RSUs are probably the biggest part of your comp—and most people don't understand how they work until tax season shows up with a surprise.

Here's what actually matters: the mechanics, the taxes, and the decisions you'll face.

What Are RSUs?

RSUs are a promise: "Stay employed here, and we'll give you actual shares of stock."

Unlike stock options, RSUs have value from day one (as long as the stock price is above $0). You don't have to pay anything to receive them. The catch? You have to wait for them to vest.

Until RSUs vest, you don't own the shares. They're just a promise. If you leave before vesting, you forfeit the unvested portion. This is why job-hoppers often leave significant money on the table.

How RSU Vesting Works

RSUs typically vest over a multi-year schedule. Common patterns include:

• 4-year vest with 1-year cliff: Nothing for 12 months, then 25% vests at month 12, and the rest vests monthly or quarterly
• 4-year quarterly vest: Equal portions vest every quarter (2.5% per quarter)
• Back-weighted vest: More shares in later years (Amazon's famous 5%, 15%, 40%, 40%)

The vesting schedule is in your grant agreement. Read it.

RSU Tax Treatment: The Part Nobody Explains Clearly

RSUs are taxed as ordinary income when they vest—not when granted, not when you sell.

This is the single most important thing to understand.

What Happens at Vesting

1. Your employer calculates the fair market value (FMV) of the shares
2. That value is added to your W-2 income for the year
3. Your employer withholds taxes (we'll cover how below)
4. You receive the remaining shares

The Receipt: What a $25,000 Vest Actually Looks Like

Don't just think "I'm getting $25,000 in stock." Here's reality for someone in California:

| Line Item | Amount | |-----------|--------| | Gross Value | $25,000 | | Federal Tax (22% supplemental rate) | -$5,500 | | Social Security + Medicare (7.65%) | -$1,913 | | California State Tax (~10%) | -$2,500 | | Net Value (shares you keep) | ~$15,088 |

That's roughly 60% of the headline number. Welcome to RSU taxation.

The 22% Problem: The Withholding Gap

Here's the number that matters most: 22%.

That's the federal supplemental income tax withholding rate. When your RSUs vest, your employer withholds 22% for federal taxes by default.

The problem? If you're making $150K+ salary plus significant RSU vests, you're likely in the 32% or higher federal tax bracket.

22% withheld. 32%+ actually owed. The IRS will want that 10% difference in April.

Action step: Check your paystub after your next vest. Look for the "supplemental" or "RSU" line item. Is it 22%? Now look at your overall federal marginal rate. If there's a gap, you need to plan for it.

For a detailed breakdown of what a $500K RSU grant is actually worth after taxes, see our real-world example.

How Tax Withholding Works: Your Three Options

When RSUs vest, your employer needs to send money to the IRS. You usually have three choices:

1. Sell-to-Cover (Most Common)

Your employer sells just enough shares to cover the tax bill and gives you the rest.

• Example: 100 shares vest at $150 = $15,000. Taxes are ~$6,000. Employer sells 40 shares, you get 60 shares.
• Pros: No out-of-pocket cost, you still get shares
• Cons: You end up with fewer shares

2. Same-Day Sale (Cash Out Everything)

Your employer sells all the shares and gives you cash minus taxes.

• Example: 100 shares vest at $150 = $15,000. Taxes are ~$6,000. You get ~$9,000 cash.
• Pros: Immediate liquidity, no stock concentration risk
• Cons: You don't participate in future stock gains

3. Cash Payment (Keep All Shares)

You pay the taxes out of pocket, keeping all the shares.

• Example: 100 shares vest. You wire $6,000 to cover taxes. You keep all 100 shares.
• Pros: Maximum share ownership
• Cons: Requires cash on hand, increases concentration in company stock

Most employees default to sell-to-cover without realizing they have options. Check your grant agreement and brokerage account settings.

Cost Basis 101: No, You're Not Being Double-Taxed

A common anxiety: "I paid taxes when the shares vested. Now I have to pay taxes again when I sell?"

Here's how it actually works:

At vesting (let's say $150/share):

• You pay ordinary income tax on $150/share
• Your cost basis is now $150/share

When you sell (let's say at $200/share):

• You're only taxed on the gain above your cost basis: $200 - $150 = $50/share
• This $50 is capital gains, not double-taxed ordinary income

If you sell immediately at $150, there's no additional tax—you already paid at vesting.

If the stock drops to $120 and you sell:

• You have a capital loss of $30/share ($150 basis - $120 sale)
• This loss can offset other gains

Key insight: You're never taxed twice on the same money. The vesting tax sets your cost basis. Everything after that is capital gains math.

What Happens After Vesting

Once shares vest, you own them. You have three paths:

Sell Immediately

• No additional tax beyond what you already paid at vesting
• Eliminates company stock concentration risk
• Common strategy: "I already have my paycheck tied to this company. I don't need my investments tied here too."

Hold and Sell Later at a Higher Price

• Pay capital gains tax on the increase above your cost basis
• Short-term gains (sold within 1 year of vesting): Taxed as ordinary income
• Long-term gains (held 1+ year): Taxed at preferential 15-20% rate
• Risk: The stock could go down

Hold and Sell at a Lower Price

• Capital loss that can offset other gains
• Up to $3,000/year can offset ordinary income
• Losses carry forward to future years

The holding period for capital gains treatment starts at vesting, not at grant.

Common RSU Mistakes

1. Treating Unvested RSUs as "Yours"

Your offer letter says "$400K in RSUs." But you don't have $400K. You have a promise that depends on you staying employed and the stock price not collapsing. Plan accordingly.

2. Not Accounting for the 22% Gap

If you're in a higher tax bracket, the default withholding won't cover your bill. Either adjust your W-4, make quarterly estimated payments, or set aside cash from your vest.

3. Over-Concentration in Company Stock

After a few years of vesting, you might have 50%+ of your net worth in one stock—the same company that pays your salary. A bad quarter could hit your job AND your portfolio.

4. Ignoring the Vest Schedule

Some people don't even know when their shares vest. Mark your calendar. Each vest is a tax event and a decision point.

Key Takeaways

• RSUs are taxed as ordinary income at vesting—plan for it
• The 22% federal withholding rate is often not enough if you're a high earner
• Your cost basis is the FMV at vesting—you're not double-taxed
• You have options for how taxes are withheld (sell-to-cover, same-day, cash)
• Diversification matters—don't let company stock dominate your portfolio

Next Steps

Ready to go deeper?

• What's a $500K RSU grant actually worth? — the real after-tax math
• Golden handcuffs calculator — what you're leaving on the table if you quit
• Using RSUs for a house down payment — what lenders won't tell you
• ESPP guide — if you have ESPP too, understand the lookback math

What's Your RSU Tax Liability?

Not sure if you're facing a withholding gap? Tarqeq calculates your actual tax liability based on your income, state, and vesting schedule.

Check your RSU tax liability

References

• IRS Publication 15-A — 22% federal supplemental income withholding rate
• IRS Topic 409 — Capital gains and losses ($3,000 annual deduction limit)
• IRS Topic 751 — Social Security and Medicare withholding rates
• SSA Contribution and Benefit Base — Social Security wage cap ($176,100 for 2025)