RSUs and Stock Compensation Taxes: What Employees Actually Owe
Key Takeaways
- ✓Restricted stock units (RSUs) are taxed as **ordinary wage income** when they vest — not when the grant is signed
- ✓Employers typically withhold 22% federal on supplemental wages under $1M in a calendar year (37% on the portion above $1M) — often less than your actual marginal rate
- ✓A large vest can push you into higher brackets, trigger NIIT, and create a surprise April balance due even though you "already paid taxes"
- ✓Concentrated employer stock is an investment risk separate from the tax question — treat the two explicitly
Tech, healthcare, finance, and industrial employers often pay a meaningful part of compensation in equity. RSUs are the most common format for public-company employees today. They look simpler than stock options — but the tax withholding mechanics create predictable April surprises every spring.
This guide focuses on RSUs in publicly traded companies. Private-company RSUs can involve 83(b) elections, double-trigger vesting, and illiquidity — those complications deserve separate advice from a CPA.
Taxation at Vest (The Core Rule)
When RSUs vest, the fair market value of the shares on that date is compensation wage income, reported on your W-2 just like salary. You pay ordinary federal income tax, Social Security (up to the wage base), Medicare (plus Additional Medicare Tax above thresholds), and state/local income tax where applicable.
If you hold shares after vest, any future gain or loss when you sell is a capital gain or loss — usually short-term if sold within one year after vest (ISO-specific holding rules do not apply to RSUs).
Why Withholding Falls Short
IRS rules allow employers to use flat supplemental withholding rates on equity income — commonly 22% federal on supplemental wages under $1 million during the calendar year, and 37% on supplemental wages above $1 million.
If your all-in marginal federal bracket is 32–37%, a giant March vest withheld at 22% leaves a large gap. Add state taxes, Medicare surcharges, and you can owe a significant amount despite "taxes being taken out."
Actionable fix: After a large vest, model your taxes in Q2 with a CPA or use safe-harbor estimated payment rules; increase W-4 withholding on salary or make quarterly estimates to close the gap.
Sell-to-Cover vs. Net Settlement vs. Hold
Most plans default to sell-to-cover or net settlement — the employer sells enough shares at vest to cover statutory withholding and deposits the remainder in your brokerage account.
Holding all shares might require you to fund withholding from cash flow — verify you will not trigger a cash crunch.
Investment note: Holding a large single-stock position because of tax inertia is common and often suboptimal. Many advisors recommend a schedule to diversify after vest while respecting blackout windows and insider trading policies.
RSUs vs. ISOs vs. NSOs (Orientation)
ISOs can receive favorable long-term capital gains treatment if holding periods are met — but AMT exposure can be substantial at exercise.
Non-qualified stock options are taxed roughly like wage income at exercise on the bargain element.
RSUs avoid exercise-date ambiguity but trade away upside optionality relative to deeply underwater options — different instruments, different planning.
Concentration and Leverage to Employer Risk
RSU wealth is correlated with your paycheck and possibly your geographic housing market (Silicon Valley, Seattle, NYC patterns). Financial planners sometimes recommend treating employer stock above a threshold (say 5–10% of net worth) as a deliberate overweight to trim over time.
Where a CPA Helps
Coordinate vest timing with charitable contributions, retirement deferrals, deferred compensation elections, and marriage filing status changes. For executives, RSU spikes intersect with Section 162(m), payroll tax caps, and nonqualified deferred compensation schedules.
Find a CPA or advisor experienced with equity compensation.
Browse CPAs & Tax Advisors →