Restricted stock units, or RSUs, are one of the most common ways tech and finance companies pay employees beyond salary. They are also one of the most misunderstood. People often assume RSUs are taxed like a stock investment, only when they sell. In reality, RSUs are taxed as wages the moment they vest, and that single fact drives almost every planning decision around them.

This guide explains how RSU taxation actually works, the two distinct taxable events, why your paycheck withholding usually falls short, and how to think about selling.

What an RSU actually is

An RSU is a promise from your employer to give you shares of company stock on a future date, provided you are still employed and any conditions are met. You do not own the shares when they are granted. You own nothing until the units vest.

Most RSU grants vest on a schedule. A typical pattern is a four-year grant with a one-year cliff, meaning 25 percent vests after your first year and the rest vests monthly or quarterly afterward. Until a tranche vests, it is just a contractual promise with no tax consequence.

The first taxable event: vesting

When RSUs vest, the shares become yours, and the fair market value of those shares on the vesting date is treated as ordinary income. It lands on your W-2 exactly like salary or a bonus. It is subject to federal income tax, Social Security and Medicare taxes, and state income tax where applicable.

Here is the key worked example. Suppose 100 shares vest on a day the stock trades at 80 dollars. That is 8,000 dollars of ordinary compensation income added to your wages for the year. It does not matter whether you sell the shares or hold them. The income is recognized at vest, full stop.

Your cost basis in those 100 shares is now 80 dollars per share, the same value that was already taxed. This basis matters enormously for the second taxable event.

How withholding works, and why it is often too low

Because vesting creates wage income, your employer must withhold taxes. The most common method is share withholding, sometimes called sell-to-cover. The company automatically holds back a portion of the vested shares, sells them, and remits the proceeds to the IRS and your state on your behalf. You receive the remaining shares.

The problem is the default federal supplemental withholding rate. Employers commonly withhold federal tax on this kind of supplemental wage income at a flat 22 percent. If your marginal tax rate is higher than 22 percent, and for many people receiving large RSU grants it is, the amount withheld does not cover what you actually owe. The shortfall shows up as a surprise tax bill the following April.

You can estimate the gap by comparing the flat 22 percent against your true marginal rate. Our federal income tax calculator and the tax bracket calculator help you see which bracket your RSU income pushes you into so you can set aside extra cash or adjust other withholding.

The second taxable event: selling the shares

After vesting you hold actual shares, and from that point they behave like any other stock investment. When you sell, you have a capital gain or loss equal to the sale price minus your cost basis.

Continuing the example, your basis is 80 dollars per share. Three outcomes are possible:

  • Sell immediately at 80. No gain, no additional tax. The only tax was the ordinary income at vest.
  • Sell later at 100. A 20 dollar per share gain, taxed as a capital gain.
  • Sell later at 60. A 20 dollar per share capital loss, which can offset other gains.

Whether that gain is short term or long term depends on how long you held the shares after vesting. Hold one year or less and the gain is short term, taxed at ordinary rates. Hold more than one year and it qualifies for lower long-term capital gains rates. The holding clock starts at vesting, not at grant. You can model the difference with our capital gains tax calculator.

A common and costly mistake: double counting basis

Brokerages frequently report a cost basis of zero on the 1099-B for shares acquired through equity compensation, or they report only the amount you paid out of pocket, which for RSUs is nothing. If you take that figure at face value, you will pay tax twice on the same money: once as wages at vest and again as a phantom capital gain at sale.

The fix is to make sure your cost basis equals the fair market value that was already taxed as income. In our example that is 80 dollars per share. Adjusting the reported basis is a routine part of filing for anyone with RSUs, and it is worth checking carefully.

Sell now or hold? A framework, not advice

A useful way to think about RSUs is to ask whether you would buy your employer’s stock with cash today. If a friend handed you 8,000 dollars, would you put all of it into a single company, the same one that already pays your salary?

For most people the honest answer is no, which argues for selling vested shares promptly and diversifying. Selling at or near the vesting price also keeps things simple because there is little or no capital gain to manage. Holding can make sense if you have strong conviction and your overall portfolio is not already concentrated in the stock, but recognize that you are making an active investment decision, not simply leaving compensation untouched.

Concentration risk is the quiet danger. It is common to wake up with half your net worth in one employer’s stock without ever having decided to invest that way.

Frequently asked questions

Do I owe taxes on RSUs if I never sell them?

Yes. The taxable event for ordinary income is vesting, not selling. Once shares vest, their fair market value is taxed as wages whether you sell, hold, or forget about them. Selling only triggers an additional, separate capital gains calculation.

Why did I get a tax bill when my employer already withheld shares?

Most likely your employer withheld federal tax at the flat 22 percent supplemental rate, but your actual marginal rate is higher. The withholding covered part of the liability, not all of it. Use the federal income tax calculator to estimate the true rate on your total income and set aside the difference.

What is my cost basis in RSU shares?

Your cost basis is the fair market value per share on the vesting date, the same amount that was reported as income on your W-2. If your broker reports a basis of zero, you must correct it when filing, or you will be taxed twice on the same value.

Is it better to sell RSUs right away or wait a year for lower tax rates?

Waiting more than a year converts any gain above the vesting price into long-term capital gains, which are taxed at lower rates. But waiting also exposes you to single-stock risk, and only the gain above your basis gets the lower rate, not the original grant value. Selling promptly to diversify is a reasonable default; holding is an investment bet you should make deliberately.