If you work at a public tech company, a significant portion of your comp likely arrives in the form of restricted stock units (RSUs). Unlike salary, RSUs create two separate taxable events — and the default payroll withholding rarely covers what you actually owe. Understanding how RSUs are taxed is the single highest-leverage tax move most tech employees can make.
How RSUs Work
An RSU is a promise from your employer to give you company stock once you meet a vesting condition — usually time-based (four-year vest with a one-year cliff) or performance-based. You owe no tax when the grant is issued; you owe tax at vesting (when shares are delivered to you) and potentially again at sale.
Event 1: Vesting — Taxed as Ordinary Income
The moment shares vest, the fair market value (FMV) of those shares is treated as ordinary W-2 wages. It shows up on your pay stub and year-end W-2 alongside your salary, and is subject to:
- Federal income tax (bracket varies by total income)
- Social Security tax (6.2% up to the wage base: $176,100 for 2025, $184,500 for 2026)
- Medicare tax (1.45%, plus 0.9% Additional Medicare Tax above $200K single / $250K MFJ)
- State income tax (varies)
The Withholding Gap
Most employers withhold federal tax on RSU vest income at the 22% supplemental wage rate (or 37% on amounts above $1 million in a calendar year). But if you are in a higher marginal bracket, 22% is not enough.
Worked Example: Under-Withholding on a Big Vest
Jordan is single, earns a $220,000 base salary, and has $180,000 of RSUs vest in 2025. Total ordinary income = $400,000, which puts Jordan in the 35% federal bracket at the top (the first part of the vest is taxed at 32%).
| Item | Amount |
|---|---|
| RSU vest income | $180,000 |
| Federal tax withheld at 22% supplemental rate | $39,600 |
| Actual added federal income tax from the RSU income (stacked on the $220,000 salary, 2025 brackets) | $61,612 |
| Shortfall due at filing | $22,012 |
Without making a quarterly estimated payment, Jordan also owes an underpayment penalty. The fix: top up with an estimated payment in the same quarter the RSUs vest, or increase W-4 withholding on regular paychecks.
Event 2: Sale — Taxed as Capital Gain or Loss
When you sell the vested shares, you have a capital gain or loss equal to sale price minus cost basis. Your cost basis is the FMV on the vest date (which is what you already paid ordinary income tax on).
- Held ≤ 1 year after vest → short-term capital gain, taxed as ordinary income
- Held > 1 year after vest → long-term capital gain, taxed at 0%, 15%, or 20%
The Double-Taxation Trap
Brokerages often report cost basis on Form 1099-B as $0 or only the amount paid at grant, not the vest-date FMV. If you don’t correct it, you pay ordinary income tax at vest and capital gains on the full sale price — taxed twice on the same dollars.
Fix: On Form 8949, enter the broker-reported basis in column (e), then adjust in column (g) with code B to reflect the true vest-date FMV. Most online tax software asks specifically about “RSU / ESPP basis adjustment” — use it.
Worked Example: Same-Day Sale vs. Hold
Sasha has 1,000 shares vest at $50 FMV on March 15, 2025 (ordinary income of $50,000). Six months later the stock is $60.
Scenario A: Sell immediately at vest ($50)
- Proceeds: $50,000
- Cost basis: $50,000
- Capital gain/loss: $0 — no additional tax
- Sasha has already paid ordinary tax on $50K at vest
Scenario B: Hold 6 months, sell at $60
- Proceeds: $60,000
- Cost basis: $50,000 (vest-date FMV)
- Short-term capital gain: $10,000 taxed at ordinary rate (~32%) = $3,200 tax
Scenario C: Hold 13 months, sell at $60
- Proceeds: $60,000
- Cost basis: $50,000
- Long-term capital gain: $10,000 taxed at 15% = $1,500 tax
The long-term hold saves $1,700 vs. the 6-month hold, but exposes Sasha to concentration risk.
The Concentration Trap
Most financial advisors recommend selling RSUs at vest and diversifying — even though it looks like you’re “paying taxes twice.” You’re not: the vest tax is already paid regardless. The sale decision is purely whether you want to keep owning your employer’s stock with already-taxed dollars. Framed that way, most employees would not buy their company’s stock at the vest-day price with after-tax cash.
A common rule of thumb: sell 100% of RSUs at vest if your total company-stock exposure (RSUs + ESPP + 401(k) match in company stock + options) exceeds 10% of your net worth.
Section 83(b) Election — Not for Standard RSUs
The 83(b) election applies to restricted stock awards (actual shares granted with vesting restrictions), not RSUs. You cannot make an 83(b) election on a standard RSU. A few companies offer “double-trigger” RSUs at pre-IPO stage where 83(b)-like planning matters — consult a CPA if you’re in that situation.
State Tax and Mobile Employees
If you vested RSUs while living in California and moved to Texas before selling, the vest-date ordinary income is sourced to California (and California will come asking). The post-vest appreciation, however, is sourced to your residence at the time of sale. Keep records of vest dates, FMV, and your state of residence on each date.
2025 Planning Checklist
- Estimate total ordinary income including RSU vests
- If your marginal bracket exceeds 22%, make a quarterly estimated payment or increase W-4 withholding
- Check 1099-B cost basis; adjust on Form 8949 with code B if broker reports $0
- Consider selling at vest to diversify unless you’re at or under the 10% concentration threshold
- Harvest capital losses elsewhere to offset short-term gains on sold RSUs
- Track state of residence on every vest date
Key Takeaways
- RSUs create two taxable events: ordinary income at vest and capital gains at sale
- Employers typically withhold only 22% federal on vest — high earners will owe more at filing
- The vest-date FMV becomes your cost basis; always verify and adjust 1099-B to avoid double taxation
- Selling at vest is usually the tax-neutral, risk-reducing default
- Holding more than 12 months after vest converts short-term gains into long-term (0–20%) rates