Restricted stock units are one of the most common forms of equity compensation, especially in tech. They're also one of the most commonly misunderstood — not because the rules are exotic, but because the way they're withheld can leave even careful people with a surprise tax bill. Here's how RSU taxation actually works, and where the trap is.
RSUs are taxed as ordinary income at vesting
When your RSUs vest, the IRS treats their full market value on that day as ordinary income — exactly like salary or a cash bonus. If 500 shares vest at $200 each, that's $100,000 of ordinary income added to your W-2 for the year. It's subject to federal income tax, Social Security, Medicare, and state income tax, all in the year of vesting. This happens whether or not you sell the shares.
The 22% withholding trap
Here's where people get caught. The IRS lets employers withhold federal tax on supplemental wages — including RSUs — at a flat 22% (rising to 37% on amounts over $1 million in a year). Many employers use that flat 22% by default. The problem: if your salary already puts you in the 32% or 35% marginal bracket, withholding only 22% on your RSU income means not enough tax is being taken out.
That gap doesn't vanish. It shows up as a balance due when you file your return — sometimes a very large one, and sometimes with an underpayment penalty on top.
A concrete example
Say you earn a $300,000 base salary and $100,000 of RSUs vest during the year. Your employer withholds 22% on the RSUs — that's $22,000. But because that $100,000 stacks on top of your salary, it's actually taxed at your marginal rate, around 35% — roughly $35,000. The difference, about $13,000, is what you'll owe at filing. Across multiple vesting events in a year, the shortfall multiplies.
What about Social Security and Medicare?
RSU income is wages, so payroll taxes apply too. Social Security only applies up to the annual wage base — if your salary already exceeds it, your RSUs owe no additional Social Security. Medicare's 1.45% applies to every dollar, and high earners pay an extra 0.9% above the threshold. State income tax depends on where you live; in no-income-tax states, your RSUs escape state tax entirely.
How to avoid the surprise
- Estimate the gap in advance. Compare your true marginal rate to the 22% withheld and know the dollar difference before filing season.
- Set the money aside. Park the shortfall in savings so it's ready when the bill comes.
- Increase withholding or pay estimates. Adjust your W-4 or make quarterly estimated payments to close the gap and avoid penalties.
See your exact gap
The fastest way to know your number is to run it. Our RSU tax calculator stacks your RSU income on your salary, applies your real marginal federal and state rates plus FICA, and shows the exact withholding gap — the amount you may owe at filing.
The reason this trap exists comes down to marginal vs. flat rates. If that distinction is fuzzy, our guide on understanding tax brackets makes it concrete.
Vesting income and capital gains are two separate events
One of the biggest sources of RSU confusion is treating "getting the shares" and "selling the shares" as a single taxable moment. They are two distinct events with two distinct tax treatments. At vesting, the full market value becomes ordinary income, as described above. From that moment, you own ordinary shares with a cost basis equal to that vesting-day value. When you later sell, you only owe tax on the change in price since vesting — as a capital gain or loss.
Suppose 100 shares vest at $200 each. That $20,000 is ordinary income now, and your basis is $200 per share. If you sell months later at $230, the taxable gain is only the $30 per share of appreciation — $3,000 — not the whole $23,000. Sell at $180 instead and you have a $2,000 capital loss, even though you were taxed on the full $200 value at vesting. Forgetting this leads people to either double-count their income or mis-report basis and overpay.
The hold-or-sell decision
Because the vesting-day value is already taxed as income, holding the shares afterward is, in effect, a decision to invest that money in your own company's stock. A useful way to frame it: if your employer handed you the cash equivalent instead of shares, would you choose to buy that much of your company's stock with it? For many people the honest answer is no — they'd prefer a diversified mix. That's the logic behind the common "sell at vest" approach, which converts the shares to cash so the money can be spread across other investments. There's no universally correct choice; the point is to make it deliberately, rather than holding by default and ending up heavily concentrated in one stock.
Holding also reintroduces the short-term vs. long-term distinction. Sell within a year of vesting and any gain is taxed as a short-term capital gain — at ordinary rates. Hold longer than a year and the gain may qualify for lower long-term rates. That difference applies only to the gain since vesting, never to the original vesting income.
Common RSU mistakes that cost money
- Assuming withholding equals what you owe. The flat 22% (37% on very large amounts) is a default supplemental rate, not your actual rate. Treat it as a down payment, not the final bill.
- Forgetting state tax. If you vest in a high-tax state, the state portion can be substantial and is also under-withheld in many setups.
- Double-paying at sale. Brokers sometimes report a cost basis of $0, which would tax your already-taxed vesting income a second time. Confirm your basis equals the vesting-day value.
- Ignoring estimated payments. A large shortfall can trigger an underpayment penalty even if you pay in full at filing. Adjusting withholding or making quarterly estimates avoids it.
When to bring in a professional
A single modest vesting event is usually manageable on your own once the withholding gap is clear. Consider a CPA or tax advisor when RSUs are a large share of your pay, when you have multiple vesting dates across the year, when you're juggling RSUs alongside stock options or an ESPP, or when you move between states mid-year. Those are exactly the situations where the gap compounds and where a small planning step early can prevent a large, penalty-laden surprise at filing.
How RSUs differ from stock options
People often lump all equity compensation together, but RSUs and stock options work differently in ways that matter at tax time. An RSU becomes yours simply by vesting — there's nothing to buy, and it has value as long as the stock has any value at all, which is why it's taxed as income at vesting. A stock option, by contrast, gives you the right to buy shares at a set "strike" price; it's only worth exercising if the market price is above that strike, and the tax treatment depends on whether it's a non-qualified option or an incentive stock option. The practical upshot: RSUs are simpler and almost always retain some value, while options carry more upside, more risk, and more complex tax rules. If your compensation mixes both, the planning question of which to hold and which to sell gets more involved — another signal it may be time for professional guidance.
Educational information, not tax advice. RSU and withholding rules vary; consult a CPA for your situation.