Restricted Stock Units (RSUs) can be one of the most valuable parts of your compensation package, but understanding how RSUs are taxed when they vest and when you sell them is essential for avoiding tax surprises.
Let's dive into the basics of RSU taxation, including how RSUs are taxed at vesting, how RSUs are taxed when sold, examples of RSU taxation, RSU tax planning strategies, and RSU tax mistakes to avoid.
Vesting of Restricted Stock Units (RSUs)
When you get an RSU grant, you are granted a certain number of shares. They vest according to whatever the vesting schedule of that grant is, which could be either tranches of shares vesting over time or cliff vesting, where all shares from that grant vest at once after a certain time period.
How RSUs are Taxed at Vesting: First Taxable Event
For each tranche of shares that vests, the first taxable event is at the time of vesting. The value of the shares at vesting is taxable income to you, and this is taxed as earned income.
For example, if you have 100 shares of company ABC vesting and the value of the stock is $10/share as of the time of vesting, then your taxable income on this tranche of shares that has vested is $10 x 100 shares = $1,000.
Important aspects of RSU taxes to know
When the shares vest, a certain number of shares will automatically be sold to cover taxes. However, beware that typically the amount of shares sold and taxes withheld is not enough to actually cover your tax liability! This trips a lot of people up because you would expect that if taxes are being withheld on this taxable income, it would be the appropriate amount, right?
Federal Taxes on RSUs
Well, let me explain how this all works. Typically, taxes on RSUs are withheld at a flat 22%. If you are in the 22% tax bracket, then you should be fine, the proper amount of taxes has been withheld (for federal taxes at least). However, many people who receive equity compensation end up in a tax bracket higher than 22%. That means you're going to owe more in taxes.
State and local taxes
State taxes will also be withheld if you live in a state with state income taxes (which most of us do). This amount is going to vary from state to state. Typically, if you live in a state with a flat state income tax rate, then you should be properly withheld. However, if you live in a state with different brackets, you must again be aware that you may not get withheld at the proper rate. This also goes for those who live in cities with city income taxes, such as New York City, several cities in Ohio, and San Francisco.
Medicare and Social Security taxes
You are also going to owe (and presumably automatically have withheld) Medicare taxes at rate of 1.45%. Additionally, you will have Social Security taxes withheld at 6.2% if you have not already paid the maximum Social Security taxes for the year yet. (You only have to pay the 6.2% Social Security tax on your first $168,600 of earned income for 2024, so if you are a high earner and have already earned over $168,600 in income so far in the given calendar year then you will neither owe nor have withheld this 6.2% when your RSUs vest.) Finally, if you have earned over $200,000 (if single) or $250,000 (if married filing joint) so far in the calendar year then you will owe an additional 0.9% Medicare surtax which will also be withheld from your RSUs when they vest.
Vested RSUs Tax Example
Here are the three assumptions we'll make for our example when it come to the topic we've covered above:
- Vesting date & income: Let’s assume your $1,000 worth of RSUs vest on the 1st of the year, so you have not earned over $168,600 yet this year and thus will have Social Security taxes withheld on this income.
- State of residence: Let’s also assume that you live in Michigan, which has a flat 4.25% state income tax.
- Tax bracket: Finally, let’s assume that you will be in the 37% tax bracket for the year.
When your RSUs vest at $1,000, the amount of shares that will be sold will be enough to cover the following tax withholding amounts:
- 22% for federal taxes, or $220.00
- 4.25% for state (again, we’re assuming you live in Michigan in this example), or $42.50
- 6.2% in Social Security taxes, or $62.00
- 1.45% in Medicare taxes, or $14.50
(No 0.9% Medicare surtaxes owed or withheld since it’s the beginning of the year and you have not yet earned over $200,000 if single/$250,000 if married filing joint in the current tax year.)
This totals a tax withholding of $339.00, leaving you with $661.00 left of vested company stock.
But remember, in this example you are in the 37% marginal tax bracket! This means that you are going to owe an additional (37% - 22%) x $1000 = $150.00 in federal taxes! Be sure to work closely with your tax accountant to make any estimated quarterly tax payments if needed.
If you are safe-harbored—and therefore do not need to make estimated tax payments—then be sure that you are at least setting aside enough cash to pay the taxes owed when due. Now, of course, if you are in the 37% tax bracket, then owing an additional $150 at tax time is pretty minor. But most of you who receive RSUs are getting RSU income way above $1000, so in real life the difference between what is owed and what is withheld could be quite large.
How RSUs Are Taxed When Sold: The Second Taxable Event
You may recall that I said the vesting of the RSUs is the FIRST taxable event, so yes, there is a second taxable event that you need to be aware of. When you sell the RSUs, you will be realizing a capital gain (or possibly a capital loss).
The amount of the capital gain is the difference between the price of the stock at sale less the price of the stock when vested. So if you have $661 in company stock after taxes have been withheld and then you sell these remaining shares for a total of say $700, then the amount of the capital gain is $700 - $661 = $39. (Note that you will not owe capital gains taxes on the shares sold to cover taxes because those shares are sold at the vesting price and therefore have a capital gain of $0.)
If you sell the shares at a gain within one year of vesting, this is what’s called a short-term gain. It's taxed at your marginal tax bracket. If you sell the shares after holding them for at least one year, then you are realizing a long-term capital gain. A long-term capital gain is taxed at a lower preferential rate of up to 20% (plus a possible additional Net Investment Income Tax (NIIT) of 3.8% if applicable), as well as any applicable state and city income taxes.
Taking our example above where you are in the 37% tax bracket and live in Michigan, if you realize a short-term gain of $39, your taxes will be (37% + 4.25% + 3.8%) x $39.00 = $17.57. If the $39 is a long-term gain, the taxes owed are: (20% + 4.25% + 3.8%) x $39.00 = $10.94.
The complete tax picture
Your $1,000 of RSUs vest, and a total of $339 is withheld in taxes, plus you owe another $150 in taxes, leaving you with $661. The stock price then increases making the shares worth $700, at which point you sell (let’s say within one year of vesting, so a short-term gain). Then you owe an additional $17.57 in taxes on the gain. You net $700 - $150 - $17.57 = $532.43.
RSU Taxation: Frequently Asked Questions (FAQ)
How are RSUs taxed when they vest?
RSUs are taxed as ordinary income at vesting. The market value of the shares on the vest date is included in your W-2 and subject to federal, state, Social Security, and Medicare taxes just like a cash bonus.
How are RSUs taxed when sold?
When you sell RSU shares, the difference between the sale price and the value at vesting is taxed as a capital gain or loss. Immediate sales typically generate little gain, while holding shares for more than one year may qualify for long-term capital gains tax rates.
Are RSUs taxed twice?
RSUs are not taxed twice. At vesting, the value of the shares is taxed as ordinary income. When you sell the shares, you are taxed only on any additional gain after the vesting price, which is treated as a capital gain.
How do RSUs show up on my W-2?
The value of vested RSUs is included in Box 1 of your W-2 as wages. Taxes withheld for RSUs also appear in the appropriate federal, state, and payroll tax boxes. A separate 1099-B will be issued when shares are sold.
What tax rate applies to RSUs?
At vesting, RSUs are taxed at your ordinary income tax rate based on your tax bracket. When sold, any gain is taxed as either short-term or long-term capital gains depending on how long the shares were held.
How are RSUs taxed when sold at a loss?
If RSU shares are sold for less than their vesting price, the difference is treated as a capital loss. Capital losses can offset capital gains and may reduce up to $3,000 of ordinary income per year.
Do RSUs have a 1099 form?
Yes. When you sell RSU shares, you will receive a 1099-B from the brokerage reporting the sale. Since the vesting value is already included in your W-2, you must ensure the cost basis is correctly adjusted to avoid misreporting gains.
Are RSUs the same as stock options?
No. RSUs automatically convert to shares at vesting, while stock options give you the right to buy shares at a set price. Their tax treatment, risk, and wealth-planning implications differ significantly.
How can I reduce the taxes owed on RSUs?
Common RSU tax strategies include selling shares immediately to avoid unexpected gains, coordinating vesting with overall income planning, using tax-loss harvesting, and donating appreciated shares to a donor-advised fund. A financial planner or tax professional can help optimize these strategies.
What happens to my RSUs if I leave the company?
Unvested RSUs are typically forfeited when you leave your employer. Vested RSUs that you still hold remain taxable only when sold and follow normal capital gains rules.
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About the Author
Carla Adams is a CERTIFIED FINANCIAL PLANNER® practitioner who specializes in helping women build strong financial plans around their equity compensation, including Restricted Stock Units (RSUs). With over 15 years of experience in financial services, Carla has in-depth knowledge and expertise geared toward helping clients with complex financial situations. She enjoys boiling down complicated scenarios through practical examples and down-to-earth conversations.