RSU income is the fair market value of the company shares you receive when your restricted stock units vest, and the IRS taxes it as ordinary wages in the year of vesting. Your employer usually withholds federal tax at a flat 22% supplemental rate, plus Social Security and Medicare, and deposits the remaining shares in your brokerage account. That flat withholding often falls short of what you actually owe, so a large vest can leave you writing a check in April.
What Counts as RSU Income
A restricted stock unit is a promise from your employer to deliver shares once you meet certain conditions, usually staying employed through a vesting date. Before vesting, an RSU is a bookkeeping entry. You don’t own shares, you can’t vote them, and you don’t collect dividends. You also pay nothing to receive them, which is what separates RSUs from stock options.
Your RSU income equals the number of shares that vest multiplied by the stock’s closing price on the vesting date. If 500 shares vest at a $50 close, your RSU income is $25,000. When vesting falls on a weekend or market holiday, the company uses the closing price from the last trading day before that date.
That dollar figure does double duty. It’s your gross compensation for tax purposes right now, and it’s your cost basis if you sell the shares later. Both numbers matter, and both come from the same vesting-day value.
One boundary worth naming: RSUs are not the same as restricted stock awards (RSAs), where shares are actually issued at grant. Because no shares exist until an RSU vests, the Section 83(b) election that lets some RSA holders recognize income early is not available for RSUs.
How RSU Income Is Taxed at Vesting
The full fair market value of your vested shares is ordinary income, taxed the same as salary or a cash bonus. Withholding happens at vesting, not at year-end.
Federal Withholding
The IRS classifies RSU income as supplemental wages. For amounts up to $1 million in a calendar year, employers withhold federal income tax at a flat 22%. Anything above $1 million is withheld at 37%.1Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
The 22% is a convenience rate, not your actual bracket. If your total income puts you in the 32% or 35% bracket, the withholding won’t cover what you owe. This gap catches many people off guard, especially when a large vest hits mid-year.
Social Security and Medicare
Your employer also withholds Social Security tax at 6.2% and Medicare tax at 1.45%.2Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates Social Security applies only until your total wages reach the annual wage base, which is $184,500 for 2026.3Social Security Administration. Contribution and Benefit Base If your salary alone has already crossed that cap, no additional Social Security tax comes out of the RSU income. Medicare has no cap.
An extra 0.9% Medicare surtax kicks in on wages above $200,000 for single filers or $250,000 for joint filers.4Internal Revenue Service. Topic No. 560, Additional Medicare Tax RSU income counts toward that threshold, and a sizable vest can push you over the line even if your salary wouldn’t.
State Withholding
States with an income tax also withhold on RSU income. Nine states have no wage income tax; top marginal rates elsewhere reach roughly 13%. Some states apply a flat supplemental rate, others use their regular brackets. A big vest can land in a higher state bracket than your paycheck normally does, so check your state’s rule.
Sell-to-Cover
Most employers handle the tax bill through sell-to-cover. The company automatically sells enough of your newly vested shares to cover federal, state, Social Security, and Medicare taxes and deposits the rest into your brokerage account. Your equity statement shows the shares sold, the taxes paid, and the net shares delivered. The sold shares still generate taxable income; they’re just liquidated immediately to fund the withholding.
Closing the Withholding Gap
Because 22% is lower than most RSU recipients’ marginal rate, you’ll likely owe more when you file. If the shortfall is large enough, an underpayment penalty can follow.
You can avoid that penalty by hitting one of two safe harbors: paying at least 90% of the current year’s total tax through withholding and estimated payments, or paying 100% of last year’s tax (110% if your prior-year adjusted gross income was over $150,000).5Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
Two practical ways to close the gap. Ask your employer to increase withholding on your regular paychecks by filing an updated W-4, or make a quarterly estimated payment on Form 1040-ES. For 2026, quarterly deadlines fall on April 15, June 15, September 15, and January 15, 2027.6Internal Revenue Service. 2026 Form 1040-ES – Estimated Tax for Individuals If a vest happens early in the year, paying estimated tax for the quarter of the vest is the cleanest fix.
Capital Gains When You Sell the Shares
Once shares hit your brokerage account, any price movement from that point on becomes a capital gain or loss. Your cost basis is the fair market value on the vesting date, which is the same amount already taxed as wages.
Sell within one year of vesting and the gain is short-term, taxed at your ordinary rate. Hold longer than a year and the gain qualifies for long-term capital gains rates: 0%, 15%, or 20% for 2026 depending on taxable income.7Internal Revenue Service. Topic No. 409, Capital Gains and Losses For single filers, 0% applies up to $49,450 of taxable income, 15% runs from $49,451 to $545,500, and 20% starts above that.
If the stock falls below your basis and you sell at a loss, you can offset other gains or up to $3,000 of ordinary income per year, carrying any excess forward.
High earners face an additional 3.8% net investment income tax on gains from RSU sales. It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 (single) or $250,000 (joint).8Internal Revenue Service. Topic No. 559, Net Investment Income Tax Between that surtax, the 20% long-term rate, and state tax, the effective rate on RSU gains can exceed 30% for top earners.
How RSU Income Appears on Your W-2 and 1099-B
Your RSU income shows up on your W-2 in Box 1 (wages), Box 3 (Social Security wages), and Box 5 (Medicare wages). Many employers also note the amount in Box 14 labeled “RSU” for reference.9Internal Revenue Service. U.S. Taxation of Stock-Based Compensation Received by Nonresident Aliens RSU income does not belong in Box 12 with Code V; that code is for nonqualified stock option exercises.
The 1099-B Cost Basis Trap
When you sell RSU shares, your broker sends a Form 1099-B reporting the sale proceeds. The trap: the 1099-B often shows cost basis as $0 or leaves it blank. IRS rules prevent brokers from reporting the full adjusted basis on many equity-compensation sales. Copy those figures straight onto your return and you’ll be taxed on the full sale price, paying tax a second time on income that was already taxed at vesting.
The fix is to use the supplemental statement your broker provides, sometimes called a tax lot detail or gain/loss report, to find the correct basis. It should equal the vesting-day fair market value plus any fees. Report the corrected basis on Form 8949, check the box indicating the basis wasn’t reported to the IRS, and let the corrected gain or loss carry through to Schedule D.10Internal Revenue Service. 2025 Instructions for Form 8949 This is the most common RSU tax error, and it’s entirely avoidable once you know to look for it.
If You Work at a Private Company
Private-company RSUs work on a different timeline. Most private employers use double-trigger vesting: shares are delivered only after both a service condition and a liquidity event such as an IPO or acquisition. Until the second trigger occurs, no shares transfer and no tax is due. If the company never has a liquidity event, the RSUs expire worthless and no tax is ever owed.
After a liquidity event, Section 83(i) lets qualifying employees defer federal income tax on RSU vesting for up to five years. Eligibility is narrow. The employer must have a written plan covering at least 80% of U.S. employees with the same equity rights, and you cannot be a 1% owner, current or former CEO or CFO, or one of the four highest-compensated officers. Social Security and Medicare are still due at vesting; only federal income tax is deferred.11Internal Revenue Service. Employer’s Tax Guide to Fringe Benefits