RSU Taxes Explained: What You Actually Owe When Shares Vest

Your offer letter says "200 RSUs vesting over 4 years" and you nod like you understand what that means for your taxes. You do not. Almost nobody does until they get their first vesting paycheck and wonder why it is so much smaller than expected.

Here is how RSU taxes actually work - no jargon, no hand-waving.

What Happens When RSUs Vest

RSUs (Restricted Stock Units) are a promise: your company will give you shares of stock on a set schedule, usually over four years. Until they vest, you own nothing. They are just a line item in your offer letter.

The moment shares vest, two things happen simultaneously:

1. You receive actual shares of stock. They appear in your brokerage account (Schwab, E*Trade, Fidelity, etc.).
2. The IRS treats it as ordinary income. The fair market value of those shares on the vesting date is added to your W-2, just like a cash bonus.

This is the part that trips people up. You did not sell anything. You did not receive cash. But the IRS sees it as income, and your employer is required to withhold taxes on it.

The 4 Taxes You Owe at Vesting

When your RSUs vest, four taxes come out:

1. Federal income tax - Based on your marginal tax bracket (22%, 24%, 32%, 35%, or 37% for most tech workers)
2. State income tax - Depends on your state (California is 9.3% to 13.3%, Texas and Washington are 0%)
3. Social Security tax - 6.2% up to the wage base ($176,100 in 2026)
4. Medicare tax - 1.45%, plus an additional 0.9% if your total income exceeds $200,000

For a tech worker in California earning $200,000+ in total compensation, the combined tax rate on RSU income can easily reach 40% to 50%.

Why Your Withholding is Probably Wrong

Here is the problem. Most employers withhold at the supplemental income flat rate of 22% for federal taxes. That is the default IRS rate for bonuses and stock compensation.

But if your salary is $150,000 and you have $80,000 in RSUs vesting, your marginal federal rate is likely 32% or higher. That 22% withholding is not enough. You will owe the difference when you file your return.

The fix: Either make estimated quarterly tax payments to cover the gap, or ask your employer if they can withhold at a higher rate. Do not wait until April to find out you owe $5,000 to $15,000.

Sell-to-Cover vs. Hold: Your Two Options

When shares vest, you need to handle the tax bill somehow. Most companies offer two approaches:

Sell-to-Cover: Your broker automatically sells enough shares to cover the tax withholding, and you keep the rest. If 100 shares vest at $50 each ($5,000 total), and your combined withholding rate is 40%, the broker sells 40 shares ($2,000) for taxes and you keep 60 shares.

Hold All Shares: You keep every share, but your cash paycheck gets reduced (sometimes to nearly zero) to cover the withholding. Or worse, the withholding comes out of your regular salary over the next few pay periods, leaving you cash-strapped.

Most people should sell-to-cover. It is clean, automatic, and you do not have to worry about coming up with cash for taxes. The only reason to hold everything is if you have a strong conviction the stock will rise and you have plenty of cash elsewhere to cover the tax bill.

What Happens When You Sell

Here is where it gets interesting. After vesting, you own stock. If you later sell those shares, you may owe capital gains tax on any price increase since the vesting date.

• Held less than 1 year after vesting: Short-term capital gains, taxed as ordinary income (your full marginal rate)
• Held more than 1 year after vesting: Long-term capital gains, taxed at 0%, 15%, or 20% depending on income

The "cost basis" for your shares is the fair market value on the vesting date - the price the IRS already taxed you on. You only owe additional tax on gains above that price.

Example: 100 shares vest at $50 (you paid income tax on $5,000). You sell a year later at $65 per share. Your capital gain is $15 per share, or $1,500 total, taxed at the long-term rate.

If the stock drops below your vesting price, you can claim a capital loss when you sell. That loss offsets other gains or up to $3,000 of ordinary income per year.

The W-2 Confusion

Your W-2 at year-end will include your RSU income in Box 1 (total wages). This is where people accidentally pay tax twice.

When you file your return and also enter your 1099-B from selling shares, the brokerage often reports the full sale price as proceeds with a cost basis of $0. If you do not adjust the cost basis to reflect the income already reported on your W-2, you end up paying tax on the same money twice.

Common RSU Tax Mistakes

1. Not setting aside cash for the tax gap. Your 22% withholding is almost certainly not enough if you earn over $100,000. Set aside an extra 10-15% of each vesting amount in a savings account earmarked for taxes.

2. Double-counting income on your tax return. Your W-2 already includes RSU income. Your 1099-B may report cost basis as $0. If you do not correct this, you pay tax twice on the same income.

3. Holding too much company stock. Your salary, bonus, and career growth already depend on your employer. Holding a huge chunk of your net worth in the same company's stock is a concentration risk. Many financial advisors suggest selling RSUs at vesting and diversifying.

4. Ignoring state tax when relocating. If you move from a high-tax state to a low-tax state mid-vesting, the allocation of income between states gets complicated. Both states may try to tax the same income. Plan ahead with a tax professional.

5. Forgetting about AMT. RSUs themselves do not trigger Alternative Minimum Tax (that is ISOs), but high RSU income can push you into AMT territory through other interactions. Another reason to check with a tax pro.

Calculate Your RSU Tax Liability

Use the calculator below to estimate what you will actually owe when your RSUs vest. Plug in your vesting details and see the full tax breakdown.

File Your RSU Taxes Correctly

RSU tax returns are more complex than a standard W-2 filing, but you do not need to pay $500 for a CPA. FreeTaxUSA handles stock compensation, cost basis adjustments, and multi-state returns at a fraction of the price.