Performance stock units are taxed as ordinary wage income at vesting, based on the full fair market value of the shares delivered to you, and any later price change is taxed as a capital gain or loss when you sell. There is no tax at grant, no election to accelerate the tax, and the withholding your employer does at vesting is often not enough to cover what you actually owe. The rules below walk through each stage.
The Taxable Event Happens at Vesting, Not at Grant
A PSU grant is a contractual promise, not property. You don’t own shares during the performance period, so there is nothing to tax when the units are granted. The taxable moment arrives after two conditions are both satisfied: the company’s compensation committee certifies that the performance goals were met, and you’ve completed the required service period. Only then do actual shares land in your brokerage account.1Source
On that delivery date, the full fair market value of every share delivered counts as ordinary compensation income, taxed at the same rates as your salary. The income equals the number of shares received multiplied by the stock price on the delivery date. Your employer reports the amount on your W-2 in Box 1, and it also shows up in Box 3 (up to the Social Security wage base) and Box 5 for Medicare wages.
One detail worth flagging: at some companies the certification date and the actual share delivery date are not the same day. When they differ, the delivery date’s price is what controls your taxable income, not the price on the vesting date. A price swing during that lag changes the tax bill.
If your plan attaches dividend equivalent rights to your PSUs, any accumulated dividend equivalents paid out with the shares are also taxed as ordinary wages, not as qualified dividends.
Payroll Taxes and Withholding at Vesting
Because PSU income is wages, it carries the same payroll taxes as your regular paycheck.
Social Security tax runs 6.2% on earnings up to the 2026 wage base of $184,500. Most PSU recipients have already crossed that threshold on salary alone by the time shares vest, so no additional Social Security tax applies to the PSU income. Medicare tax at 1.45% applies to all of it with no cap. Once your total Medicare wages for the year pass $200,000, your employer must also withhold the 0.9% Additional Medicare Tax on the excess. The actual amount you owe depends on filing status — $250,000 for married filing jointly, $200,000 for single — and any difference gets reconciled on your return.
Federal income tax is withheld on PSU income at the flat supplemental wage rate, which for 2026 is 22%. If your total supplemental wages from a single employer exceed $1 million in a calendar year, the excess is withheld at 37%.
To satisfy the withholding, most companies use a “sell to cover” transaction. On the delivery date the company immediately sells enough of your shares to cover federal, state, and FICA withholding, and the remainder land in your account. If 500 shares vest at $100, roughly 120 shares might be sold to cover taxes, leaving you with about 380. Because the sale price can differ from the fair market value used to compute your income by pennies of intraday movement, the sell-to-cover trade often generates a tiny short-term gain or loss that shows up on your 1099-B and needs to be reported.
The Withholding Gap That Catches High Earners
The 22% supplemental rate is frequently far less than what a PSU recipient actually owes. If your combined salary and PSU income sits in the 32% or 35% bracket, the shortfall between what was withheld and what’s due can be tens of thousands of dollars. A $200,000 PSU vesting with only $44,000 withheld for federal tax can leave someone in the 32% bracket short by roughly $20,000.
Two ways to close the gap:
- Make an estimated tax payment in the quarter the shares vest.
- Increase withholding on your regular paycheck by adjusting your W-4.
Doing nothing and settling up at filing time invites an underpayment penalty on top of the tax itself.
Capital Gains When You Sell the Shares
Once vested shares are in your brokerage account, they are ordinary stock. Your cost basis is the fair market value on the delivery date — the same figure that was included in your W-2 wages — and your holding period starts the day after delivery.
Sell within one year of delivery and any gain is short-term, taxed at your ordinary income rates. Hold more than a year and the gain qualifies as long-term. For 2026 the long-term capital gains brackets are:
- 0% on taxable income up to $49,450 (single) or $98,900 (married filing jointly)
- 15% on taxable income up to $545,500 (single) or $613,700 (married filing jointly)
- 20% on taxable income above those thresholds
Most PSU recipients with meaningful grants land in the 15% bracket for long-term gains. The spread between 15% long-term and a 35% or 37% marginal short-term rate is large enough that the holding period is worth tracking carefully.
Capital gains from a PSU sale can also trigger the 3.8% Net Investment Income Tax if your modified adjusted gross income tops $200,000 (single) or $250,000 (married filing jointly). Those thresholds are set by statute and do not adjust for inflation. For high earners, the NIIT sits on top of the underlying capital gains rate, pushing the effective long-term rate as high as 23.8%.
Holding for a year to reach long-term treatment is not a free trade. You are betting the stock will not drop by more than the tax savings, and after a PSU vesting a significant portion of your net worth may already sit in a single company’s stock. Diversification risk deserves the same attention as the tax rate.
The Cost Basis Mistake That Causes Double Taxation
This is where PSU holders most often overpay. When your broker files Form 1099-B for the sale, the cost basis reported to the IRS is frequently $0 or reflects only what you paid for the shares, which for a PSU is nothing. Brokers are required to exclude the compensation component — the amount already reported on your W-2 — from the basis they report.
Copy those 1099-B figures onto your return without adjustment and you will pay tax twice on the same dollars: once as ordinary wage income at vesting, and again as capital gain when you sell. The fix goes on Form 8949: report the sale, then use adjustment code “B” in column (f) to correct the basis to the fair market value on the delivery date. That corrected figure should match the income your employer included in your W-2.
Keep the vesting confirmation your employer or plan administrator issues. It documents the share count, the fair market value used, and the income reported. Rebuilding this information years later is difficult.
When You Leave the Company or the Company Is Acquired
Leaving before vesting almost always means forfeiting unvested PSUs. Forfeited units carry no tax consequences because no property was ever transferred to you.
Grant agreements often carve out exceptions for retirement, death, disability, or involuntary termination without cause. Treatment varies by plan: some accelerate vesting, some prorate the award, some allow it to vest on the original schedule. Any shares that do vest under one of these provisions are taxed the same way as a normal vesting — ordinary wage income on the full fair market value at delivery. Read your specific grant agreement rather than assuming a favorable rule applies.
Acquisitions are the other scenario that reshapes the tax picture. If the acquiring company assumes your unvested PSUs and a double-trigger acceleration clause fires (typically an acquisition plus an involuntary or constructive termination within a defined window), the accelerated shares are taxed as wages when delivered. If instead the acquirer cancels outstanding awards and pays cash, the payout — usually calculated at target or based on performance-to-date — is taxed as ordinary income in the year you receive it. A large payout concentrated in one year can push you into the top bracket on income that would otherwise have spread across several vesting years.
Multiple awards vesting in the same calendar year can also push your supplemental wages past $1 million and trigger the 37% withholding rate on the excess. If you hold PSUs alongside RSUs or stock options and can influence timing, spreading vesting across tax years may help.
Why Section 83(b) Is Not an Option
If you have read about the Section 83(b) election for restricted stock, set it aside for PSUs. Section 83 applies when property is actually transferred, and a PSU is a contractual promise, not a transfer of stock. There is nothing to make the election on at grant, and no way to lock in an earlier, lower tax value. The full tax hit lands at vesting, at whatever the stock is worth on the delivery date.