An RSU grant, or restricted stock unit grant, is a written promise from your employer to give you shares of company stock once you meet certain conditions, almost always staying employed for a set period. You don’t own anything on the day of the grant. You own shares when the units vest, and on that day the market value of those shares becomes taxable wages under 26 U.S.C. § 83.1Office of the Law Revision Counsel. 26 U.S. Code 83 – Property Transferred in Connection With Performance of Services
RSUs are one of the most common forms of equity compensation at technology companies and large corporations because they give employees a real stake in the company without requiring any purchase.
From Grant Date to Shares in Your Account
Each restricted stock unit represents the right to receive one share of your company’s common stock at a future date. Until that date, you hold a contractual promise, not shares. The value of the promise tracks the stock price, rising and falling with it.
The process starts on the grant date, when your employer formally awards you a specific number of units and sends you an RSU grant agreement. That agreement is the primary legal document for your award: it states how many units you’re getting, the vesting schedule, and any other conditions. The grant date establishes the award but triggers no tax. Taxes come at vesting.
When the vesting conditions are satisfied, the company settles the units. In most cases that means depositing actual shares into a brokerage account with the plan’s third-party administrator. At that point you’re a shareholder with voting rights and dividend eligibility on those shares. Some plans settle in cash instead, paying you the fair market value of the shares on the vesting date.
Some plans also include dividend equivalent rights, which pay you an amount equal to the dividends real shareholders receive before your units vest. Those payments are treated as wages when you receive them. If your plan instead accumulates dividend equivalents and pays them out at vesting, that lump is taxed then.
How Vesting Works
Vesting is how you earn the right to your shares. Until units vest they remain a promise, you can’t sell them, and you forfeit them if you leave. Companies use vesting schedules to encourage retention, and your grant agreement spells yours out.
Time-Based Vesting
Time-based vesting ties your shares to continued employment over a defined period. A common arrangement is a four-year schedule with a one-year cliff: no shares vest during the first year, then 25 percent of the grant vests all at once on your first anniversary, and the rest vests in monthly or quarterly installments over the next three years. Some companies use equal annual vesting instead, or front-loaded schedules that vest more in the early years.
Performance-Based Vesting
Performance-based vesting ties your shares to company goals such as revenue targets, earnings benchmarks, or stock price thresholds. Depending on how closely the company hits its objectives, you may end up with more or fewer shares than the target. Some grants combine the two approaches, requiring you to stay employed and the company to hit milestones before shares vest.
How RSU Income Is Taxed at Vesting
The IRS treats vested RSU shares as ordinary income on the date your vesting conditions are satisfied. Under 26 U.S.C. § 83(a), once the property is no longer subject to a substantial risk of forfeiture, its fair market value minus anything you paid is included in your gross income for that year.1Office of the Law Revision Counsel. 26 U.S. Code 83 – Property Transferred in Connection With Performance of Services Because RSUs have no purchase price, the full market value on the vesting date is taxable.
If 100 units vest when the stock trades at $50, you have $5,000 of ordinary income. That amount shows up on your Form W-2 alongside your regular wages and is subject to federal income tax, Social Security tax up to the 2026 wage base of $184,500, and Medicare tax.2Social Security Administration. Contribution and Benefit Base The additional 0.9 percent Medicare surtax applies if total wages exceed $200,000 ($250,000 if married filing jointly).
How Your Employer Handles Withholding
RSU income is treated as supplemental wages, so federal income tax is withheld at a flat 22 percent. If your total supplemental wages for the year exceed $1 million, the rate on the excess jumps to 37 percent.3Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide Social Security and Medicare are withheld too.
Companies generally satisfy the withholding one of two ways. Under sell-to-cover, the employer sells enough of your newly vested shares on the open market to pay the tax bill and delivers the rest to you. Under net share settlement, the employer withholds a portion of your shares directly and uses company cash to remit the taxes, so no shares hit the market.
Watch the 22 percent flat rate. It often does not cover your actual tax liability, especially when a large vest pushes you into a higher bracket. Set aside extra funds or adjust your W-4 during the year, or expect a bill at filing time.
What Happens When You Sell the Shares
Once your RSUs vest, any change in the stock price from that point on is a capital gain or loss, not ordinary income. The vesting-date fair market value becomes your cost basis. Sell later at a higher price and the difference is capital gain. Sell lower and you have a capital loss that can offset other gains.
Holding period drives the rate. Shares held one year or less after vesting are taxed at short-term rates, which match your ordinary income bracket. Shares held more than a year qualify for long-term capital gains rates of 0, 15, or 20 percent depending on your taxable income. For 2026, the 20 percent rate kicks in above $545,500 for single filers and $613,700 for married couples filing jointly. High earners may also owe the 3.8 percent net investment income tax on gains if modified adjusted gross income exceeds $200,000 (single) or $250,000 (joint).
The Double-Taxation Trap on Form 1099-B
A costly mistake is paying tax twice on the same income. Your broker reports the sale on Form 1099-B, but the cost basis shown is often zero or incomplete. IRS rules generally prevent brokers from reporting the full adjusted basis for stock received through compensation plans. Enter the 1099-B numbers as-is on your return and you’ll appear to have a gain equal to the entire sale price, even though you already paid ordinary income tax on the vesting-date value.4Internal Revenue Service. Instructions for Form 8949
Report the sale on Form 8949 and adjust your basis upward by the amount already included in income at vesting. Your stock plan administrator usually provides a supplemental statement with the adjusted figure. If the 1099-B shows zero or wrong basis, use Code B in column (f) of Form 8949 to flag the correction.4Internal Revenue Service. Instructions for Form 8949 That signals to the IRS you’re fixing the basis, not hiding income.
What Happens to Unvested RSUs When You Leave
Unvested RSUs are almost always forfeited when your employment ends, whatever the reason. Resign, get laid off, or get terminated, and the units that haven’t yet vested typically return to the company for no payment.5SEC.gov. Form of Restricted Stock Unit Agreement (Employees and Consultants) This is how RSUs function as a retention tool.
Most agreements carve out exceptions. Unvested RSUs often vest immediately or on a pro-rata basis if employment ends due to death or disability. Some plans allow pro-rata vesting at retirement for employees who meet age and service thresholds, for example age 60 with 20 or more years of service.6SEC.gov. Terms of the Restricted Stock Units If the company is acquired, unvested RSUs may accelerate, be assumed by the acquirer under the original schedule, or be forfeited, depending on the plan. Some plans use double-trigger acceleration, meaning the RSUs vest only if the acquisition happens and you lose your job within a specified window afterward.
The specifics vary. Check your grant agreement and the underlying equity plan before making job-change decisions, because the unvested portion of your grant is real money you would leave behind.
Trading Windows After Vesting
Even after the shares are yours, you may not be able to sell them whenever you want. Most publicly traded companies impose trading windows: sales are permitted only during an open window after quarterly earnings and blocked during blackout periods, when insiders may have access to material nonpublic information. Your company’s insider trading policy applies to you as an RSU holder even if you’re not an executive.
How RSUs Differ From Stock Options
RSUs and stock options are both equity compensation, but they behave differently. Stock options give you the right to buy shares at a set strike price, typically the market price on the grant date. You benefit only if the stock rises above that strike price, and you have to spend money to exercise. If the price drops below the strike, the options can become worthless.
RSUs require no purchase. When they vest, you receive shares or cash outright, and because there is no strike price, RSUs always have some value as long as the stock does. The tradeoff is that RSUs are taxed as ordinary income at vesting, while stock options let you control the timing of the tax event by choosing when to exercise.
A Deferral Option for Private-Company Employees
If you work for a privately held company, Section 83(i) of the Internal Revenue Code may let you delay federal income tax on RSU vesting for up to five years.1Office of the Law Revision Counsel. 26 U.S. Code 83 – Property Transferred in Connection With Performance of Services The point is to avoid a big tax bill on shares you can’t easily sell to raise the cash.
Qualifying is narrow. The company’s stock cannot have been traded on an established securities market in any prior calendar year. The company must have a written equity plan granting stock options or RSUs to at least 80 percent of its U.S. employees, on the same terms. You must make the election within 30 days of vesting, and the deferred shares must be placed in an escrow arrangement before year-end.
The deferral covers only federal income tax. Social Security and Medicare are still owed at vesting.7Internal Revenue Service. Publication 15-B (2026) – Employer’s Tax Guide to Fringe Benefits The income becomes taxable at the earliest of five years after vesting, the date you sell the stock, or the date the company goes public. You cannot combine a Section 83(i) election with a Section 83(b) election on the same shares.