RSUs are taxed as ordinary income when they vest, on the value of the shares that day, exactly like a cash bonus. Your employer withholds tax at vest, usually by selling some of the shares, but the federal withholding rate is often lower than what you actually owe, which is where the April surprise comes from. After vest, the shares are just stock. There is nothing to do at grant and no election to file.
What happens when RSUs are granted?
Nothing, tax-wise. A grant is a promise of shares later, on a vesting schedule. You don't own anything yet, you can't sell anything, and there's nothing to report. If someone suggests filing an 83(b) election on your RSUs, they're thinking of restricted stock, which is a different thing. There is no 83(b) for RSUs.
What happens when RSUs vest?
Vesting is the tax event. On the vest date, the value of the shares you receive is added to your wages. It shows up on your W-2 and is taxed at your ordinary income rate, the same as salary or a bonus.
Say 1,000 shares vest when the stock is at $50. That's $50,000 of income, taxed the same as a $50,000 bonus. Your employer sells enough shares to cover withholding: federal, California, Social Security up to the annual wage base, Medicare, and state disability. Roughly 350 to 400 shares go to taxes and you keep the rest, which are now yours to hold or sell.
The number that matters later is the value at vest, $50 a share in this example. That becomes your cost basis.
Why is the withholding usually not enough?
Federal withholding on supplemental wages like RSUs is a flat rate until your supplemental wages for the year pass $1 million, and a higher flat rate above that. California withholds at its own flat rate on equity compensation.
Here's the problem. If your household's actual federal rate is well above the flat withholding rate, every vest leaves a gap. Do that four times a year and you're looking at a five-figure bill you didn't plan for, plus underpayment penalties if nothing was done about it during the year.
There are two ways to close the gap: increase the withholding on your regular paycheck with a new W-4, or make quarterly estimated payments. For most higher earners the safe harbor is paying in at least 110% of last year's total tax. We run a mid-year projection for ongoing clients for exactly this reason.
What happens when you sell the shares?
Once they've vested, RSU shares are ordinary stock. When you sell, you compare the sale price to your cost basis, which is the value at vest.
- Sell at vest, or within a few days: the gain or loss is small, and the tax is essentially handled by the withholding already taken.
- Sell within one year of the vest date: any gain is short-term, taxed as ordinary income.
- Sell more than one year after vest: any gain is long-term, taxed at the lower federal capital gains rates, plus the net investment income tax for higher earners.
California has no special capital gains rate. The state taxes gains as regular income whether you held for one day or ten years. That changes the math on holding a year for the lower rate: the federal saving is real, the California saving is zero.
Should you sell at vest or hold?
This is the real decision, and it's an investment question more than a tax question.
Because your basis equals the value at vest, selling right away costs you almost nothing in tax. So the question becomes: if your employer had handed you $50,000 in cash instead of shares, would you use it to buy this stock today? If yes, hold. If not, sell and put the money where you'd actually put it.
Most people we work with answer "not this much of it." A common rule of thumb is to keep no more than 10 to 15% of your net worth in any one company, and that includes the company that also pays your salary. If your job, your unvested grants, and your investments all depend on one stock, a bad year at the company hits all three at once.
If you're an insider, or your company has trading windows, selling at vest may need to run through an open window or a 10b5-1 plan set up in advance. That's a scheduling problem, not a reason to hold.
What if your company is private?
Private company RSUs are usually double-trigger. You earn them on the vesting schedule, but they don't settle, and you don't owe tax, until a second event happens: an IPO or an acquisition. When that day comes, every share you've earned over the years settles at once, at the new price.
That creates two problems. A large amount of income lands in a single year, withheld at the flat supplemental rate, which leaves the biggest gap of your life. And after an IPO there's typically a lockup of about six months when you can't sell, so you may owe the tax before you can raise the cash. This is the situation we spend the most time planning around: an estimate of the tax, a plan for the cash, and a sell-down schedule for when the lockup ends.
What if you move out of California?
California taxes RSU income for the part of the vesting period you worked in the state, even if you vest after you've moved. If you were granted shares while working in Orange County and they vest two years later in Texas, a share of that income is still California income, based on the days worked here during the vesting period. Plan the move with that in mind rather than finding out from a Franchise Tax Board notice.
The mistakes we see most often
Paying tax twice. Some brokerage 1099-B forms show a cost basis of zero for RSU shares. If that goes on your return unadjusted, you pay tax on the full sale price even though the vest value was already taxed on your W-2. The fix is an adjustment on Form 8949. Check it every year.
Treating withholding as the bill. It isn't. It's a down payment.
Letting the shares pile up by default. Not deciding is a decision to hold.
Looking at the grant on its own. RSUs are one piece. How much you sell, when, and what you do with the cash should fit your tax year, your cash flow, and the rest of your plan.
What to do next
- 1
Pull your grant documents and your last two vest confirmations, and note the vest-date values. That's your basis.
- 2
Estimate this year's total vest income and compare the withholding to your actual bracket. If there's a gap, adjust your W-4 or set up estimated payments now.
- 3
Decide, in writing, how much of your net worth you're willing to keep in company stock, and sell down to that number on a schedule.
If you'd rather work through it with someone, that's what we do. A one-time plan covers the grant review, the tax projection, and a sell-down plan in one engagement. Ongoing planning keeps it current every quarter as new shares vest. Either way, the first step is a 30-minute intro call.