Restricted stock units (RSUs) are taxed as ordinary income when they vest, based on the stock’s fair market value on the vesting date. Your employer withholds federal income tax, Social Security, and Medicare taxes from that amount, just like it would from a bonus. If you hold the shares after vesting and sell them later at a different price, you may also owe capital gains tax on the difference.
How RSUs Are Taxed at Vesting
RSUs have no tax consequences when they’re granted. The taxable event happens when shares actually vest and land in your brokerage account. At that point, the total market value of the vested shares counts as ordinary income, and your employer is required to withhold taxes before you receive anything.
Say you have 100 RSUs that vest when the stock price is $50. That’s $5,000 in ordinary income added to your W-2 for the year, right alongside your salary. It doesn’t matter whether you sell the shares or hold them. The income is recognized and taxed the moment the shares vest.
Your employer withholds federal income tax on RSU income at the flat supplemental wage rate of 22%. If your total wages (salary plus RSU income plus any bonuses) exceed $1 million in a calendar year, the withholding rate on the portion above $1 million jumps to 37%. State income tax withholding applies too, at whatever rate your state requires. These withholding amounts show up on your pay stub or a supplemental earnings statement.
The 22% flat withholding is just a default estimate. It may not match your actual tax bracket. If your marginal federal rate is 32% or 35%, you’ll owe additional tax when you file your return. If you’re in a lower bracket, you could get a refund. Either way, review your total tax picture after a large vest to avoid a surprise bill in April.
Payroll Taxes on RSU Income
RSU income is also subject to Social Security tax (6.2%) and Medicare tax (1.45%), just like regular wages. Social Security tax applies only up to the annual wage base, which is $184,500 for 2026. Once your combined salary and RSU income crosses that threshold, no more Social Security tax is withheld for the rest of the year.
Medicare tax has no cap. If your total earnings exceed $200,000 as a single filer (or $250,000 if married filing jointly), an additional 0.9% Medicare surtax kicks in on the excess. A large RSU vest can easily push you past that threshold, adding to your overall tax bill.
How Your Employer Covers the Withholding
Your employer needs to send withholding to the IRS on your behalf, so it has to get the cash from somewhere. The most common method is sell-to-cover: your company automatically sells enough of your newly vested shares to pay the tax withholding, then deposits the remaining shares into your account. If 100 shares vest at $50 each and the combined withholding rate is roughly 40%, around 40 shares would be sold and 60 shares would be delivered to you.
Some companies offer other options. With net settlement, the company simply withholds a portion of the shares themselves rather than selling on the open market, delivering fewer shares to you. A third option is paying the withholding out of pocket with cash from your paycheck or bank account, which lets you keep all the shares. Not every employer offers all three, so check your equity plan documents to see what’s available.
Capital Gains Tax When You Sell
Once your RSUs vest, you own actual shares of stock. Your cost basis in those shares is the fair market value on the vesting date, which is the same amount that was taxed as ordinary income. Any gain or loss after that point is a capital gain or loss, not ordinary income.
How long you hold the shares after vesting determines whether the gain is taxed at short-term or long-term capital gains rates. If you sell within one year of the vesting date, any profit is a short-term capital gain, taxed at ordinary income rates. If you hold for more than one year after vesting, the profit qualifies as a long-term capital gain, taxed at the lower rates of 0%, 15%, or 20% depending on your taxable income.
Here’s a quick example. You receive 100 shares that vest at $50 per share. Six months later, you sell at $60. Your cost basis is $5,000 (100 × $50), your sale proceeds are $6,000, and you owe short-term capital gains tax on the $1,000 profit. If the stock dropped to $45 and you sold, you’d have a $500 capital loss you could use to offset other gains or deduct against ordinary income (up to $3,000 per year).
Selling Immediately vs. Holding
Many people sell RSU shares as soon as they vest. This simplifies the tax situation because there’s little or no capital gain, and you avoid the risk of the stock price falling. You’ve already been taxed on the full value at vesting, so if the stock drops 20% before you sell, you’ve effectively paid tax on money you never received. Selling immediately converts the shares to cash and eliminates that risk.
Holding makes sense if you believe the stock will appreciate enough to justify the concentration risk and you want the benefit of long-term capital gains rates. But keep in mind that you likely already have significant exposure to your employer through your salary and future RSU grants. Holding large positions in a single stock, especially your employer’s stock, adds a layer of financial risk that diversified investments don’t carry.
How RSUs Show Up on Your Tax Return
RSU income appears on your W-2 in Box 1 (wages) and is included in your total compensation for the year. The taxes withheld are reflected in the federal and state withholding boxes. You don’t need to do anything special to report the vesting income itself since it’s already baked into your W-2.
When you sell shares, your brokerage issues a 1099-B reporting the sale. Watch the cost basis carefully. Brokerages sometimes report RSU sales with a cost basis of zero or with an unadjusted basis, which would make it look like your entire sale price is a gain. Your actual cost basis is the per-share price on the vesting date, and you may need to adjust the reported basis on Schedule D to avoid being double-taxed on income you already paid tax on through your W-2.
If your RSUs vest in multiple tranches throughout the year, each tranche has its own cost basis based on the stock price on that specific vesting date. Keep records of each vest so you can accurately calculate gains or losses when you eventually sell.