If part of your compensation is Restricted Stock Units (RSUs), you’ve probably noticed something jarring: your employer withholds tax when shares vest, but the amount they withhold is almost always too low. The result is a April tax bill that catches even high earners off guard.

This guide explains exactly how RSUs are taxed at vest, why supplemental withholding under-withholds for most people, the double-taxation trap when you sell, and how to plan ahead.

What RSUs are

An RSU is a promise from your employer: “When you hit this vesting milestone, I’ll give you X shares of company stock.” There’s no purchase, no exercise, no option price. Just shares delivered on the vest date.

Most US tech companies vest RSUs on a 4-year schedule with a 1-year cliff: 25% at year 1, then quarterly through year 4. Some larger companies (Meta, Google, Amazon’s revised schedule) front-load more heavily.

Tax event #1: Vesting

The IRS treats RSU vesting as ordinary W-2 wages. On the day shares vest:

  • The fair market value (FMV) of the vested shares is added to your taxable W-2 wages for the year.
  • Federal income tax, Social Security (up to wage base), Medicare, state, and sometimes local taxes all apply.
  • Your employer is required to withhold tax, but at the supplemental wage rate, not your marginal rate.

The supplemental wage rate is 22% federal (up to $1 million of supplemental wages in a year, then 37%). For most tech professionals in California or New York, this is dramatically less than the marginal rate they actually owe, often 32-37% federal + 9-13% state.

Example: Vest of $100,000 worth of RSUs for a California engineer earning $250,000 base.

  • Withheld at 22% federal + 10.23% CA = $32,230
  • Actual liability: ~35% federal + 11.3% CA = $46,300
  • Under-withheld by ~$14,000. That’s the April surprise.

Our RSU Calculator computes the actual liability vs supplemental withholding for any state and grant size.

Tax event #2: Sale

After vesting, you own the shares outright. When you eventually sell:

  • Cost basis = FMV on the vest date (the amount already taxed as W-2 wages).
  • Sale price − cost basis = capital gain (or loss).
  • If held more than 1 year from vest date → long-term capital gains (0%/15%/20% + 3.8% NIIT for high earners).
  • If held less than 1 year → short-term capital gains at ordinary rates.

This is where the double-taxation trap happens. Many people forget that the vest amount was already taxed as W-2 income. When they report the 1099-B from their broker, they enter the sale price without subtracting the cost basis, and pay tax twice on the same income.

The fix: when you file, manually adjust the cost basis on Form 8949 to match the vest-date FMV. Brokers often report cost basis as $0 (or only the supplemental withholding amount), not the full FMV. This is the #1 tax filing error on RSU sales.

The four-step framework to avoid an April surprise

Step 1: Estimate your true tax bracket

Add base salary + bonus + estimated annual RSU vest value + spouse income (if MFJ). That total puts you in a specific federal bracket. Add state.

Step 2: Calculate the gap

Compare your true marginal rate to the 22% supplemental withholding rate. For every $1,000 of RSU vest, the gap is (your_rate - 22%) × $1,000.

Step 3: Fill the gap proactively

You have three options:

  1. Extra W-4 withholding (Step 4(c) on your W-4), covers it via paychecks.
  2. Quarterly estimated tax payments, Form 1040-ES, paid 4 times a year on IRS schedule.
  3. Sell-to-cover plus extra, when shares vest, instruct your broker to sell additional shares beyond the default to cover the gap.

Step 4: Avoid the underpayment penalty

Pay either:

  • 90% of current-year liability, or
  • 100% of prior-year liability (110% if AGI > $150K).

Either threshold avoids the IRS underpayment penalty.

State-specific gotchas

California: Source rule means RSUs vested while California-resident are CA-taxable for the full grant period if any part was earned in CA, even if you’ve moved. CA has the most aggressive equity-comp residency rules in the US.

New York: Similar to CA. NY uses a workday-based allocation. If you worked in NY during the vesting period, NY taxes the proportional share.

Texas / Florida / Washington / Nevada: No state income tax. RSU vests are fully federal-only for current residents.

The relocation trap: Moving from CA to TX before a large vest doesn’t fully escape CA tax if the grant period overlapped CA residency. Always consult a CPA before relocating during a vesting cycle.

What about RSUs in a pre-IPO company?

Pre-IPO RSUs are typically double-trigger: they vest on schedule AND require a liquidity event (IPO, acquisition). Until the second trigger, you owe no tax even though you’ve technically “vested.” When the liquidity event happens, the full value vests at once, often a giant tax event in a single year.

Public-company RSUs are single-trigger: they vest and are taxable on the same day.

Common mistakes

Holding RSUs out of company loyalty. Once vested, RSUs are no different from any other stock purchase at the vest-date price. Ask yourself: “If I had been handed $100,000 in cash today, would I use it to buy my employer’s stock?” If no, sell at vest.

Forgetting cost basis when selling. Always subtract vest-date FMV from sale price. Your broker likely won’t do this correctly.

Treating supplemental withholding as the full tax. It almost never is.

Counting on RSU value at grant. RSUs are valued at vest, not at grant. A $200K grant that becomes a $400K grant at vest creates $200K of additional ordinary income, and the matching tax bill.

Skipping ESPP because RSUs feel “good enough.” If your employer also offers an ESPP, the 15% qualifying-disposition discount is essentially free money on top of RSUs.

Worked example

A senior engineer in Seattle (WA, no state income tax):

  • Base: $200,000
  • Annual RSU vest: $150,000
  • Married, spouse earns $80,000

Combined household income: $430,000. They’re in the 32% federal bracket (Medicare additional 0.9% kicks in at $250K MFJ wage base).

When the RSUs vest:

  • Withheld: $33,000 (22% supplemental)
  • Actual liability on that $150K slice: ~$48,000 (32% bracket + Medicare + Add’l)
  • Gap: ~$15,000

Solutions:

  1. Add ~$1,250/month extra W-4 withholding starting January, OR
  2. Make 4 quarterly estimated payments of $3,750.

Either avoids the underpayment penalty and the April shock.

Other countries

RSU taxation differs significantly:

  • United Kingdom, taxed at vest as employment income (PAYE), subject to NI. Section 431 election common.
  • Canada, taxed at vest as employment income; 50% capital gains inclusion on subsequent appreciation.
  • Australia, ESS rules: deferred tax to vest, then taxed as ordinary income.
  • India, TDS at vest, plus perquisite tax based on FMV.

Country guides coming.

Primary sources