How RSUs Are Taxed

When Are RSUs Taxed?

RSUs are taxed at vesting, not at grant or sale. When your RSUs vest:

1. The fair market value of the shares is added to your W-2 income
2. Your employer withholds taxes (usually by selling some shares)
3. You receive the net shares in your account

RSU Tax Calculation

When RSUs vest, here's what you owe:

Federal Income Tax

• Treated as ordinary income
• Added to your other income for the year
• Could push you into a higher bracket

State Income Tax

• Varies by state (0% to 13%+)
• Some states have special rules for equity compensation

Social Security & Medicare (FICA)

• 6.2% Social Security (up to wage base limit)
• 1.45% Medicare (plus 0.9% additional above $200k)

The Withholding Problem

Most companies withhold at a flat rate (often 22% federal), but this may not cover your actual tax bill.

Example

Your RSUs vest worth $50,000:

You'll owe the $5,000 difference at tax time!

How to Handle the Gap

1. Sell extra shares at vesting to cover taxes
2. Make estimated tax payments quarterly
3. Adjust W-4 withholding to withhold more from paychecks
4. Save cash for the tax bill

What Happens When You Sell?

After vesting, your cost basis is the price at vesting. Any future gains are capital gains.

Short-Term Capital Gains

• Sell within 1 year of vesting
• Taxed as ordinary income

Long-Term Capital Gains

• Hold for 1+ year after vesting
• Lower tax rates (0%, 15%, or 20%)

RSU Tax Example

Grant: 100 RSUs

At Vesting (stock price $200):

• Value: $20,000
• Federal (22% withheld): $4,400
• State (5%): $1,000
• FICA (7.65%): $1,530
• Net shares received: ~65 shares (35 sold for taxes)

Later Sale (stock price $250):

• Gain per share: $50
• If short-term: ordinary income
• If long-term: capital gains

State Tax Considerations

High-Tax States

California, New York, and New Jersey have income taxes over 10%. This significantly impacts RSU taxation.

No Income Tax States

Texas, Washington, Florida, Nevada, and others have no state income tax.

Multi-State Situations

If you move or work remotely:

• Some states tax based on where work was performed
• Could owe tax to multiple states

RSU Tax Strategies

1. Maximize Retirement Contributions

Reduce taxable income through 401k, IRA contributions.

2. Consider Charitable Giving

Donate appreciated shares after holding period to avoid capital gains.

3. Tax-Loss Harvesting

Offset gains with losses from other investments.

4. Plan Around Vesting Dates

Large vests can push you into higher brackets. Consider strategies like timing other income or deductions.

Common RSU Tax Mistakes

1. Not planning for withholding gap
2. Forgetting state taxes when moving
3. Missing cost basis adjustments on tax returns
4. Holding too long and creating concentration risk