Restricted Stock Units (RSUs)

An RSU grant names a number of units and a vesting schedule. A common pattern is four years with a one-year cliff: nothing vests for twelve months, then a quarter vests at once, and the rest follows monthly or quarterly. Each vested unit is usually settled with one share, deposited in an account with the plan’s broker.

Until units vest, you own nothing. You have no shares to sell, vote or borrow against, and leaving the job normally forfeits whatever hasn’t vested, which is why large unvested grants act as golden handcuffs. Many public companies add annual refresh grants, so a long-tenured employee often has several overlapping grants vesting at once.

Private companies often use double-trigger RSUs, which need both time-based vesting and a liquidity event, such as an acquisition or a public listing, before shares are delivered and taxed. That keeps employees from owing tax on shares they can’t yet sell.

Because an RSU is worth the full share price, not just the rise above an exercise price, it keeps value in a falling market in a way stock options don’t. A 30% drop cuts an RSU’s value by 30%; it can leave an option with no exercise value at all.

For federal tax, vested RSUs are ordinary compensation. The value on the delivery date, shares times fair market value, goes into box 1 of your W-2 with your salary. It is subject to Social Security tax up to the $184,500 wage base for 2026 and to Medicare tax with no cap, plus the 0.9% Additional Medicare Tax, which your employer starts withholding once your wages pass $200,000. The income is taxed at your marginal tax rate, whatever the company withheld.

Employers treat vesting income as supplemental wages. IRS Publication 15 for 2026 lets them withhold federal income tax at a flat 22%, and withholding on supplemental wages above $1 million in a year must be 37%. Most cover the tax by holding back some of the vesting shares or selling enough of them to pay it.

The value you were taxed on becomes your cost basis, and your holding period starts the day after the shares are delivered. Sell within a year and any further gain is a short-term capital gain; hold longer and it becomes a long-term capital gain.

An RSU is an unfunded promise, not property, until it is settled, so the section 83(b) election that lets holders of restricted stock pay tax early isn’t available. Employees of certain private companies with broad-based plans can instead make a section 83(i) election that defers income tax on RSU shares for up to five years.

RSUs are one of three common ways to pay employees in stock, and each is taxed on a different event. With restricted stock, sometimes called a restricted stock award, you receive actual shares at grant that you can still forfeit. Income arises as they vest, unless you file an 83(b) election within 30 days of the transfer and pay tax on the grant-date value instead.

With stock options, you receive the right to buy shares at a fixed exercise price. Nonqualified options are taxed as wages on the spread when you exercise. Incentive stock options aren’t taxed for regular tax at exercise but can trigger the alternative minimum tax. An employee stock purchase plan is different again: you buy discounted shares with your own after-tax pay rather than receiving a grant.

Selling at vesting costs little extra tax. Your basis equals the price you were just taxed on, so an immediate sale produces little or no gain. The real question is investment risk.

A useful test: if your employer had paid the same amount as a cash bonus, would you use it to buy the company’s stock? Keeping vested shares is economically the same decision. You already depend on the company for your paycheck and future grants, so a large holding ties both your income and your savings to one business. Moving the proceeds into a diversified portfolio reduces that single-company risk.

Holding can still make sense, for example waiting a few weeks for the one-year mark when shares have risen well above their vest price. Weigh that tax saving against how far the price could fall meanwhile. Shares kept for years grow into large gains, which makes a concentrated position harder to unwind later.

Most RSU problems come from treating a volatile, taxable payment as if it were fixed cash. They show up most often in the first year a large grant starts vesting, or when a refresh grant lands on top of earlier ones. Your W-2, the plan administrator’s vesting confirmations and the broker’s Form 1099-B together show what you were paid, what was withheld and the basis you should report, so keep all three for every vest.