Wash Sale Trap
Sell company stock at a loss within 30 days before or after an RSU vesting date and the IRS may disallow the loss under the wash sale rule. A vesting event counts as acquiring new shares of the same stock, so selling at a loss anywhere inside that 61-day window triggers the disallowance.9Office of the Law Revision Counsel. 26 US Code 1091 – Loss from Wash Sales of Stock or Securities
The disallowed loss isn’t lost permanently; it adds to the cost basis of the newly acquired shares and reduces your gain when you eventually sell those. But you can’t use it against gains in the current year. Employees with monthly vesting face particular risk, since overlapping 61-day windows can make loss harvesting on company stock nearly impossible during the year.
What Happens If You Leave
When you leave the company, you forfeit any RSUs that haven’t vested. Unvested units return to the company’s equity pool. Most grant agreements end your right to future vesting on your last day of active employment, with no grace period. Shares that already vested and settled into your brokerage account are yours regardless of how or why you left.
Some agreements accelerate vesting under specific circumstances. The most common trigger is a change in control: when the company is acquired or merges, unvested RSUs may vest immediately. Death and permanent disability provisions are also common, allowing partial or full acceleration for the employee or their estate. Retirement provisions vary widely; some plans allow continued vesting after retirement, others accelerate at the retirement date.
RSUs at Private Companies
Private company RSUs work differently in one important way: there’s no public market to sell shares on. Most private company RSUs use a double-trigger structure. The first trigger is the time-based schedule. The second is a liquidity event, such as an IPO or acquisition. Both conditions have to be met before you receive anything. If you satisfy the time requirement but the company never goes public, your RSUs sit in limbo.
Private companies determine share value through formal independent appraisals under Section 409A, since there’s no public price. These appraisals are updated periodically and set the fair market value used for tax and accounting.
Employees of qualifying private companies may access a Section 83(i) election, which allows deferring income tax on vested shares for up to five years. The company must have no publicly traded stock and must grant RSUs or stock options to at least 80% of its U.S. employees under a written plan with equal terms. The election is off-limits to anyone who is or was a 1% owner, the CEO, the CFO, or one of the four highest-compensated officers during the current or preceding ten tax years.2Office of the Law Revision Counsel. 26 US Code 83 – Property Transferred in Connection with Performance of Services