Restricted stock units are the most common way tech companies pay employees beyond salary. They feel like free money, until tax season arrives and the bill shows up in places people didn’t expect.
What an RSU actually is
A promise of company shares that vest over time, typically over four years. Unvested units have no value to you and can’t be sold. The tax story starts the day they vest.
Taxed as ordinary income at vesting
The big taxable event is vesting, not selling. When shares vest, their fair market value that day counts as wage income, it lands on your W-2 and is taxed exactly like salary. Your employer withholds taxes at vesting, usually at the 22% flat supplemental-wage rate. Here’s the trap: if your marginal rate is 32% or higher, that 22% withholding doesn’t cover the bill, and you’ll owe the difference in April. RSUs have pushed plenty of people into an unpleasant surprise filing.
Your cost basis is the vesting-day price
The fair market value on vesting day becomes your cost basis in the shares. This number is the foundation for everything that happens when you sell, get it wrong and you pay tax twice on the same dollars.
A worked example: the $50,000 vest
Say 250 shares vest when the stock trades at $200, a $50,000 vest. That $50,000 lands on your W-2 as wage income. Your employer withholds 22%, or $11,000, and you receive roughly 195 shares after sell-to-cover. But if your marginal rate is 35%, you actually owe $17,500 on that vest, leaving a $6,500 gap due in April. The shares you hold have a $200-per-share basis. Sell at $220 a year later and you owe long-term capital gains on the $20-per-share gain. Every number flows from that vesting-day price.
The withholding gap: why 22% isn’t enough
The IRS requires employers to withhold on supplemental wages at a flat 22% up to $1 million (37% above that). But your actual marginal rate depends on your total income. A tech worker earning $250,000 in salary plus $150,000 in vested RSUs sits in the 35% bracket, so 22% withholding leaves a 13-point shortfall on every vest. The fix: bump your W-4 withholding, make quarterly estimated payments, or set aside the difference yourself. Don’t let April deliver the news.
Selling: capital gains (or losses)
Sell immediately at vesting and there’s usually only a tiny gain or loss. Hold the shares and sell later, and the difference between the sale price and your basis is a capital gain, short-term (held one year or less after vesting) taxed as ordinary income, long-term (more than a year) at the lower capital gains rates. For the full picture on keeping that bill down, see how capital gains tax works.
RSUs vs. stock options: a quick contrast
RSUs are not stock options. Options give you the right to buy shares at a set price; RSUs are a promise of shares themselves, no purchase needed. Options (especially ISOs) have their own complex tax rules around exercise and holding periods. RSUs are simpler: taxed at vesting as wages, then capital gains on any further growth. If your company offers both, don’t mix up their rules, especially the 83(b) election, which can help with restricted stock but never with RSUs.
What to do with vested shares: sell or hold
Once shares vest and the wage tax is settled, they’re just stock you own. The common default is selling immediately and diversifying, which many financial planners recommend because your salary is already tied to this company. Holding is a concentrated bet: if the stock doubles, you win twice (job and portfolio); if it crashes, you lose twice. Either choice is defensible, but make it a choice. Decide in advance, write it down, and don’t drift.
The mistakes that cost people thousands
- Not fixing the cost basis. Brokers often report a $0 basis on the 1099-B for RSU sales. If you don’t correct it to the vesting-day value, you get taxed twice on the same income.
- Forgetting the withholding gap. 22% withheld versus a 32-37% marginal rate leaves a real bill due.
- Letting shares pile up. Vested RSUs held indefinitely become a concentrated single-stock bet, decide to hold deliberately, not by inertia.
- Thinking an 83(b) election helps. It doesn’t apply to RSUs at all, only to restricted stock awards granted up front.
The simple playbook
Expect the tax bill at vesting and check whether 22% withholding covers your bracket. Fix your cost basis before you file. And decide in advance what you’ll do with vested shares, sell and diversify, or hold on purpose, rather than drifting into a decision by default.
Bottom line: RSUs are taxed first as salary at vesting, then as capital gains or losses when you sell. Know your basis, mind the withholding gap, and the “free money” stays mostly yours.
Winchell House 
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