What Is an RSU? How Restricted Stock Units Work

A restricted stock unit (RSU) is your employer’s promise to give you one share of company stock, or its cash value, once you meet the vesting conditions, usually by staying employed for a set time. You pay nothing for it, and nothing is yours until it vests.

• At vest, the shares’ market value becomes wages on your W-2, taxed like salary whether you sell or not.
• Withholding is usually a flat 22% for federal income tax, which falls short for anyone in a higher bracket.
• Your cost basis is that vest-day value, and getting it wrong on your return is how RSU holders end up paying tax on the same income twice.

What is an RSU?

An RSU is a bookkeeping entry, not a share. Your employer grants you a number of units, each tied to one share, and promises to deliver the shares (or, under some plans, their cash value) when the units vest. Until then you hold no stock: no vote, no dividends, nothing you can sell.

That is the difference from restricted stock, where the company hands you actual shares on day one that you can forfeit. Because no property changes hands at grant, the IRS’s equity compensation audit guide treats RSUs as deferred compensation rather than property under Section 83, so the 83(b) election that lets founders pay tax early on restricted stock is not available for an RSU. Nino’s guide to the 83(b) election covers the stock it does apply to.

Three dates matter:

At most public companies, vesting and settlement happen on the same day or within a few days, so people use the words interchangeably. At private companies they can be years apart.

How does RSU vesting work?

Most grants vest on a schedule tied to time at the company. A common pattern for a new-hire grant is four years with a one-year cliff: nothing vests for the first twelve months, a quarter vests at the anniversary, and the rest vests quarterly or monthly after that. Refresh grants and promotion grants usually start their own schedules, so after a few years you may have three or four grants vesting on different dates.

If you leave, the grant agreement controls, but the usual rule is that unvested units are forfeited on your last day. That is why the next vest date weighs so heavily in the timing of a job change, and why a mid-year move can leave RSUs vesting at two employers in the same year, each withholding as if it were your only job.

Double-trigger RSUs at private companies

Private companies usually add a second condition. A double-trigger RSU needs both time served under the schedule and a liquidity event, usually an IPO or an acquisition, before it settles. The IRS guide says stock-settled RSUs come under Section 83 only when the stock is actually transferred, so a private-company employee can watch units “vest” for years without owing income tax on them.

The catch arrives all at once. When the company goes public or is sold, every unit that has met its time condition settles together, and their full value is wages in that one year. Four years of equity can land on a single W-2. In a sale, the merger agreement decides whether units are cashed out, converted or accelerated, which What Happens to Your Stock Options and RSUs in an Acquisition walks through. Above $1 million of supplemental wages from one employer in a year, federal withholding jumps to a mandatory 37% on the excess under IRS Publication 15, but the first $1 million can still be withheld at 22%. And if the shares are locked up after an IPO, you may owe tax on value you can’t yet sell. Read your grant’s liquidity-event deadline and post-termination terms too: they decide what happens to time-vested units if you leave before the event.

How are RSUs taxed?

As wages. On the day the shares are delivered, their fair market value is compensation income, reported on your W-2 alongside salary, and subject to federal and state income tax plus Social Security and Medicare. Selling or holding doesn’t change that. The tax is owed because you were paid, and you were paid in stock.

Anything after that is an ordinary investment. Your cost basis in the shares is the value you were taxed on, and your holding period starts at vest. Sell above that value and the difference is a capital gain; below it, a capital loss. Hold for more than a year from vest and the gain is long-term under IRS Publication 550. A falling stock price never reverses the wage income: if shares taxed at $50 sell for $30, you have a $20 capital loss per share, not $20 less salary.

That gives you the most useful way to think about a vest. Selling on vest day leaves you in exactly the tax position of a cash bonus of the same size, because the sale price equals your basis and there is no gain to tax. Holding the shares is the same as taking that bonus and using it to buy your employer’s stock. There’s no tax reason to hold “until it’s capital gains”; the wage tax is already settled either way.

A vest-day example

A single filer earns a $316,100 salary, so with the 2026 standard deduction of $16,100 their taxable income is $300,000 before any equity. In November, 2,000 RSUs vest at $50 a share. By then their salary has passed both the $184,500 Social Security wage base and the $200,000 point where employers start withholding the 0.9% Additional Medicare Tax (IRS Publication 15). Their plan uses sell-to-cover.

The $100,000 sits between $300,000 and $400,000 of taxable income, entirely inside the 2026 single 35% bracket, which runs from $256,225 to $640,600 (IRS 2026 inflation adjustments). The vest statement looks like a quarter of the award went to taxes, and still $13,000 of federal tax is unpaid, before any state tax. Try your own numbers in the RSU tax calculator.

Why is the withholding on RSUs too low?

Because 22% is a withholding method, not your tax rate. Payroll treats a vest as supplemental wages, the same category as a bonus, and Publication 15 lets employers withhold federal income tax on it at a flat 22%. The 37% rate kicks in only on supplemental wages above $1 million from the same employer in a calendar year. Neither number looks at your bracket, your spouse’s income, or your other vests.

For 2026, the 32% bracket starts at $201,775 of taxable income for a single filer and $403,550 for a married couple filing jointly. Above those lines, each vest is under-withheld by 10 to 15 cents on the dollar, and the shortfall adds up across four quarterly vests and every grant you hold. RSU tax withholding breaks down what comes out of a vest and how sell-to-cover works, and RSU tax planning covers projecting the year so the gap is paid through extra W-4 withholding or estimated payments rather than discovered in April.

Why does your 1099-B show the wrong cost basis?

When you sell RSU shares, your broker sends a Form 1099-B. For shares that came from an employer plan, the basis box is often $0 or blank, because the wage income was reported by your employer on your W-2, not by the broker. If you or your tax software take that number at face value, the return taxes the whole sale price as a capital gain, including the vest-day value you already paid tax on as wages.

In the example, say the 1,513 kept shares sell the next March at $55. The proceeds are $83,215 and the real gain is $7,565. Reported with a $0 basis, the gain shows as $83,215, and $75,650 of income gets taxed twice: about $29,350 of extra tax at 35% plus the 3.8% net investment income tax, if the next year looks like this one.

The fix is on Form 8949. Take the correct basis from your stock plan’s supplemental statement or vest confirmations. If the broker reported a basis to the IRS, enter that wrong number in column (e), put code B in column (f), and add the correction in column (g); if it reported none, enter the correct basis in column (e). Keep those records for every lot you hold.

What happens to RSU taxes when you move states?

The state you worked in while a grant was vesting can keep a claim on it after you leave. States generally source RSU income to where you worked while you earned it, and California spells the rule out in FTB Publication 1004: a nonresident owes California tax on the wage income from a vest “to the extent services were performed in California from the grant date to the vesting date.”

Say you were granted RSUs in California, moved to Texas, and worked 700 of the 1,000 workdays between grant and vest in California. Then 70% of that vest is California income, filed on a nonresident return, even though Texas has no income tax and you no longer live in California. If you’re a California resident on the vest date, California taxes all of it, with a possible credit for tax another state charges on the same income. Your employer’s payroll may not track this split, so the withholding can be wrong in both directions. Gain on the shares after vest is a separate question, generally taxed by the state you live in when you sell. Nino’s page on moving states covers part-year returns and splitting equity by workdays, and Multi-State Taxes runs the numbers for a California-to-Texas move.

RSUs vs stock options

An option is the right to buy shares at a fixed strike price, so it’s worth something only when the stock trades above the strike, and exercising it costs cash. An RSU has no purchase price and is worth something whenever the stock is. Options are usually taxed at exercise (or, for ISOs, possibly through the alternative minimum tax), while RSUs are taxed at vest. RSUs vs. stock options compares the two at the same stock prices, and when to exercise stock options covers the timing decisions options add.

What should you do with vested RSUs?

Start from the bonus framing: if your employer had paid this vest in cash, would you spend it on company stock? For most people the honest answer is “not this much,” because their salary, their unvested grants, and often their bonus already ride on the same company. A bad year for the company can cut the stock price and your job security at the same time.

Selling at vest diversifies with almost no tax cost. Shares you’ve already held and that have grown are a harder call, because selling them realizes a gain. If you give to charity, donating lots held more than a year instead of cash avoids that gain, as Donor-Advised Funds shows. Concentrated stock position covers how to size the exposure and sell down across tax years. Should you sell employer stock when it vests? weighs the tax reserve, concentration, and cash needs together, and capital gains tax when selling company stock shows what a sale actually nets. If you’re an insider at a public company, trading windows and blackout periods decide when you can sell at all, so plan sales around them.

Where Nino fits

RSU mistakes happen in two places: payroll under-withholds during the year, and the basis gets reported wrong at filing. On every Nino Advisor plan, a dedicated CPA and Financial Planner team projects each vest against your household’s full-year tax, tells you what to change on your W-4 before the gap grows, helps you decide how much company stock to keep, and prepares your return with the RSU basis corrected. Nino is a fiduciary to Advisor plan customers and charges a flat fee, never a percentage of assets; it doesn’t manage your investments. Plans start at $3,600 a year; see plans and pricing and how Nino plans equity compensation. If you’re weighing separate providers instead, what a CPA plus a financial advisor costs with RSUs lays out the comparison.

Book a free consultation before your next vest.