How Are RSUs Taxed? A Plain-English Guide for US Employees
Your RSUs vest on a Tuesday. By Wednesday, you’re staring at a statement that shows fewer shares than you counted on, and a paycheck that looks oddly thin. Sound familiar? That’s the tax bill, showing up before you’ve sold anything.
So, how are RSUs taxed? Twice, in two different ways. You owe ordinary income tax when the shares vest, then capital gains tax when you sell, but only on whatever the stock did after vesting. Get that split straight and most of the confusion goes away.
In this guide, you’ll learn
- What the IRS taxes at grant, at vesting and at sale
- Why your employer’s withholding can leave you short
- How cost basis works and how to stop paying tax on the same dollars twice
- When a sale counts as short-term or long-term
- How state taxes, private-company RSUs and dividend equivalents change things
- How to think through the sell-or-hold decision
Table of Contents
- What RSUs Really Are
- The Three Tax Moments
- RSU Tax at Vesting
- Tax When Selling RSU Shares
- Are RSUs Taxed Twice?
- Reporting RSUs on Your Return
- State and Local Taxes
- Special Cases
- RSUs Compared With Other Equity Pay
- Sell or Hold?
- Who This Guide Is Not For
- Common Mistakes to Avoid
- Quick Glossary
- Key Takeaways
- FAQs
- Conclusion
- References
What RSUs Really Are
Think of an RSU as an IOU from your employer. Work through the vesting schedule, and shares show up. A common setup is a quarter of the grant each year for four years, though plans vary a lot.
Before a batch vests, you hold nothing. No shares in your account, no vote, no dividends in most plans. That’s why the tax code treats the grant as a non-event. The IRS looks at what you’ve received, and an unvested unit hasn’t been received yet.
RSUs sit in the same family as stock options and ESPPs, but each one is taxed differently, and mixing them up is how people end up with surprise bills. If you want to test your own numbers as you read, the RSU Tax Calculator will do the arithmetic.
The Three Tax Moments
Every RSU has three dates that matter. Only two of them cost you money.
| Moment | Taxable? | What happens |
|---|---|---|
| Grant | No | Nothing is due. You hold a promise, not shares. |
| Vesting | Yes | Ordinary income, FICA, and state or local income tax where they apply |
| Sale | Yes, if there’s a gain or loss | Capital gain or loss, short-term or long-term, depending on how long you held |
Important: Vesting is taxable even if you never sell a share. The tax is due on what you received, and you still have to find the cash to pay it.
RSU Tax at Vesting
When RSUs vest, the market value of the shares that day counts as pay. Your employer adds it to your wages, and it lands on your Form W-2 as ordinary income. Same rates as your salary.
Take an example. 200 RSUs vest when the stock closes at $40. That’s $8,000 of income (200 x $40). Keep the shares or dump them the same afternoon, the $8,000 is taxable either way.
Social Security and Medicare
Vesting income gets hit with FICA too. The Social Security part only applies up to a yearly wage base that the government adjusts, so high earners may stop paying it midyear. Medicare has no cap.
Above a certain income level, an Additional Medicare Tax kicks in as well. The thresholds depend on your filing status and change over time, so check IRS.gov for the current ones instead of trusting an old blog post (including this one, a year from now).
The Withholding Gap
Most employers withhold federal income tax on RSUs using a flat supplemental wage rate. For plenty of people, that rate sits below their real marginal rate. Supplemental wages over $1 million in a year are treated differently, with a higher mandatory rate.
Here’s the catch. The shortfall doesn’t vanish. It comes due when you file, as a balance owed or a smaller refund. State withholding can fall short the same way.
Note: If you get big RSU grants, think about adjusting your Form W-4 or making quarterly estimated payments so you avoid an underpayment penalty. A tax professional can help you size it.
How the Tax Gets Paid
Companies cover the withholding in a few different ways. Your plan documents will say which one you have.
| Method | How it works | What you end up with |
|---|---|---|
| Sell-to-cover | The broker sells enough vested shares to pay the tax | The leftover shares, plus a 1099-B for the shares sold |
| Net share settlement | The company holds back shares worth the withholding and sends you the rest | Fewer shares, usually no sale shown for the held-back portion |
| Cash payment | You pay the withholding yourself | All of the vested shares |
Whichever method your company uses, the taxable income is the same. Only the way the bill gets paid changes.
Tax When Selling RSU Shares
After vesting, the shares are yours, and a second tax clock starts. Sell them and you report a capital gain or loss. The gain is your sale price minus your cost basis.
Cost Basis
Your basis is the market value on the vesting date. It’s the same number that was already taxed as income, and that’s the whole point. It keeps those dollars from being taxed again as a gain.
Back to our example. Your basis is $40 a share, or $8,000 total. Sell at $52 and you have a $12 gain per share, or $2,400.
Short-Term vs Long-Term Gains
Your holding period starts the day after vesting. Not at grant. Plenty of people get this wrong.
Sell within one year and the gain is short-term, taxed like regular income. Hold more than a year and it becomes long-term, taxed at the lower federal capital gains rates of 0%, 15% or 20%, depending on your taxable income. Higher earners may also owe the 3.8% Net Investment Income Tax. And some states tax gains as ordinary income no matter how long you held.
Four Sale Scenarios
Same 200 RSUs, same $40 vesting price, same $8,000 of income in every row. Only what you do next changes. These numbers are illustrations, not tax calculations.
| Scenario | Sale price | When sold | Gain or loss | Treatment |
|---|---|---|---|---|
| A. Sell on vest day | $40 | Same day | $0 | No real capital gain. Income tax already handled. |
| B. Stock falls, sell early | $35 | 5 months later | -$1,000 | Short-term capital loss |
| C. Stock rises, sell early | $52 | 6 months later | +$2,400 | Short-term gain, ordinary rates |
| D. Stock rises, hold | $52 | 14 months later | +$2,400 | Long-term gain, lower rates |
Scenario A is why so many people sell the moment shares land. It locks in the value that was already taxed and removes the price risk. Scenario D rewards patience, but you only get that reward if the stock cooperates.
Are RSUs Taxed Twice?
They shouldn’t be. Double taxation on RSUs is a paperwork problem, not a rule. The vesting income and the later gain are different slices of money, and they shouldn’t overlap.
The trouble usually starts on Form 1099-B. Brokers often list a cost basis of zero for RSU sales, or a basis that leaves out the vesting income. Copy that onto your return and you’re reporting the full sale price as profit.
Run the numbers. You sell 200 shares at $52 for $10,400, and the 1099-B shows a $0 basis. Report it as is and you’d claim a $10,400 gain. But $8,000 of that was already taxed as wages. Your true gain is $2,400.
Important: Check every RSU line on your 1099-B. Match the basis to your vesting income on your W-2 and your equity plan statements. If it’s wrong, fix it on Form 8949.
Reporting RSUs on Your Return
You’ll deal with four documents. Your W-2 shows vesting income in the wages box, and it’s included in the Social Security and Medicare wage boxes as well. Form 1099-B reports your sales. Form 8949 lists each sale and lets you correct a bad basis. Schedule D totals it all up.
When the broker’s basis is off, you enter an adjustment on Form 8949 with the right code. Hang on to your vesting confirmations as backup.
One more thing. You won’t get Form 3921 or 3922 for RSUs. 3921 covers incentive stock options, and 3922 covers employee stock purchase plans.
State and Local Taxes
Federal rules are the same nationwide. State rules aren’t. A few states have no income tax at all. Others tax RSU income and gains at full ordinary rates, and some cities pile on a local tax.
Moving makes it messier. Say you earned RSUs while working in one state and they vest after you relocate. Both states may want a piece. Many split the income by where you worked between grant and vesting, but the formulas vary. If this is you, find a tax pro who knows both states.
Special Cases
Double-trigger RSUs at private companies
Pre-IPO companies often require two things before your units vest: time served, and a liquidity event such as an IPO or acquisition. The tax hits when both boxes are checked. Years of accumulated units can vest at once, which means a large income event on a day when you may not be able to sell yet. If your company is heading for an IPO, talk to a tax professional before the date arrives, not after.
Dividend equivalents
A few RSU agreements pay you the equivalent of dividends while your units are still unvested. Don’t expect the friendly qualified dividend rate here. These payments are generally treated as wages.
Leaving, layoffs and retirement
If you quit, unvested units are usually gone. Some plans make exceptions for retirement, layoffs or a company sale and speed up vesting. The tax rules don’t change, they just apply sooner. Read your award agreement, because it decides.
RSUs Compared With Other Equity Pay
Next to options, RSUs are the easy ones. This table shows how the main equity plans stack up.
| Plan type | Tax at grant | Tax at vest or exercise | Special rules |
|---|---|---|---|
| RSUs | None | Ordinary income at vesting | No 83(b) election. Doesn’t trigger AMT. |
| Non-qualified stock options (NSOs) | Generally none | Ordinary income on the spread at exercise | Employer withholding applies |
| Incentive stock options (ISOs) | None | No regular tax at exercise, but possible AMT | Form 3921, holding period rules |
| ESPP | None | Depends on plan type and holding periods | Form 3922 |
| Restricted stock awards | Possibly, with an 83(b) election | Ordinary income at vesting without an election | 83(b) election has a strict deadline |
RSUs don’t transfer shares at grant, so an 83(b) election generally isn’t available for them. Restricted stock awards are a different story. For option math, try the Employee Stock Option Calculator.
Sell or Hold?
The tax code can’t tell you whether to sell. All it can do is put a price tag on each choice. A few questions help you weigh it.
- How much of my net worth already depends on this one company?
- Do I have cash set aside for the withholding gap?
- Would I buy this stock today with the cash value of these shares?
- Does waiting past a year meaningfully cut my tax?
- Am I close to a higher bracket or income threshold this year?
- Do trading windows or blackout periods limit when I can sell?
If your answer to question three is no, selling at least some of the position deserves a hard look. The Share Incentive Plans Calculator can help you compare outcomes side by side.
Who This Guide Is Not For
This guide is about US federal rules for employees paid in RSUs. If you’re a nonresident, working across borders, or holding shares through a trust or foreign plan, the picture gets more complicated, with tax treaties, foreign tax credits and extra reporting. Go to a specialist for that.
Common Mistakes to Avoid
- Assuming withholding covers it all. The flat rate can sit below your real bracket, leaving a bill at filing time.
- Trusting the 1099-B basis. A zero or partial basis is the classic route to double taxation. Verify every line.
- Counting the holding period from grant. Long-term treatment starts after vesting.
- Sitting on too much company stock. A price drop can wipe out your gains on top of income you already paid tax on.
- Forgetting about state tax after a move. Two states can each claim part of your vesting income.
- Overlooking the wash sale rule. Sell at a loss, then acquire substantially identical shares within the restricted window (new vesting counts), and the loss may be disallowed for now.
Quick Glossary
- Vesting date: the day your RSUs convert into real shares.
- Fair market value (FMV): the share price used to put a dollar figure on your vesting income.
- Cost basis: the starting point for measuring gain or loss. For RSUs, that’s the FMV at vesting.
- Supplemental wages: bonuses, RSU income and similar extras, which get their own withholding method.
- Holding period: how long you keep the shares after vesting. It decides short-term versus long-term treatment.
Key Takeaways
- Nothing is taxed at grant. Vesting is when ordinary income tax arrives.
- FICA applies to the vesting value, and your state may want a cut too.
- Withholding at vesting often falls short, so set cash aside.
- Your cost basis is the share price on the vesting date.
- Held a year or less after vesting, a gain is short-term. Longer, it’s long-term.
- A wrong 1099-B basis is the usual cause of double taxation. Fix it on Form 8949.
- Tax is only one input. How much of your wealth rides on one employer matters just as much.
FAQs
When do I pay taxes on RSUs?
Twice, in effect. Income tax comes at vesting, usually through payroll withholding. Capital gains tax comes later, in the year you sell.
Are RSUs taxed when they are granted?
No. At grant you only hold a promise, so there’s nothing to tax yet.
Are RSUs taxed twice?
They shouldn’t be. You’re taxed on the vesting value as income, then only on growth after that as a capital gain. When people do get hit twice, it’s nearly always because the 1099-B showed the wrong basis and nobody caught it.
What is the tax rate for RSUs?
There isn’t one rate. Vesting income is taxed at your ordinary federal rates, plus FICA and any state or local tax. After vesting, short-term gains follow ordinary rates and long-term gains get the lower capital gains rates.
Do I pay Social Security and Medicare taxes on RSUs?
Yes, because the vesting value counts as wages. Social Security tax stops after you reach that year’s wage base, while Medicare keeps going.
What happens if I don’t sell my RSU shares?
The vesting income is still taxed. Capital gains tax simply waits until you sell, and any gain or loss is measured from your vesting-date basis.
How is the cost basis of RSUs determined?
Take the market price on the vesting date. That’s your basis per share, and it matches the amount that went on your W-2.
Can I avoid paying taxes on RSUs?
You can’t skip the income tax at vesting. What you can control is timing, loss harvesting against gains, and how much you withhold. A tax professional can help you use those tools without tripping over the rules.
Do RSUs trigger the alternative minimum tax (AMT)?
Generally not. AMT is mostly a concern with incentive stock options. RSUs are taxed as plain wages at vesting.
What if my 1099-B shows a zero cost basis for my RSUs?
Don’t file it as is. Find the vesting-date price in your equity plan statements, then adjust the basis on Form 8949 so you report only your real gain or loss.
What if I moved to a different state between grant and vesting?
Two states may both claim part of the income. Many divide it based on where you worked between grant and vesting, but the formulas aren’t uniform. Ask a tax professional who knows both states.
Are dividend equivalents on unvested RSUs taxed differently?
Yes, in the sense that they usually count as ordinary wages when paid, not as qualified dividends.
Conclusion
So, how are RSUs taxed? In two steps. Ordinary income tax and FICA on the value at vesting, then capital gains tax on any price change after that. Your cost basis is the bridge between the two, and getting it right is your best defense against paying twice.
What should you do next? Look up your upcoming vesting dates, estimate the withholding gap, and check your basis before you file. Then run a few scenarios through the RSU Tax Calculator and take the results to a qualified tax professional.
References
- IRS, Publication 525, Taxable and Nontaxable Income
- IRS, Publication 15, Employer’s Tax Guide (supplemental wages)
- IRS, Topic No. 409, Capital Gains and Losses
- IRS, Topic No. 751, Social Security and Medicare Withholding Rates
- IRS, Topic No. 559, Net Investment Income Tax
- IRS, Topic No. 560, Additional Medicare Tax
- IRS, About Form 8949, Sales and Other Dispositions of Capital Assets
- IRS, Publication 550, Investment Income and Expenses
- Cornell Law School Legal Information Institute, 26 U.S. Code Section 83, Property transferred in connection with performance of services
Disclaimer: This article is for educational purposes only and does not constitute financial or tax advice. Please consult a qualified tax professional or financial advisor about your situation.