Your RSUs Just Vested. Now What? How RSUs Are Taxed, Step by Step
Key takeaways
When they're taxed: RSUs aren't taxed when granted. They're taxed as ordinary income when they vest, based on the stock's value that day.
Withholding: Companies typically withhold federal tax at 22%, but many tech employees are in the 32%, 35%, or 37% bracket.
Cost basis: Your basis is the stock's value at vest. If you sell right away, there's usually little or no additional tax.
Keeping shares: Holding RSUs is a choice to buy company stock. Ask whether you'd buy it with a cash bonus of the same amount.
Selling later: Brokers often report your cost basis incorrectly, which can lead to paying tax twice.
Meet Sarah
The easiest way to understand restricted stock units (RSUs) is to follow one grant from beginning to end.
Sarah is a senior software engineer at a public tech company. Her salary is $300,000, and as part of her offer she receives 1,000 RSUs. They vest over four years: 25% after her first year (called a cliff), then the rest in equal amounts each quarter.
Here's what happens at each step, and the decisions Sarah has to make along the way. The numbers are simplified, but the process is the same for most public company employees.
Step 1: Grant day, nothing happens (yet)
On the day Sarah receives her RSUs, she doesn't own any stock and owes no tax. The grant is a promise of future shares, as long as she stays with the company.
Step 2: Vest day, the shares become hers and are taxed
One year later, 250 RSUs vest. The stock is trading at $80, so Sarah receives shares worth $20,000.
That $20,000 is treated like a cash bonus. It's added to her W-2 and taxed as ordinary income, including federal income tax, Social Security, Medicare, and state tax.
Sarah doesn't have to send a check. Most companies use "sell to cover" or share withholding: they keep or sell enough shares to pay the withholding, and the remaining shares land in her brokerage account. For federal income tax alone, 22% of $20,000 is $4,400, or 55 shares at $80.
Step 3: The April surprise
Sarah's company withheld federal tax at 22%, the standard rate for bonuses and stock income. But with a $300,000 salary, Sarah is a single filer in the 35% federal bracket.
The difference is 13% of $20,000, or about $2,600 she still owes on this one vest. Once her RSUs start vesting every quarter, that gap repeats all year and can add up to a large bill in April, sometimes with an underpayment penalty.
The fix: Sarah estimates her real tax on each vest and sets aside the difference, or makes quarterly estimated tax payments. Some companies also let employees choose a higher withholding rate for RSUs.
Step 4: Keep the shares or sell them?
Now Sarah owns company stock outright. She can hold it or sell it, and this is where many people get stuck.
A simple way to decide is the bonus test: If your company paid you $20,000 in cash instead, would you use it to buy company stock? If the answer is no, holding the RSUs is the same as making that purchase.
Selling right after vesting usually creates little or no extra tax, because Sarah already paid income tax on the full value. That makes RSUs one of the easiest places to diversify.
Sarah also considers what she already has riding on her employer: her salary, her future vests, and her career. Adding more company stock would put even more of her financial life in one place.
Step 5: Selling later, and the tax trap to avoid
Say Sarah keeps 100 shares and sells them a year and a half later at $95.
Her cost basis is $80 per share, the value when the shares vested. Her gain is $15 per share, or $1,500. Because she held the shares more than one year after vesting, it's a long-term capital gain, taxed at lower rates. If she had sold within a year, it would be a short-term gain, taxed like regular income.
The trap: Sarah's broker may report her cost basis as $0 on Form 1099-B, since she didn't pay anything for the shares. If she files that way, she'd be taxed on the full $9,500 instead of $1,500, paying tax twice on income that was already on her W-2. She checks the supplemental information from her broker and adjusts her cost basis on her tax return.
What Sarah decided
After walking through each step, Sarah set a simple plan for every future vest:
Sell most shares at vest: She sells about 80% of each vest right away and keeps 20%, capping how much of her net worth is in company stock.
Cover the tax gap: She sets aside 13% of each vest's value in a savings account for April.
Invest the rest: She moves the proceeds into a diversified portfolio aligned with her long-term goals.
Track her cost basis: She keeps a record of each vest date and value so her tax return is correct when she sells.
Her exact numbers won't fit everyone, but the approach does: decide in advance, so each vest isn't a new emotional decision.
RSU terms, defined
Restricted stock unit (RSU): A promise from your employer to give you company shares once you meet a vesting requirement, usually staying employed for a set time.
Grant date: The day you're awarded the RSUs. No tax is due.
Vesting date: The day the shares become yours. The value is taxed as ordinary income.
Cliff: A waiting period, often one year, before any RSUs vest.
Sell to cover: Your company sells some of your vested shares to pay the tax withholding.
Supplemental withholding rate: The flat federal rate, 22% on the first $1 million, applied to bonuses and RSU income.
Cost basis: The stock's value on your vesting date. It's used to calculate your gain or loss when you sell.
Get a plan for your RSUs
Have RSUs vesting and not sure whether to keep or sell, or how much tax you'll owe? Reliant Wealth Advisory helps tech professionals build a clear plan for their equity compensation.
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About the author
Michael Walstedt, CFA, CFP®, is the founder of Reliant Wealth Advisory, a fee-only fiduciary firm in Hoboken, New Jersey. He helps tech professionals in the New York/New Jersey area, as well as nationwide, plan around stock options, RSUs, and concentrated stock positions.
This article is for educational purposes only and is not tax, legal, or investment advice. The example is hypothetical and simplified. Tax rules change, and your situation may differ. Consult a qualified tax professional before acting.
