Restricted Stock Units (RSUs)

What are Restricted Stock Units (RSUs)?

Restricted Stock Units are one of the most common forms of equity compensation in the tech industry, and they usually show up once a company reaches its later stages of growth. Earlier on, companies tend to grant stock options, but options eventually become impractical. Employees have to come up with cash to exercise them, and incentive stock options (ISOs) carry Alternative Minimum Tax (AMT) risk. RSUs are much more straightforward, and they represent a bona fide value of compensation rather than a purely speculative bet on the stock price.

An RSU is your employer’s promise to deliver shares of stock to you on a vesting schedule as part of your compensation. The grant date is the day the company promises you the RSUs and you accept them, which usually happens when you are hired or promoted. You don’t actually own any shares on the grant date. You own them as each portion vests.

A common vesting schedule is four years with a one-year cliff. The cliff means nothing vests during your first year, and then the entire first year’s worth vests at once on your one-year anniversary. After that, the remaining shares usually vest quarterly.

Example: 1,600 RSUs granted January 1, Year 1, vesting over four years with a one-year cliff. The employee receives:

How do RSUs affect your taxes?

When a company offers you RSUs, it will usually tell you what they’re worth. An offer might say 1,600 RSUs at $20 per share, for an equity award of $32,000. For tax purposes, that dollar figure doesn’t affect you at all. The only number that really matters is the 1,600 shares, because nothing is taxed until the shares vest, and what you’re taxed on is what the shares are worth on the day they vest.

One note if you work for a private company: RSUs there are usually “double-trigger.” That means they need both your time-based vesting and a liquidity event, like an IPO or an acquisition, before they settle. Until both triggers are met, there’s generally nothing to tax. But when the liquidity event does happen, several years’ worth of vested RSUs can settle at once and create a very large tax year.

When those first 400 shares vest, the IRS sees it as if you were paid additional salary and that salary was converted into stock. Say the stock is trading at $22 on vesting day. The IRS says you were just paid $8,800 (400 × $22). That $8,800 is added to your W-2 wages in box 1, and you pay tax on it as ordinary income, along with Social Security and Medicare taxes.

Because you’re paid in shares instead of cash, the withholding is usually handled through your company’s stock plan broker (the firm where you can see your shares, like Morgan Stanley, Fidelity or Schwab). The most common setup is “sell to cover”: the broker sells enough of your newly vested shares to cover the withholding. The federal rate used is almost always the flat 22% supplemental wage rate, regardless of your actual tax bracket. In our example, the broker immediately sells 88 shares and sends $1,936 (22% of $8,800) to the IRS on your behalf. In practice, a few more shares are sold to cover Social Security, Medicare and any state tax, but we’ll keep the example to federal income tax.

This is usually the first surprise for people. They log into their brokerage account on vesting day and see fewer shares than they expected.

What are common RSU tax mistakes that cost you money?

Mistake #1: Not enough tax withheld

The first common mistake is assuming the broker took care of it. Sometimes no shares were sold to cover at all. And even when they were, 22% often isn’t enough. If you’re in a tax bracket above 22%, you will be underpaid. In our example, someone in the 37% bracket owes about $3,256 on that $8,800 vest, so the 22% withholding leaves them about $1,320 short on this one vest alone. Repeat that every quarter and the gap grows quickly.

That shows up as a surprise tax bill when you file, but the bigger issue is the underpayment penalty. The IRS expects tax to be paid throughout the year, through withholding or quarterly estimated payments. When you fall short, the IRS charges a penalty on the shortfall at the federal short-term rate plus 3%, which works out to 7% a year as of the fourth quarter of 2026. It runs from each quarterly due date until the tax is paid. So if the $1,936 from our example was never withheld and stayed unpaid for a full year, that’s about $136 on top of the tax itself, and most people have no idea they did anything wrong. I have seen people hit with more than $10,000 in penalties from under-withholding on their RSU vests.

The good news is there are safe harbors. You generally won’t owe a penalty if your withholding and on-time estimated payments cover at least 90% of this year’s tax, or 100% of last year’s tax (110% if last year’s AGI was over $150,000). If you know your RSU withholding is running short, you can make estimated payments or increase the withholding on your regular paycheck. Withholding is treated as if it were paid evenly throughout the year, so even bumping it up late in the year can help.

Mistake #2: Paying tax twice on the same income

The second common mistake is paying tax twice when you sell your RSU shares, and once again the broker reporting is usually the culprit. Each year your broker sends you Form 1099-B, which reports all the sales in your account. For RSU shares, the 1099-B often shows a cost basis of $0, or leaves it blank, because there’s no purchase on record. If you (or your tax software) take that at face value, you will pay capital gains tax on money you already paid ordinary income tax on through your W-2.

Back to our example. You received 400 shares, the broker sold 88 to cover taxes, and you kept 312. You hold those 312 shares for more than a year, the stock rises to $25, and you sell them for $7,800.

• If the cost basis is reported as $0, your long-term capital gain is $7,800. At a 20% rate, that’s $1,560 of tax.
• Your correct cost basis is $22 per share, the value you were already taxed on when the shares vested. Your real gain is $3 per share, or $936, and the tax is $187.20.

If you put the 1099-B into TurboTax and it takes the $0 cost basis, you will have paid $1,372.80 more in tax than necessary. Some brokers send a supplemental statement with the adjusted cost basis, but not always, and I’ve seen them get the vesting-date value wrong. The fix is to report the correct basis on Form 8949 and keep your vesting confirmations so you can support it.

RSUs are the simplest type of equity compensation to understand, but simple doesn’t mean the default settings are right for you. Knowing what your broker is withholding and what it’s reporting is where most of the money is saved.

This article is for general educational purposes and is not tax advice for your specific situation. Figures reflect 2026 federal tax rules.