Restricted Stock Units (RSUs) are a form of equity compensation where your employer promises to give you shares of company stock on a future date, provided you meet certain conditions — typically remaining employed through a vesting schedule. RSUs have become the dominant form of equity compensation at publicly traded tech companies because they always have value (unlike stock options, which can go underwater) and are straightforward to understand.
This glossary entry covers everything you need to know about RSUs: the complete lifecycle from grant to sale, exactly how they are taxed, sell-to-cover mechanics, cost basis tracking, and how RSUs work differently at public versus private companies.
The RSU Lifecycle: Grant, Cliff, Vest, Own
RSUs move through four distinct stages:
1. Grant
Your employer awards you a specific number of RSU shares. At this stage, you own nothing — it is a promise of future stock. No tax event occurs at grant.
2. Cliff
Most RSU grants include a cliff period (typically 1 year) during which no shares vest. If you leave the company before the cliff date, you forfeit all unvested RSUs from that grant. The cliff exists to ensure a minimum commitment before any equity is delivered.
3. Vest
After the cliff, shares begin vesting according to your vesting schedule — monthly, quarterly, or annually depending on the company. Vesting is the critical tax event. When shares vest, you receive actual shares of stock (or their cash equivalent), and the full fair market value (FMV) of those shares on the vest date is added to your W-2 as ordinary income.
4. Own
Once shares vest, they are yours. You can hold them, sell them immediately, or sell them later. Any appreciation (or depreciation) after the vest date is treated as a capital gain or loss when you eventually sell.
How RSUs Are Taxed
RSU taxation is simpler than stock option taxation, but still trips people up. Here are the key rules:
At Vesting: Ordinary Income
The full FMV of vesting shares is taxed as ordinary income. This is not just the gain — it is the entire share value. RSUs have no exercise price, so the full amount is income.
| Event | Tax Treatment |
|---|---|
| Grant date | No tax |
| Vesting date | Ordinary income on full FMV |
| Sale (if held after vest) | Capital gain/loss on difference from vest-date FMV |
Withholding at Vesting
Your employer withholds taxes on RSU income at the federal supplemental rate:
| Tax | Withholding Rate |
|---|---|
| Federal income | 22% (37% on amounts over $1M/year) |
| Social Security | 6.2% (up to $176,100 wage base in 2025) |
| Medicare | 1.45% (+ 0.9% Additional Medicare Tax over $200K) |
| State (varies) | CA: 10.23%, NY: 11.70%, WA/TX: 0% |
The 22% federal supplemental withholding rate is almost always too low. If your total income puts you in the 32%, 35%, or 37% bracket, you will owe additional tax at filing time. Many employees are surprised by a $5,000-$15,000 shortfall on their tax return. See our RSU withholding guide for strategies to avoid underpayment penalties.
At Sale: Capital Gains
If you hold shares after vesting and then sell, the difference between your sale price and the vest-date FMV is a capital gain or loss:
- Held 1 year or less after vest: Short-term capital gain (taxed as ordinary income)
- Held more than 1 year after vest: Long-term capital gain (0%, 15%, or 20% rate)
Sell-to-Cover Mechanics
Most companies use sell-to-cover as the default method to handle tax withholding on RSU vests. Here is how it works:
- Shares vest (e.g., 100 shares at $150/share = $15,000 income)
- Your employer automatically sells enough shares to cover the withholding obligation
- You receive the remaining shares in your brokerage account
Example at $150/share:
| Item | Amount |
|---|---|
| Shares vesting | 100 |
| Gross value | $15,000 |
| Federal withholding (22%) | $3,300 |
| State withholding (CA 10.23%) | $1,535 |
| FICA (7.65%) | $1,148 |
| Total withheld | $5,983 |
| Shares sold (~40 shares) | 40 |
| Shares you keep | ~60 |
The sold shares are not a separate taxable event — the income was already recognized at vesting. The shares sold for withholding have a cost basis equal to the sale price, so they generate zero additional gain or loss.
Worked Example: $180K Salary + 1,000 RSUs at $150/Share
Let us walk through a complete 4-year RSU scenario:
Setup: You receive a grant of 1,000 RSUs with a standard 4-year vesting schedule and 1-year cliff. Your base salary is $180,000. The stock price is $150/share at each vest date (simplified).
| Year | Shares Vesting | RSU Income | Salary | Total W-2 |
|---|---|---|---|---|
| Year 1 (cliff) | 250 | $37,500 | $180,000 | $217,500 |
| Year 2 | 250 | $37,500 | $180,000 | $217,500 |
| Year 3 | 250 | $37,500 | $180,000 | $217,500 |
| Year 4 | 250 | $37,500 | $180,000 | $217,500 |
Year 1 Tax Estimate (Single filer, California):
| Tax Component | Amount |
|---|---|
| Federal income tax (est.) | ~$38,500 |
| California state tax (est.) | ~$14,800 |
| Social Security (6.2% to $176,100) | ~$10,918 |
| Medicare (1.45% + 0.9% over $200K) | ~$3,310 |
| Total tax | ~$67,528 |
| Effective rate | ~31% |
The RSU-attributable portion of this tax is the incremental amount: the total tax on salary + RSU income minus the tax on salary alone. This is the methodology used in our RSU calculator — it correctly accounts for the fact that RSU income stacks on top of your salary and is taxed at your marginal rate, not at an average rate.
Cost Basis Tracking
Every RSU vest creates a new tax lot with a specific cost basis equal to the FMV on the vest date. If you hold shares and sell later, you must report the correct cost basis on your tax return.
Common mistake: Your brokerage may report a cost basis of $0 on Form 1099-B for RSU shares. This is incorrect for tax purposes — you already paid ordinary income tax on the full FMV at vesting. Your actual cost basis is the FMV on the vest date. You may need to adjust your reported basis on Schedule D or Form 8949.
Keep a record of every vest date and the closing stock price on that date. You will need this information when you sell shares, especially if you have multiple vests at different prices throughout the year.
RSUs at Public vs Private Companies
| Feature | Public Company RSUs | Private Company RSUs |
|---|---|---|
| Liquidity at vest | Immediate (traded on exchange) | None (no public market) |
| Sell-to-cover | Available | Usually not available |
| Valuation | Market price | 409A valuation |
| Tax at vest | Yes, on FMV | Yes, on FMV (even though you cannot sell) |
| Risk | Stock price may decline | Company may never go public/get acquired |
Private company RSUs create a tax-without-liquidity problem. When RSUs vest at a private company, you owe ordinary income tax on the FMV — but you cannot sell the shares to pay that tax because there is no public market. This can create a significant cash burden. Some private companies use "double-trigger" vesting (vest on time + liquidity event) to solve this problem.
Double-Trigger RSUs at Private Companies
At private companies, RSUs typically use "double-trigger" vesting to solve the tax-without-liquidity problem described above:
- Trigger 1 (time-based): Standard vesting schedule — typically 4 years with a 1-year cliff. As you complete service, you satisfy Trigger 1 for successive tranches of RSUs.
- Trigger 2 (liquidity event): An IPO, direct listing, acquisition, or other specified liquidity event. No shares are actually delivered until this event occurs.
Shares only deliver — and taxes only come due — when both triggers are satisfied. This protects you from owing tax on stock you cannot sell.
The IPO tax bomb: If you have been at a private company for 3-4 years, you may have multiple years of time-vested RSUs waiting for Trigger 2. When the company finally IPOs, ALL time-vested shares deliver at once — creating a massive single-day taxable event.
Example: You have been at a pre-IPO company for 3 years. Over that time, 4,000 RSUs have satisfied Trigger 1 (time vesting). The company IPOs at $50/share. On IPO day (or whenever your company settles double-trigger RSUs), all 4,000 shares deliver. That is $200,000 of ordinary income hitting your W-2 on a single day — on top of your regular salary.
At a 40% combined federal + state tax rate, you owe approximately $80,000 in taxes on this single event. The supplemental withholding rate of 22% federal will not come close to covering it. And if there is a post-IPO lock-up period of 90-180 days, you cannot sell shares to cover the tax bill until the lock-up expires.
Plan ahead for this scenario. Model the tax timeline and liquidity gap with our IPO lock-up calculator, and review our guidance on estimated tax payments on RSU income.
RSU Withholding Shortfall: The Math
The 22% federal supplemental withholding rate is almost always insufficient for employees who earn above the 22% bracket. Here is a detailed worked example showing exactly where the gap comes from:
Scenario: 500 RSUs vest at $150/share = $75,000 RSU income. Your base salary is $200,000.
| Tax Component | Withheld (Supplemental Rate) | Actual Tax (Marginal Rate) | Shortfall |
|---|---|---|---|
| Federal income | 22% = $16,500 | 32% marginal = $24,000 | $7,500 |
| California state | 10.23% = $7,673 | ~11.3% effective on increment = $8,475 | $802 |
| Total shortfall | $8,302 |
This $8,302 gap must be covered by April 15 (or through quarterly estimated payments) or you face an IRS underpayment penalty. And this is for a single vest event — if you vest quarterly, multiply the shortfall by 4.
The shortfall grows even larger for higher earners. At a $300,000 base salary, your marginal federal rate on RSU income is 35%, not 32%. The federal shortfall on the same $75,000 RSU vest jumps from $7,500 to $9,750.
For strategies to proactively close the withholding gap, see our RSU withholding guide and tax refund impact guide.
RSUs and Net Worth Concentration
After 3-4 years of vesting plus annual refresh grants, it is common for 30-50% of your net worth to be in your employer's stock. This concentration risk is amplified by the fact that your income (salary and future RSU grants) also depends on the same company. If the company's stock drops significantly, you lose investment value and potentially face reduced future compensation simultaneously.
Diversification strategies to consider:
- Sell at vest: Treat RSUs like a cash bonus — sell the shares immediately upon vesting and invest the after-tax proceeds in a diversified portfolio. This eliminates concentration risk entirely.
- Rule-based selling: Sell a fixed percentage at each vest (for example, 80%) and hold 20% if you are bullish on the company's prospects. This provides systematic diversification without requiring you to time the market.
- Tax-loss harvesting: If you have capital losses in other investments, realize them to offset ordinary income from RSU vesting. While capital losses can only offset up to $3,000 of ordinary income per year, they can offset unlimited capital gains — so selling depreciated investments in the same year as a large RSU vest creates a partial tax offset.
No single strategy is universally right — it depends on your conviction in the company, your overall portfolio allocation, your risk tolerance, and your financial goals. But the default of holding all vested shares indefinitely is rarely the optimal choice from a risk management perspective.
RSUs vs Stock Options vs Restricted Stock
| Feature | RSUs | Stock Options (ISO/NSO) | Restricted Stock |
|---|---|---|---|
| Cost to acquire | $0 | Exercise price | Purchase price (often discounted) |
| Value if stock drops | Still has value | Can go underwater ($0 value) | Still has value |
| Tax at grant | None | None | At grant (or election date with 83(b)) |
| Tax at vest | Ordinary income on full FMV | None (ISO) or ordinary income on spread (NSO) | None (already taxed) |
| 83(b) election available | No | No | Yes |
| AMT implications | None | Yes (ISO spread is AMT preference) | None |
RSUs are the simplest to understand but offer the least tax planning flexibility. Stock options (particularly ISOs) offer more potential for tax optimization but carry more risk and complexity. Learn more about ISO tax planning in our AMT calculator guide.
Calculate RSU Withholding
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Try Calculator →Frequently Asked Questions
What happens to my RSUs if I leave the company?
Unvested RSUs are forfeited when you leave. Vested RSUs are yours to keep — they are shares of stock in your brokerage account. Some companies have clawback provisions in specific circumstances, but this is uncommon for standard RSU grants.
Can I make an 83(b) election on RSUs?
No. The 83(b) election applies only to restricted stock (actual shares transferred with restrictions), not to RSUs (which are a promise of future shares). RSUs are always taxed at vesting.
Are RSUs taxed twice?
No, but it can look that way if your brokerage reports a $0 cost basis. You pay ordinary income tax at vesting on the FMV. When you later sell, you only pay capital gains tax on any appreciation above the vest-date FMV. Make sure your cost basis is correctly reported.
How do RSUs affect my estimated tax payments?
RSU vesting income often causes withholding shortfalls. If your total withholding (from salary + RSU vests) does not cover at least 90% of your annual tax liability, you may owe an underpayment penalty. See our guide on estimated taxes on RSU income.
What is the difference between RSUs and RSAs?
RSAs (Restricted Stock Awards) are actual shares transferred to you at grant, subject to vesting restrictions. RSUs are a promise to deliver shares in the future. The key difference: RSAs are eligible for the 83(b) election, which can significantly reduce your tax burden if the stock appreciates. RSUs are not.
Tax Disclaimer: This content is for educational purposes only. Always consult with a licensed tax professional or certified public accountant before making financial decisions related to equity compensation, tax planning, or investment strategies.