An RSU distribution is the moment your restricted stock units convert into actual shares and land in your brokerage account. On the vesting and settlement date, the company’s transfer agent moves the shares to you, the full fair market value counts as ordinary income on your W-2, and your employer withholds taxes (usually by holding back some of the shares). Anything the stock does in price after that is a separate capital gain or loss when you sell.
What Happens on the Vesting Date
When your vesting date arrives, the company’s transfer agent moves shares from the corporate treasury to your brokerage account. Since May 28, 2024, most U.S. securities transactions settle on a T+1 basis, meaning shares are delivered one business day after the transaction date.1U.S. Securities and Exchange Commission. SEC Chair Gensler Statement on Upcoming Implementation of T+1 The SEC shortened the cycle from T+2 to reduce risk and improve efficiency.2Investor.gov. New T+1 Settlement Cycle – What Investors Need To Know
After settlement, your account will show the shares deposited along with a transaction record listing the total units that vested and the number withheld for taxes. The fair market value per share on the vesting date becomes your cost basis for those shares. Write that number down. It matters enormously when you eventually sell, and, as you’ll see below, brokerages routinely fail to report it correctly.
How the Income Is Taxed at Distribution
Under federal tax law, the fair market value of your shares on the vesting date, minus anything you paid for them (for RSUs, usually nothing), counts as ordinary income in the year the shares are delivered.3Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services Your employer reports this on your W-2, and it’s subject to federal income tax, Social Security tax, Medicare tax, and any applicable state income tax.
For federal withholding, employers apply a flat 22% rate on supplemental wages up to $1 million in a calendar year. Any amount above $1 million is withheld at 37%.4Internal Revenue Service. Publication 15 – Employers Tax Guide Social Security tax is 6.2% on earnings up to $184,500 in 2026, and Medicare tax is 1.45% with no cap.5Social Security Administration. Contribution and Benefit Base State supplemental withholding ranges from 0% in no-income-tax states to roughly 12% in high-tax states.
Why 22% Withholding Often Isn’t Enough
The flat 22% rate is one of the most common sources of tax surprises for RSU recipients. For 2026, the 22% federal bracket ends at $105,700 for single filers and $211,400 for married couples filing jointly. If your combined income (salary, RSU income, anything else) pushes you into the 24%, 32%, or 35% bracket, your employer still withholds only 22% on the RSU portion.4Internal Revenue Service. Publication 15 – Employers Tax Guide
The gap can be substantial. A $100,000 RSU vest withheld at 22% sends $22,000 to the IRS, but if your marginal rate is 32%, you actually owe $32,000 on that income. The $10,000 shortfall shows up as a balance due when you file. To avoid the surprise, make an estimated tax payment in the quarter your RSUs vest, or increase your W-4 withholding on regular wages to compensate.
How the Withholding Actually Gets Paid
Most equity plan platforms offer three ways to cover the tax bill, and you make the election through the brokerage platform before the vesting date. If you don’t choose, the platform applies a default, which is usually net shares.
- Net shares (share withholding). Your employer holds back enough shares to cover the taxes and deposits the rest. If 200 shares vest and your combined tax rate is 30%, the company withholds 60 shares and you receive 140. No cash out of pocket.
- Sell to cover. The broker sells just enough shares on the open market to generate cash for the tax payment, then deposits the remaining shares in your account.
- Cash payment. You pay the tax from your own bank account and keep every share. This makes sense if you want maximum ownership and have the liquidity.
Selling the Shares Later
Once the shares settle, you own stock. Any change in price from the vesting date forward is a capital gain or loss, separate from the ordinary income you already paid tax on at distribution.
How long you hold determines the rate. Shares sold within one year of vesting are taxed at short-term capital gains rates, which match ordinary income rates. Shares held longer than one year qualify for long-term capital gains rates of 0%, 15%, or 20%, depending on taxable income. High earners may also owe an additional 3.8% Net Investment Income Tax if modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers.
The Cost Basis Trap on Your 1099-B
This is where many people overpay their taxes without realizing it. When you sell RSU shares, your broker sends you a Form 1099-B reporting the sale proceeds. Brokerages frequently report the cost basis as $0 or leave the field blank, because IRS rules don’t require them to report the full adjusted basis for shares acquired through equity compensation.6Fidelity. Filing Taxes for Your Restricted Stock, Restricted Stock Units, or Performance Awards
If you enter the 1099-B numbers straight into your return without adjusting, the IRS sees a sale with zero cost basis and taxes the entire sale amount as a gain. But you already paid ordinary income tax on the fair market value at vesting. Without the adjustment, you’re taxed twice on the same money.
To fix this, use the supplemental information statement your broker provides (sometimes called an “adjusted cost basis” form) to find the correct basis. Report the adjustment on Form 8949 using column (g) before the totals flow to Schedule D.7Internal Revenue Service. Instructions for Form 8949 The correct cost basis equals the fair market value per share on the vesting date multiplied by the number of shares sold. If your broker reported $0 in the basis column, your column (g) adjustment will be a negative number equal to your full basis, reducing the taxable gain accordingly.
Blackout Periods Can Delay a Sale
Even after your shares vest and settle, you may not be able to sell them right away. Companies impose blackout periods around earnings announcements, regulatory filings, and other corporate events during which employees can’t trade company stock. If your RSUs vest during a blackout, the shares land in your account but you can’t sell until the window lifts, and the stock could drop while you wait. Executives, directors, and other insiders face stricter rules and often use a Rule 10b5-1 trading plan that sets predetermined sell instructions in advance.
If You Leave Before Vesting
Unvested RSUs are almost always forfeited when your employment ends, whether you quit, get laid off, or are fired. The vesting schedule stops on your termination date, and the company takes back any units that haven’t converted. HR generally has no discretion to restore forfeited units.
Grant agreements do contain some common exceptions worth checking:
- Death or disability. Many plans accelerate vesting so all or a prorated portion of unvested shares transfers to you or your beneficiaries immediately.
- Retirement. Some plans include continued or accelerated vesting if you meet specific age and service requirements at the time you leave.
- Change of control. Merger or acquisition provisions often trigger accelerated vesting, either automatically (single-trigger) or only if you’re also terminated after the deal closes (double-trigger). Double-trigger is more common.
- Severance agreements. Even when the plan says unvested RSUs are forfeited, your severance package may include accelerated vesting as a negotiated term.
Shares that have already vested and settled into your brokerage account are yours. Leaving the company doesn’t affect them. The risk sits entirely with unvested units.
Private Company RSUs and the Section 83(i) Deferral
If you work for a private company, your RSUs may be eligible for a special tax election under Section 83(i). This provision lets qualifying employees defer the income tax on RSU shares for up to five years after vesting.8Internal Revenue Service. Guidance on the Application of Section 83(i) – Notice 2018-97
Eligibility is narrow. The company must have no publicly traded stock, and at least 80% of its U.S. employees must receive stock options or RSUs with the same rights and privileges. You can’t be a current or former CEO, CFO, 1% owner, or one of the company’s four highest-compensated officers.8Internal Revenue Service. Guidance on the Application of Section 83(i) – Notice 2018-97 The deferral helps because private shares can be hard to sell, and without the election you’d owe tax on income you can’t easily convert to cash. Social Security and Medicare taxes still apply at vesting even with the deferral, and the company must notify eligible employees of their right to make the election within 30 days of vesting.