Restricted Stock Units have become one of the most common forms of equity compensation in tech and beyond. If you have received an RSU grant or are evaluating a job offer that includes them, understanding exactly how they are taxed is critical — because the tax bill can be surprisingly large and the timing of when you owe is different from what most people assume.
An RSU is a promise from your employer to give you shares of company stock on a future date, provided you meet certain conditions — typically remaining employed through a vesting schedule. A common schedule is four years with a one-year cliff: 25% vests at the one-year mark, and the rest vests monthly or quarterly over the next three years. Until shares vest, you do not own them, cannot sell them, and they have no tax implications. The grant date is economically meaningless for tax purposes.
The critical tax event happens at vesting, not at grant. When RSU shares vest, the fair market value of those shares on the vesting date is treated as ordinary income and added to your W-2. This is the single most important concept in RSU taxation: the IRS treats vested RSUs exactly like a cash bonus. If 500 shares vest when the stock price is $200 per share, you have $100,000 of ordinary income added to your W-2 for that year — on top of your base salary and any other compensation.
Federal income tax on vested RSUs is calculated at your marginal tax rate, which depends on your total compensation for the year. If your base salary is $150,000 and $100,000 worth of RSUs vest in the same year, your total income is $250,000. After the standard deduction of $16,100, taxable income is $233,900. This puts you solidly in the 32% federal bracket, which starts at $203,300 for single filers in 2026. The marginal rate on much of that RSU income is 32%, not the 22% that your salary alone would suggest. This bracket bump catches many people off guard.
FICA taxes also apply to RSU income. Social Security tax at 6.2% applies to all earnings up to the $184,500 wage base for 2026. If your salary alone exceeds the cap, your RSU income will not face additional Social Security tax. But if your salary is $120,000, the first $64,500 of RSU income will also be subject to the 6.2% Social Security tax — an additional $4,000. Medicare tax at 1.45% applies to all RSU income with no cap. And if your total earnings exceed $200,000 as a single filer, the Additional Medicare Tax of 0.9% kicks in on earnings above that threshold. On a $100,000 RSU vest with $150,000 salary, the additional Medicare tax adds $450.
State income tax on RSUs varies dramatically depending on where you live. In California, RSU income is taxed at rates up to 13.3% — on that $100,000 RSU vest, a high-earning California resident could owe $10,000 or more in state tax on the RSU income alone. In New York, rates reach 10.9% at the state level plus 3.876% for NYC residents. Meanwhile, in Texas, Florida, Nevada, and the other no-income-tax states, the state tax on RSU income is zero. The state you live in when shares vest is what determines which state taxes the income.
Most companies use a sell-to-cover mechanism to handle tax withholding on RSU vests. When shares vest, the company automatically sells enough to cover estimated tax withholding and delivers the remaining shares to your brokerage account. If 500 shares vest at $200 each ($100,000 total) and the combined withholding rate is 40%, the company sells 200 shares for taxes and deposits 300 shares into your account.
Here is the withholding gap problem that trips up many employees. Federal supplemental income withholding is typically done at a flat 22% rate, regardless of your actual marginal bracket. If your total compensation puts you in the 32% or 35% bracket, the 22% withholding is significantly less than your actual tax liability. On a $100,000 RSU vest where your marginal rate is 32%, the federal underwithholding is roughly $10,000. Add state underwithholding if your state rate exceeds the amount withheld, and you could owe $12,000 to $15,000 at tax time. Plan for this by setting aside cash or making estimated tax payments.
Let us walk through a complete example. Sarah earns a $150,000 base salary and 500 RSU shares vest on June 1 when the stock price is $200. Her RSU income is $100,000, bringing total W-2 income to $250,000. Federal income tax on $250,000 (after $16,100 standard deduction): approximately $44,800. Social Security: $11,439. Medicare: $3,625. Additional Medicare Tax: $450 (0.9% on $50,000 above $200,000). If Sarah lives in California, state tax adds roughly $16,500. Total tax burden: approximately $76,800 — a 30.7% effective rate. Without the RSU vest, her tax on $150,000 salary alone would be about $38,600 (25.7% effective). The RSU income faces a marginal rate of about 38% across federal, state, and Medicare.
After vesting, your RSUs become regular stock holdings, and any subsequent price changes are subject to capital gains tax — not ordinary income tax. If Sarah's 300 remaining shares (after sell-to-cover) appreciate from $200 to $250 over the next 18 months and she sells, her gain is $50 per share times 300 shares equals $15,000. Because she held for more than one year after vesting, this qualifies for long-term capital gains treatment at 15% (for most earners) rather than her ordinary income rate of 32%. She would owe $2,250 in federal capital gains tax on the $15,000 gain. If the stock dropped to $180 and she sold, she would have a $6,000 capital loss that could offset other gains or up to $3,000 of ordinary income.
A common misconception is that RSUs are taxed twice — once at vesting and again when sold. This is not true. At vesting, you are taxed on the fair market value of the shares. When you later sell, you are only taxed on the difference between the sale price and the vest price (your cost basis). If the stock price does not change between vesting and selling, you owe zero additional tax. The vest price becomes your cost basis, and only appreciation or depreciation from that point forward creates a capital gain or loss.
Some people confuse RSUs with restricted stock that can be purchased at a discount, where an 83(b) election allows you to pay tax at the grant date rather than the vesting date. The 83(b) election does not apply to RSUs. Because RSUs have no purchase price and no value transfers to you until vesting, there is nothing to elect to be taxed on early. The 83(b) election is only relevant for restricted stock awards where you pay something upfront and want to lock in a lower valuation for tax purposes.
RSUs differ from stock options in important ways. Incentive Stock Options (ISOs) are not taxed at exercise if you hold the shares (though they may trigger AMT). Non-Qualified Stock Options (NSOs) are taxed at exercise on the spread between exercise and market price. RSUs are simpler: no exercise price, no decision about when to exercise, and no risk of options being underwater.
Tax-smart strategies for RSU holders start with understanding concentration risk. After vesting, many employees hold a large percentage of their net worth in their employer's stock — the same company that pays their salary. If the company struggles, you lose both income and savings simultaneously. Financial advisors generally recommend selling RSUs shortly after vesting and diversifying into index funds. Selling immediately generates minimal capital gains since the price has barely moved from your cost basis.
State tax planning around RSU vests can save significant money. If you are moving from California to Texas, timing the move so that shares vest after establishing Texas residency can save 10% or more in state tax. California will attempt to tax RSU income prorated based on the portion of the vesting period you spent in California. Consult a tax professional before making relocation decisions driven by vesting schedules, as multi-state rules are complex.
If you have a large RSU vest coming, take these steps. First, estimate your total income for the year and calculate your marginal bracket. Second, determine whether standard withholding will cover your liability — if not, set aside cash or adjust your W-4. Third, decide your sell-versus-hold strategy based on concentration risk. Fourth, if charitably inclined, donating appreciated shares held more than one year lets you deduct full market value without paying capital gains tax.
Use our RSU tax calculator to model the exact tax impact of your upcoming vest at any stock price. The capital gains calculator can help you plan the tax implications of selling shares after vesting. And the state comparison tool lets you see how different states would tax your RSU income — especially useful if you are considering a relocation.