RSU Taxes, Explained
Restricted stock units are the simplest form of equity compensation and still manage to generate more filing-season surprises than almost anything else on a W-2. The mechanics are genuinely simple; the traps are in the details of withholding and cost basis. This guide covers both, and the RSU tax calculator will estimate your own vest with 2026 rates.
Vesting is the taxable moment
You owe nothing when RSUs are granted. On the day shares vest, their market value becomes ordinary wage income — the same as salary, on your W-2, subject to federal income tax, Social Security, Medicare, and state tax where applicable. Vest 100 shares at $150 and you have $15,000 of income that day, whether or not you sell a single share. There is no election, timing choice, or way to defer it: holding the shares does not postpone the tax, it only adds market risk on top of a tax bill that already exists.
Sell-to-cover: why fewer shares land than vested
Employers must withhold on that income, and since the income arrived as stock rather than cash, the standard mechanism is "sell to cover": the broker sells just enough shares at vest to fund the withholding and deposits the rest in your account. Federal withholding uses the flat supplemental rate of 22% (a mandatory 37% on supplemental wages past $1 million in the year), plus 6.2% Social Security up to the $184,500 wage base, 1.45% Medicare, the 0.9% additional Medicare withholding above $200,000 of total wages, and any state amount.
Concretely: 100 shares vesting at $150 with $150,000 of wages already paid this year is $15,000 of income. Federal withholding takes $3,300 and FICA $1,148, so the broker sells about 30 shares to cover (brokers round up to whole shares) and roughly 70 land in your account. Nothing was "lost" — it was withheld, exactly like tax on a paycheck.
The under-withholding trap
Here is the part that catches high earners every year. The 22% flat rate matches the federal bracket that, for a single filer in 2026, ends at $105,700 of taxable income. RSU income stacks on top of your salary, so if the combination puts your top dollars in the 24%, 32%, or 35% bracket, every RSU dollar was withheld at 22% but is actually taxed at your higher marginal rate. On a large vest the gap is thousands of dollars, due at filing. If RSUs are a major part of your pay, check your withholding against your real bracket mid-year — the fix is an estimated payment or extra salary withholding, both painless compared to an April surprise plus a possible underpayment penalty.
Cost basis: do not pay tax on the same dollars twice
When you eventually sell, only the movement after vest is a capital gain or loss. Your basis in each share is its vest-date value — the amount already taxed as wages. The classic self-inflicted wound is trusting the 1099-B: brokers are not required to report the full basis of equity compensation, and many report zero, which silently turns your already-taxed vest value into "gain" a second time unless you correct the basis on your return. Sell above the vest price after holding more than a year and the profit gets long-term rates; sell below it and you have a deductible capital loss — our capital gains calculator shows what either scenario costs at 2026 rates.
State taxes and the California case
States tax RSU income as wages, and several publish specific supplemental withholding rates for equity compensation — California's is 10.23% for 2026, materially higher than its rate for ordinary bonuses. If you moved states between grant and vest, allocation rules can split the income between them, which is beyond any calculator and genuinely worth a professional's time.
The one-sentence strategy most advisors give
Since vest-date value is taxed regardless, holding the shares afterward is equivalent to receiving cash and choosing to buy your employer's stock with it. Some people would happily make that purchase; most would diversify. Framing it that way — rather than as "keeping" something — is the single most useful mental model RSU holders can adopt.
Rates cited are 2026 figures from IRS Publication 15, the IRS 2026 inflation adjustments, and state withholding schedules; source URLs are kept with the data in the site repository. General information, not tax advice.