How Are RSUs Taxed? A Complete Guide to Vesting, Selling, and Withholding

Imagine this: you're a software engineer earning $180,000 in salary. Your company grants you 2,000 RSUs that vest quarterly over 4 years. At $150/share, each quarterly vest puts $37,500 into your W-2 income. By year-end, you've added $150,000 in RSU income on top of your salary — and your tax situation is completely different from your pre-RSU days.

RSUs are simpler than ISOs — but "simpler" doesn't mean "simple." There are two distinct tax events, a withholding gap that catches most people, and cost basis tracking that trips up even experienced investors. Here's the complete picture.

The Two RSU Tax Events

Event 1: Tax at Vesting (Ordinary Income)

When RSUs vest, the fair market value of the shares is added to your W-2 as ordinary income. This happens automatically — you can't defer it, elect out of it, or time it (unlike ISO exercises).

What you owe at vesting:

• Federal income tax (at your marginal rate, 22-37%)
• State income tax (0-13.3% depending on state)
• Social Security tax (6.2% up to wage base of $176,100 in 2026)
• Medicare tax (1.45% + 0.9% additional on earned income over $200K)

Full tax walkthrough: 2,000 RSUs vest at $150/share ($300,000 value), $180K salary, California

Your total W-2 income: $480,000. Let's trace every dollar of tax on the RSU portion:

Employer withholds (sell-to-cover): 22% federal ($66,000) + 10.23% CA ($30,690) + 1.45% Medicare ($4,350) + 0.9% Additional Medicare ($2,700) = $103,740

Withholding shortfall: $75,850 actual tax - but wait, the federal withholding alone is $66,000 vs $47,200 actual. In this case, the federal over-withholding ($18,800) partially offsets the CA under-withholding. Net result varies — use our calculator for your exact numbers.

Event 2: Tax at Sale (Capital Gains)

When you eventually sell RSU shares, you pay capital gains tax on any appreciation after vesting.

Your cost basis = FMV at vest date (the amount already taxed as ordinary income)

Example: Shares vested at $150, you sell at $200 after holding 14 months

• Gain: $50/share × 2,000 shares = $100,000
• Tax rate: 20% LTCG + 3.8% NIIT = 23.8%
• Capital gains tax: $23,800

The 3.8% Net Investment Income Tax (NIIT), per IRS Publication 550, applies to net investment income when your modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly). With $480K+ in W-2 income, you're well above the threshold.

IRS Forms You'll Receive

Understanding which forms report what prevents the most expensive RSU tax mistakes:

The most common mistake: Your 1099-B shows cost basis of $0. If you report this without correction, you pay tax on the entire sale price as capital gain — but you already paid ordinary income tax on the vest value via your W-2. This is double taxation, and IRS Notice 2010-78 specifically addresses this issue for equity compensation.

How to fix it on Form 8949:

1. Column (a): Description — "500 shares XYZ Corp"
2. Column (d): Proceeds from 1099-B
3. Column (e): Cost basis — enter $0 (as reported on 1099-B)
4. Column (f): Adjustment code — enter "B" (basis reported to IRS is incorrect)
5. Column (g): Adjustment amount — enter the correct cost basis (FMV at vest × shares)

RSUs vs Stock Options vs ESPP: Tax Comparison

Which is "better"? It depends on company stage. At a pre-IPO startup with low 409A valuation, ISOs with an 83(b) election can save hundreds of thousands. At a public company, RSUs are more straightforward with guaranteed value. ESPPs at public companies offer a guaranteed discount (typically 15%) with favorable tax treatment on qualifying dispositions.

The Withholding Problem

Most employers withhold at the flat 22% supplemental rate, but your actual marginal rate is likely 32-37% federal + state tax + Medicare. See our detailed guide on RSU tax withholding for the exact math and solutions.

Cost Basis: The Most Common RSU Tax Mistake

The mistake: Selling RSU shares and reporting the entire sale price as a capital gain, instead of subtracting the cost basis (the amount already taxed at vesting).

Why it happens: Brokers sometimes report RSU sales on Form 1099-B with a $0 cost basis, which makes it look like the entire sale is a gain. Your W-2 already includes the vest value as income — if you don't correct the cost basis on your tax return, you'll pay tax twice.

RSU Tax by State

The state you live in dramatically changes your total RSU tax burden. Here's a comparison at $200K salary + $100K RSU vesting:

For a full comparison across all states, see our state income tax guide. For California and New York deep dives, see our California income tax guide and New York income tax guide.

Strategies to Reduce RSU Taxes

1. Sell Immediately (Eliminate Market Risk)

Sell shares at vesting to avoid both market risk and the complexity of tracking cost basis. Your only tax is the ordinary income at vest.

2. Hold for Long-Term Capital Gains

If you're bullish on the stock, hold for 1+ year after vesting to qualify for the lower LTCG rate on any appreciation. Risk: the stock could decline.

3. Tax-Loss Harvesting

If the stock drops after vesting, sell at a loss to offset other capital gains. You can repurchase after 30 days (wash sale rule).

4. Charitable Giving

Donating appreciated RSU shares held 1+ year to charity lets you deduct the full market value without paying capital gains tax.

5. Plan Around Vesting Events

If you have any control over compensation structure, consider negotiating more RSUs in years when your salary is lower, and vice versa.

6. Maximize 401(k) in High-Vesting Years

In years with large RSU vests, maxing out your 401(k) ($23,500 in 2026, plus $7,500 catch-up if 50+) reduces your taxable income at your highest marginal rate. On $100K in RSU income pushing you into the 35% bracket, the 401(k) deduction saves $23,500 × 35% = $8,225 in federal tax alone.

If you also hold ISOs, coordinating RSU sales with ISO exercises can significantly reduce your overall tax bill across all equity types. For estimated tax payment requirements when your withholding falls short, see our estimated tax guide for RSU income.

For a complete guide to reporting all equity types on your tax return, including which IRS forms you'll receive and common mistakes to avoid, see our equity compensation tax return guide. If you're worried about how RSU vesting affects your tax refund, check our guide on how RSUs affect your tax refund.

Frequently Asked Questions

Are RSUs taxed twice? No — but it can look that way if your cost basis is reported incorrectly. RSUs are taxed once as ordinary income at vesting (on your W-2), and a second time only on any appreciation after vesting (as capital gains when you sell). The common "double tax" issue occurs when your broker reports $0 cost basis on Form 1099-B, making it appear that the full sale price is a gain. Always correct your cost basis on Form 8949.

What is RSU cost basis? Your cost basis is the fair market value (FMV) of the shares on the date they vested — the same amount that was included in your W-2 as ordinary income. If you sell at a price above your cost basis, the difference is a capital gain. If you sell below, it's a capital loss.

Do RSUs count as income for mortgage qualification? Yes, but how lenders treat RSU income varies. Most lenders will count RSU income if you can show a 2-year history of consistent vesting. Some lenders use the lower of the two-year average or current year's vesting schedule. Provide your offer letter showing the grant schedule, plus two years of W-2s showing RSU income in Box 1.

Can I defer RSU taxes? Generally no. Unlike ISOs (which you choose when to exercise), RSUs vest on a fixed schedule and the income is recognized immediately. Some companies offer "deferred RSUs" or equity deferral plans under IRC Section 409A, but these are rare and come with additional complexity and risk.

How are RSUs reported on my W-2? RSU vesting income is included in Box 1 (Wages, tips, other compensation) — combined with your salary. You won't see a separate line for RSUs in the main boxes. Box 14 may include a supplemental line labeled "RSU" or "STOCK" showing the RSU-specific amount, but this is informational only. Taxes withheld from sell-to-cover appear in Boxes 2 (federal), 4 (Social Security), and 6 (Medicare).

Do RSUs affect Social Security benefits? RSU income is subject to Social Security tax (FICA) up to the annual wage base ($176,100 in 2026). If your salary alone exceeds the wage base, no additional Social Security tax applies to RSU income. However, the higher earnings from RSUs can increase your Social Security benefit calculation if RSU years replace lower-earning years in your top-35-year average.