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How Are Restricted Stock Units (RSUs) Taxed?
What to know before your RSUs vest and before you sell.
June 21, 2026
What to know before your RSUs vest and before you sell.
June 21, 2026
RSUs don’t actually belong to you until they “vest,” which means they get transferred to you without restrictions. It’s important to remember that you owe taxes on RSUs when they vest and on capital gains when you sell shares, so they might require more careful tax planning than your regular paycheck.
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RSUs are company shares that your employer promises to give you at a future date; they commonly get offered when you get hired, promoted, or given a raise. But to receive your RSUs, which is known as vesting, you must first meet certain conditions that differ based on how the RSUs are structured:
Time-based RSUs: Your RSUs vest once you work at the company for a certain amount of time – awards may be spread out over several years.
Performance-based RSUs: Your RSUs vest once specific goals are met, such as when you complete a project, meet a sales quota, or the company hits certain growth targets.
Restricted Stock Units (RSUs) are essentially a bonus paid out in company stock. It’s helpful to think of RSUs this way, because that’s exactly how they operate. Just like a cash bonus, RSUs have specific requirements you must meet before they pay out.
RSUs have no actual value until they are vested, at which time you own the shares free and clear. There are several ways that RSUs can vest:
Time-based vesting: You earn a portion of your RSUs at regular intervals (e.g., monthly or quarterly) in equal increments over time.
Cliff vesting: You meet vesting requirements to receive a large chunk of your RSUs all at once. Then, you may continue to earn RSUs gradually or at regular intervals.
Performance vesting: You receive RSUs once you or the company reaches predefined goals – such as when the company hits revenue targets or you meet specific performance metrics.
Hybrid vesting: You must remain employed at the company for a specific amount of time and meet certain performance-based goals to receive your RSUs.
For example, let’s say your RSUs are set up on a four-year time-based schedule with a one-year cliff. You receive 25% of your RSUs once you complete a full year of employment. After that, the remaining 75% of your RSUs vest in equal monthly increments over the next three years until you are 100% vested.
“When RSUs vest, they are taxed as compensation income, meaning federal ordinary income, state, local, Social Security, and Medicare taxes may all apply … the tax withholding rules that apply to cash bonuses apply to RSUs,” explains CFP®, RICP®, at Authentic Life Financial Plannng.
You don’t owe taxes on RSUs until they vest. The RSUs you receive are treated as ordinary income and are subject to federal income tax, state income tax, and FICA (Social Security and Medicare).
The good news is that your employer can make it easy for you by automatically withholding taxes from your RSU distribution, similar to how taxes get taken out of your paycheck. The IRS requires companies to withhold 22% of supplemental wages (including RSUs) for federal income tax, which can help you avoid a large tax bill when you file your tax return.
There are several ways to cover the tax bill when your RSUs vest, and your company may let you choose which tax withholding method to use:
Sell-to-cover: The broker automatically sells 22% of your vested shares immediately to cover your tax bill, then delivers the rest to you.
Net settlement: The company withholds your shares itself to cover tax obligations and delivers the rest to your brokerage account.
Cash-to-cover: You pay the tax obligations using cash out of your own pocket.
If you have the option to choose how you cover your RSU tax obligations, you may want to pick cash-to-cover and keep more shares for yourself if you believe the stock will increase significantly over time. If it’s more important to retain more cash now, choose the option where you pay taxes using a portion of your shares.
“Companies automatically withhold taxes on RSU vests at the supplemental wage rate. For federal taxes, this flat rate is 22% (up to $1 million of income, and 37% above that). However, that 22% rate may or may not be right for you. For some tech professionals, the supplemental withholding rate is too high; for many high-earning leaders, it is way too low,” cautions Ausen.
Bestie insight: The 22% your employer automatically withholds from your RSUs may not be enough to cover your tax liability if you’re in a higher tax bracket. To avoid a large tax bill, you can make quarterly estimated tax payments to the IRS or adjust your withholding.
If you sell any of your RSUs, you will owe taxes on the capital gains (the profit you make from the sale). If you sell stock for less than the value it was at vesting, the sale is a loss and you do not owe taxes on it.
When you eventually sell RSUs that have previously vested, any growth from the vest date forward is taxed as a capital gain … if you hold your RSUs for more than one year past their vest date, the growth is taxed at long-term capital gains rates, which are lower than federal ordinary income tax rates.
Whether it’s a short-term sale or a long-term sale determines your tax rate, and is dependent upon how long you held the stock:
Type of sale | Holding period | Tax rate |
Short-term sale | One year or less | Income tax rate of 10% to 37%, depending on your tax bracket |
Long-term sales | Over one year | Capital gains tax rate of 0% to 20%, depending on your tax bracket |
Bestie Insight: Oftentimes, your brokerage is not required to report the cost basis of your RSUs to the IRS, which means the 1099-B form you receive to complete your tax return may list a cost basis of $0. You must double-check your 1099-B to ensure it reflects the fair market value of the RSUs when they vested. If it shows $0, the IRS will think every dollar of your RSU sale is pure profit, even though you already paid income tax on the fair market value. Check the fair market value of your RSUs when they vested and report the correct value on your tax return to avoid getting taxed twice.
Use the following strategies to manage your RSU tax obligations:
If you know you will owe more than 22% on your vested RSUs (such as when receiving RSUs would push you into a higher income tax bracket), you may want to adjust the withholding for your paycheck. Paying more out of your paycheck now will reduce your tax bill when you file your return. Alternatively, you can make quarterly estimated tax payments to the IRS based on how much more you think you’ll owe on your tax return.
“Under-withholding is the most common reason people with RSUs get hit with a surprise tax bill in the spring. Because the default flat withholding is only 22%, many tech executives end up facing an unexpected five- or six-figure tax bill because they were actually in a higher tax bracket,” details Ausen.
Short-term RSU sales get taxed at a higher income tax rate, while long-term RSU sales get taxed at a lower capital gains tax rate. To access the lower tax rate, you need to hold on to your shares for more than one year before you sell.
You can use capital losses from other investments to offset the gains you receive from selling your RSUs, reducing your tax bill. Or you can sell your RSUs at a loss to offset the capital gains you received from other investments.
Reduce your overall tax bill by making pre-tax contributions to accounts like a 401(k), traditional IRA, or flexible spending account (FSA). This can help offset the increased income you receive when your RSUs vest.
If you work remotely, there may be additional ways to trim your taxable income in a high-vesting year. Read more on tax deductions for remote workers.
If you plan to make any charitable contributions, do it in the same year that your RSUs vest. This allows you to claim a tax deduction and reduce your overall tax bill.
RSUs can be an extremely valuable form of compensation for high performers and long-term employees. But navigating RSUs requires balancing their value against your tax liability. You need to remember that you owe taxes when your RSUs vest, and the 22% default withholding might not be enough to cover your tax bill. You also owe taxes on any capital gains you realize when you sell RSUs.
Ultimately, maximizing the value of your RSUs comes down to proactive planning. You may want to adjust your withholding, keep your RSUs long enough to access lower capital gains tax rates, and use strategies to reduce your overall taxable income. Make sure you’re considering the tax implications of your RSUs before they vest and before you sell. C
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Expert Oversight: This guide was authored by Brian Acton, a seasoned personal finance journalist at BestMoney.com who specializes in loans and debt consolidation. His work has appeared in The Wall Street Journal, TIME, USA Today, MarketWatch, Inc. Magazine, HuffPost, and other notable outlets..
Expert Contributors: We interview third-party consumer advocates and debt specialists quoted throughout this article to give a balanced view of the risks and rewards. This article features insights from Trevor Ausen, a Certified Financial Planner (CFP®) for Authentic Life Financial Planning.
The amount of tax you owe on vested RSUs depends on your income and tax bracket, as they get taxed as ordinary income. You will also owe tax on any capital gains you realize when you sell your RSUs – how much depends on if it’s a short-term sale or long-term sale.
You do not get double-taxed on RSUs. You get taxed on the fair market value of the RSUs when you vest, then you get taxed on the gains you receive when you sell an RSU. But you need to make sure you are reporting the correct cost basis on your tax return, so verify that your 1099-B is correct (it may incorrectly show a cost basis of $0).
Your employer is required to withhold 22% of the value of your RSUs when they vest to cover taxes. The actual rate you pay to the IRS is based on your tax bracket for ordinary income.
Brian Acton is a seasoned personal finance journalist at BestMoney.com who specializes in loans and debt consolidation. His work has appeared in The Wall Street Journal, TIME, USA Today, MarketWatch, Inc. Magazine, HuffPost, and other notable outlets.
