Restricted Stock Units, or RSUs, are a form of equity compensation common at tech companies, finance firms, and increasingly across other industries. Unlike stock options, RSUs are simpler: they’re essentially a promise from your employer to give you actual shares of company stock on a future date, as long as you’re still employed. When they “vest,” they belong to you — and they count as taxable income at that moment, whether you sell or not.
How RSUs Work
When your employer grants you RSUs, you’re given a quantity of units (say 1,000 RSUs of company XYZ) on a specific grant date. The units have no value until they vest. A vesting schedule defines when the units become actual shares; common schedules include:
- 4-year cliff + monthly — the first 25% vests one year after grant; the remaining 75% vests monthly over the following three years. Very common in tech.
- 4-year graded — 25% vests each year on the grant anniversary
- Performance-based — vesting tied to company milestones or share price targets (PSUs — Performance Stock Units — are a related variant)
If you leave the company before vesting, you forfeit any unvested units. Vested shares are yours to keep.
Taxes on RSUs
This is the most important RSU concept to understand: RSUs are taxed at vest, not at grant and not when you sell. The value of the shares at vesting counts as ordinary W-2 income, just like a cash bonus.
If 250 RSUs vest when the stock is trading at $40, you have $10,000 of taxable W-2 income. Your employer typically handles withholding by selling some of the shares automatically (a “sell-to-cover” mechanism) — for example, selling 60-80 shares to cover federal, state, and FICA taxes, leaving you with about 170 to 190 shares.
The Withholding Gap (Very Important)
Default federal withholding on RSU income is just 22% (the IRS supplemental wage rate), unless your total supplemental wages exceed $1 million. If you’re a high earner, your actual marginal federal rate may be 32%, 35%, or 37% — meaning the standard withholding falls 10 to 15 percentage points short of what you’ll actually owe.
This is the #1 surprise that hits employees with substantial RSU vests at tax time. To avoid an underpayment penalty:
- Estimate your true marginal rate — add federal, state, FICA (Social Security up to wage base + Medicare 1.45% + Additional Medicare 0.9% above $200K)
- Cover the gap — either set aside extra cash at each vest to pay at tax time, file quarterly estimates, or ask payroll to withhold extra via W-4 step 4(c)
- Track vest events — keep a list of every vest with date, share count, vest-day price, and shares-sold-to-cover. You’ll need it at tax time
After Vesting: Sell or Hold?
After RSUs vest, you own actual shares. Holding or selling is a regular investment decision — but with significant emotional and tax implications.
A useful frame: would you buy the same dollar amount of your employer’s stock today if you had that cash in hand? For most people, the honest answer is no — they already depend on their employer for salary and benefits, so the prudent move is to diversify. Selling at vest converts concentrated employer stock into cash you can invest elsewhere.
Tax-wise: when you sell vested shares, you pay capital gains on the difference between the sale price and the vest-date price. Sell within a year of vest = short-term gains (taxed as ordinary income). Sell after holding more than a year = long-term gains. If the stock price hasn’t moved much, the capital gains tax is minimal — you already paid ordinary income tax on the vest-day value.
A common strategy: sell at vest, redeploy proceeds into diversified index funds. If you want some exposure to your employer for the upside, cap it at a percentage you’d be comfortable losing entirely (often 5-10% of net worth).
RSU Coordination Across Vests
If you have multiple vesting tranches per year, you can coordinate sales to manage taxes:
- Sell at vest — the simplest. Short-term cap gain on any small price movement; matches what’s already been withheld; you control nothing
- Hold for long-term — lower tax on gains but concentration risk grows during the wait; only worth it if you genuinely want to hold
- Tax-loss harvest — sell underwater shares to realize losses that offset gains elsewhere; rules around “wash sales” can apply if you receive more vests within 30 days
Common Mistakes
- Treating vested RSUs as “bonus money” — vested shares represent ordinary W-2 income that was already paid; not a windfall to spend
- Underestimating tax owed — the 22% supplemental withholding rate often understates actual liability
- Holding concentrated position out of inertia — “I’ll sell when it goes up more” can become a multi-year decision with substantial risk
- Selling during blackout windows — if you’re aware of material non-public information, you may be restricted; know your company’s trading-window rules
Educational only. RSU tax treatment, vesting schedules, and trading restrictions vary by employer and jurisdiction. Consult a tax professional or financial advisor before making material decisions, especially around large vesting events.