A restricted stock unit, or RSU, is a written promise from your employer to give you a set number of company shares after you meet certain conditions — usually staying employed for a few years. You pay nothing to receive the shares, and on the day they vest, their full market value is taxed as ordinary wage income, just like salary.
What an RSU Actually Is
On the grant date, you don’t get stock. You get a contract entitling you to stock later. Because no shares have changed hands, you have no voting rights, no dividends, and no ownership stake. The units sit on the company’s books as an unfunded, unsecured obligation to you.
Each unit tracks the current price of one share of company stock. At a public company that price is whatever the shares trade for on the market; at a private company, the board or an independent appraiser sets a fair market value. Only when the units vest and settle do actual shares (or a cash equivalent) show up in your account.
How You Earn the Shares
Your grant agreement spells out exactly what you have to do to earn each unit. Most RSU grants use time-based vesting, some use performance-based vesting, and private-company grants usually layer on a second trigger tied to a liquidity event.
Time-Based Vesting
A typical schedule runs three to four years with a one-year cliff. Nothing vests until you complete your first full year of employment. On that anniversary, a chunk vests all at once — often 25 percent of the total grant. The remaining units then vest in smaller increments monthly or quarterly through the rest of the schedule.
Performance-Based Vesting
Some grants, more common for senior employees, tie vesting to corporate milestones instead of (or on top of) time. A performance target might be a revenue level, an earnings-per-share figure, or a product launch by a deadline. Miss the target inside the window and the associated units are canceled. The grant agreement defines how achievement is measured.
Double-Trigger Vesting at Private Companies
If your employer is private, your RSUs almost certainly have a double-trigger structure. Two separate conditions have to be satisfied before you get shares:
- A time-based service condition, like a standard vesting schedule.
- A liquidity event, typically an IPO, an acquisition, or a company-sponsored tender offer.
You can complete the time requirement and still hold nothing you can sell. If the company never goes public and never gets acquired, those units may never settle at all.
Settlement: When Shares Actually Arrive
Settlement is the moment your RSU converts from a promise into stock. For many grants, settlement happens the same day the units vest. Other companies batch settlements for administrative reasons — say, settling everything from a quarter on one date. Most public companies deliver actual shares into a brokerage account they’ve set up for you; some plans pay cash equal to the market price on the settlement date instead. Your grant agreement says which applies.
Because you don’t own actual shares during the vesting period, ordinary dividends don’t reach you. Some agreements include dividend equivalent rights, which credit you with cash matching the dividends paid on an equal number of shares. Those credits accumulate and pay out when the RSUs settle, and they are taxed as ordinary compensation, not as qualified dividends. Check your grant agreement — not every plan offers them.
How RSUs Are Taxed at Vesting
The IRS does not tax you when RSUs are granted. The taxable event is vesting. When shares are delivered to you, the full fair market value on that date is included in your gross income as ordinary wages for the year under Internal Revenue Code Section 83.1Office of the Law Revision Counsel. 26 U.S. Code 83 – Property Transferred in Connection With Performance of Services The amount lands on your W-2 next to your salary.
If 500 units vest when the stock is at $40, that’s $20,000 of ordinary income for the year. You owe federal and state income tax on it at your regular rates, not at capital gains rates.
Federal and State Withholding
Your employer must withhold on RSU income before you see the shares. The IRS treats it as supplemental wages. Federal withholding is a flat 22 percent on supplemental wages up to $1 million in a calendar year, and 37 percent on anything above that.2Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide States with income tax withhold too, at whatever supplemental rate they set.
The 22 percent rate is often too low. If your salary plus the RSU income puts you in the 32, 35, or 37 percent federal bracket, the gap comes due at filing time. A large vest can create a real shortfall. Making estimated tax payments during the year, or asking payroll to withhold extra, can head off an underpayment penalty.
FICA and the Additional Medicare Tax
RSU income is subject to Social Security and Medicare taxes the same way your paycheck is: 6.2 percent for Social Security up to the annual wage base and 1.45 percent for Medicare.3Internal Revenue Service. Letter to Representative Jimmy Panetta Regarding Stock Awards Taxation If your total Medicare wages for the year go over $200,000 (single) or $250,000 (married filing jointly), an extra 0.9 percent Medicare surtax applies to the excess.4Internal Revenue Service. Topic No. 560, Additional Medicare Tax One big vest can push you past that line even if your salary alone wouldn’t.
Sell-to-Cover
Most employers use a sell-to-cover method to actually pay the withholding. On the vest date, they automatically sell enough of your new shares to cover federal, state, and payroll taxes, then deliver whatever’s left to your brokerage account. You won’t owe anything out of pocket at that moment, but you may still owe more at filing if withholding fell short.
Why an 83(b) Election Doesn’t Apply
You may have heard of Section 83(b) elections, which let holders of restricted stock pay tax early at a lower value. That election isn’t available for RSUs. Section 83 requires an actual transfer of property, and at grant you have only a contractual promise — there is nothing to elect on until settlement.1Office of the Law Revision Counsel. 26 U.S. Code 83 – Property Transferred in Connection With Performance of Services
Selling the Shares After Vesting
Once the shares are in your account, they’re ordinary company stock. Your cost basis equals the fair market value on the vest date — the same amount already taxed as wages. Any change in value from that point is a capital gain or loss when you sell.
- Held one year or less after vesting: any gain is a short-term capital gain, taxed at your ordinary income rates.
- Held more than one year: any gain is a long-term capital gain, taxed at 0, 15, or 20 percent depending on your income.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses
If the price drops and you sell at a loss, the loss offsets other capital gains, and up to $3,000 of any excess offsets ordinary income each year.
The Wash Sale Trap
A wash sale happens when you sell stock at a loss and acquire substantially identical shares within 30 days before or after the sale. When it does, you cannot deduct the loss.6Office of the Law Revision Counsel. 26 U.S. Code 1091 – Loss From Wash Sales of Stock or Securities
This matters for RSU holders because a fresh tranche vesting counts as acquiring shares. Sell company stock at a loss and let another vest hit within 30 days, and the wash sale rule disallows the loss. The disallowed amount gets added to the cost basis of the newly vested shares, so the benefit isn’t gone forever — it’s just deferred. If you’re planning to sell at a loss, look at your vesting calendar first.
What Happens If You Leave Before Vesting
Any unvested RSUs on the day you leave are forfeited. They disappear from your account and the company owes you nothing for them. That forfeiture risk is the whole point of the grant from the employer’s side — it’s the retention hook.
Grant agreements sometimes carve out exceptions. Many provide accelerated vesting of remaining units on death or disability while employed, and some plans offer prorated vesting for retirement-eligible employees who meet age and service thresholds. The specifics vary; your grant agreement and the company’s equity plan document are the authoritative sources. Termination for cause — fraud, policy violations — almost always wipes out unvested units, and some agreements let the company claw back recently vested shares as well.
A Deferral Option for Private-Company RSUs
Employees at certain qualifying private companies can elect under Section 83(i) to defer the federal income tax on vested RSUs for up to five years. The election exists because owing tax on shares you can’t sell is a real problem at private employers.7Internal Revenue Service. Guidance on the Application of Section 83(i), Notice 2018-97 Qualifying is narrow: the stock can’t have been publicly traded in any prior year, the company must grant equity to at least 80 percent of its U.S. employees under a written plan,8Internal Revenue Service. Employer’s Tax Guide to Fringe Benefits and you must file the election within 30 days of the shares becoming transferable or no longer at risk of forfeiture. Social Security and Medicare taxes are still due in the year of vesting regardless of the election, and the deferral ends early if the stock goes public, you leave the company, or five years pass.