Restricted stock units are taxed twice: first as ordinary income on the day they vest, based on the stock’s fair market value that day, and again as a capital gain or loss when you sell the shares. At vesting, your employer withholds federal tax at a flat 22% supplemental rate along with payroll taxes and reports the full value on your W-2 alongside your regular wages. If you hold the shares and sell later at a higher price, you owe capital gains tax on the increase. The gap between that flat 22% withholding and what higher earners actually owe is where most RSU tax surprises come from.
The Tax at Vesting
The main tax event happens the day your shares vest. Under 26 U.S.C. ยง 83(a), when property is transferred for services and is no longer subject to a substantial risk of forfeiture, its fair market value becomes taxable income to the person who earned it.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services Before vesting, RSUs are just a promise. After vesting, you own real shares, and the IRS treats their value as compensation.
The math is simple. Multiply the stock’s market price on the vesting date by the number of shares delivered. If 200 shares vest when the stock trades at $75, you have $15,000 in ordinary income. That income is taxed at your marginal rate, added to your salary and bonuses, and reported on your W-2.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services This happens whether you sell the shares immediately or hold them for years. Vesting alone triggers the tax.
What Your Employer Withholds
Because RSU vesting counts as supplemental wages, your employer withholds federal income tax at a flat 22% for 2026. If your supplemental wages for the year exceed $1 million, the rate on the excess jumps to 37%.2Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
Payroll taxes come off too. Social Security is 6.2% on earnings up to the 2026 wage base of $184,500.3Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates4Social Security Administration. Contribution and Benefit Base If your salary has already carried you past that cap by the vesting date, no more Social Security tax comes out of the RSU income. Medicare is 1.45% with no ceiling, and an Additional Medicare Tax of 0.9% applies to earnings above $200,000 for single filers or $250,000 for joint filers.5Internal Revenue Service. Topic No. 560, Additional Medicare Tax
Most states with an income tax withhold as well, at flat supplemental rates ranging from roughly 1.5% to over 11%. A few states don’t tax income at all. Combined federal, state, and payroll withholding can eat 35% to 45% of the vested shares’ value.
Since RSUs deliver stock rather than cash, employers usually cover the tax bill through sell-to-cover, in which enough shares are sold on the open market to fund the withholding and the rest are deposited in your brokerage account. Net settlement is the other common method: the company withholds shares outright and remits the equivalent value to tax authorities without a market sale. A minority of employers let you pay withholding out of pocket to keep all your shares, but that requires writing a large check on vesting day.
Why 22% Withholding Often Isn’t Enough
The flat 22% federal rate is a convenience, not a calculation of what you actually owe. For 2026, a single filer with taxable income over $105,700 is already in the 24% bracket. Income above $201,776 hits 32%, and above $256,226 hits 35%. If your salary plus RSU income lands you in one of those brackets, 22% withholding leaves a gap the IRS expects you to close by April.
Take a software engineer earning $180,000 in salary whose RSUs add another $60,000 at vesting. The combined $240,000 puts part of that income in the 32% bracket for a single filer, but the RSU portion was withheld at 22%. Layer in state income tax and the Additional Medicare Tax, and the shortfall can run several thousand dollars.
To avoid an underpayment penalty, you need to satisfy one of two safe harbors: pay at least 90% of your current-year tax liability through withholding and estimated payments, or pay at least 100% of your prior-year liability. If your prior-year adjusted gross income exceeded $150,000, that second threshold rises to 110%.6Office of the Law Revision Counsel. 26 USC 6654 – Failure by Individual to Pay Estimated Income Tax Making a quarterly estimated payment in the quarter your RSUs vest is the cleanest way to close the gap. Waiting until you file means the deadlines have already passed and a penalty may already apply.
The Tax When You Sell the Shares
Once the vesting tax is settled, you own stock, and it behaves like any other stock investment. The fair market value on the vesting date becomes your cost basis, the starting price the IRS uses to measure future gain or loss.
If shares vested at $50 and you sell them at $75, your capital gain is $25 per share, not $75. You already paid ordinary income tax on the first $50. How the $25 gain is taxed depends on how long you held after vesting.
- Shares held one year or less after vesting produce short-term capital gains, taxed at your ordinary income rate.7Internal Revenue Service. Topic No. 409, Capital Gains and Losses
- Shares held more than one year qualify as long-term, taxed at 0%, 15%, or 20% depending on your income. For 2026, single filers pay 0% on gains up to $49,450, 15% up to $545,500, and 20% above. Married joint filers pay 0% up to $98,900, 15% up to $613,700, and 20% beyond.7Internal Revenue Service. Topic No. 409, Capital Gains and Losses
The gap between short-term and long-term rates is large. Someone in the 32% or 35% bracket who holds a few extra months to cross the one-year mark can nearly halve the tax on gains. Holding for the rate isn’t free, though. You’re also betting the price doesn’t drop, and concentrating too much of your wealth in one employer’s stock carries real risk.
The Net Investment Income Tax
High earners face a 3.8% surtax on net investment income, including capital gains from RSU sales. It applies once your modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers.8Internal Revenue Service. Topic No. 559, Net Investment Income Tax The 3.8% is charged on the lesser of your net investment income or the amount your income exceeds the threshold. If you already earn a high salary and then sell appreciated RSU shares, it’s easy to trigger and easy to miss.
The Double Taxation Trap on Your Return
This is the most expensive RSU mistake, and it’s common. When you sell vested shares, your brokerage sends you and the IRS a Form 1099-B reporting the sale proceeds. The catch: brokerages frequently show your cost basis as $0 or leave it blank. IRS rules actually prohibit brokers from reporting the full adjusted basis for this kind of equity compensation on Form 1099-B.
Enter those numbers straight into your return and the whole sale looks like taxable gain, even though you already paid ordinary income tax on the vesting value. You pay tax twice on the same money. On a $50,000 vesting, that error can cost $10,000 or more.
The correction happens on Form 8949. If the reported basis is missing or incorrect, you use adjustment code “B” in column (f) to flag it. When the basis wasn’t reported to the IRS, put the correct basis in column (e). When it was reported incorrectly, put the 1099-B figure in column (e) and the correction in column (g).9Internal Revenue Service. Instructions for Form 8949 (2025) Your brokerage’s supplemental statement or your employer’s stock plan portal will show the vesting-date fair market value you need. Keep records of every vesting event: date, share count, and price. If you use tax software, confirm it’s pulling the adjusted basis, not the raw 1099-B figure.
If the Stock Drops After Vesting
RSU taxation doesn’t pause when the stock falls. You owe ordinary income tax on the full fair market value at vesting no matter what happens next. If shares vest at $100 and the price slides to $60 while you hold them, the tax on $100 stands. There’s no refund of the difference.
What you get instead is a capital loss when you sell. Selling those shares at $60 creates a $40-per-share loss that can offset other capital gains. If losses exceed gains for the year, you can deduct up to $3,000 of the excess against ordinary income, or $1,500 if married filing separately.10Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses Unused losses carry forward indefinitely.
That $3,000 annual cap means a large loss can take many years to fully absorb. A $40,000 capital loss with no other gains to soak it up would take more than 13 years to work through at $3,000 a year. Full tax at vesting and slow-drip loss deductions is one of the harshest features of the RSU regime.
Private Company RSUs Work Differently
Employees at private companies face a problem their public-company counterparts don’t. At a public company, you can sell shares the day they vest to fund the tax bill. At a private company, there is usually no market for the shares, so you could owe a large tax bill on stock you can’t easily turn into cash.
Most private companies solve this by writing RSUs with a double-trigger vesting requirement. The first trigger is the standard time-based service condition. The second is a liquidity event, typically an IPO or acquisition. Both must be satisfied before shares actually deliver, which pushes the tax event out to a point when you can realistically sell. Before the liquidity event, time-based vesting accrues on paper but no shares move and no tax is owed.
When the liquidity event does arrive, all your accrued RSUs can vest at once. Several years of accrued shares hitting a high IPO price can shove your income into the top federal bracket in a single year. Planning ahead with a tax advisor before an anticipated IPO is worth the cost, because estimated payments, sale timing, and any charitable giving strategy need decisions in advance rather than after the fact.