Restricted stock units (RSUs) are one of the most common forms of equity compensation, especially at public companies and growth-stage firms. They can represent a significant portion of your total compensation, and a major tax event. Understanding how RSUs are taxed and applying smart planning strategies can help you keep more of their value, reduce concentration risk, and avoid costly surprises.
Let’s look at the tax rules for RSUs and practical strategies to maximize their after-tax benefit.
What Are Restricted Stock Units?
RSUs are a promise from your employer to deliver company shares (or their cash equivalent) once certain conditions are met, typically a time-based vesting schedule. Unlike stock options, you do not pay an exercise price. Once the units vest and shares are delivered, you own them outright.
Key timeline:
- Grant: No tax event. You receive the award but own nothing yet.
- Vesting/settlement: Taxable event. The fair market value (FMV) of the shares on the vest date is treated as ordinary compensation income.
- Sale: Separate capital gain or loss event based on the change in value after vesting.
Note that Section 83(b) elections generally do not apply to RSUs (This is when the tax impact of the grant is based on the date of issuance rather than the date of vesting ).
How RSUs Are Taxed
At vesting
The FMV of the shares on the vesting date is included in your W-2 as ordinary income. It is subject to federal income tax at your marginal rate (up to 37%), state income tax (where applicable), Social Security tax (up to the wage base), Medicare tax, and the 0.9% Additional Medicare Tax if your wages exceed the thresholds.
Your employer typically withholds taxes using the supplemental wage rates: 22% federal on the first $1 million of supplemental wages in a calendar year and 37% on amounts above that. State withholding rules vary. Many companies use a “sell-to-cover” approach, selling enough shares to satisfy the withholding and delivering the net shares to your account.
Important: The 22% federal default is often too low for higher earners. If your marginal rate is 32%, 35%, or 37%, you will likely owe additional tax when you file. Under withholding is one of the most common RSU-related tax surprises.
Cost basis
The FMV included in your income at vesting becomes your cost basis in the shares. Any later gain or loss is measured from that basis.
When you sell
- Held one year or less after vesting equals a short-term capital gain or loss (taxed at ordinary income rates).
- Held more than one year equals a long-term capital gain or loss (preferential rates of 0%, 15%, or 20%, plus the 3.8% Net Investment Income Tax if applicable).
Selling near the vest date usually produces little or no additional capital gain because the sale price is close to the basis.
Tax Planning Strategies to Maximize RSUs
- Close the Withholding Gap Proactively
Calculate the expected tax on upcoming vests using your actual marginal rate (federal + state). Compare it to the amount that will be withheld. Cover any shortfall by:
- Increasing withholding on regular pay via Form W-4.
- Making estimated tax payments.
- Setting cash aside from each vest.
Running quarterly tax projections helps avoid underpayment penalties and large April balances.
- Maximize Pre-Tax Retirement Contributions
RSU vesting increases your adjusted gross income. Offsetting that income with pre-tax contributions can lower your current tax bill:
- Maximize 401(k) or similar plan contributions (including catch-up contributions if eligible).
- Fund a Health Savings Account (HSA) if you have a high-deductible health plan.
- Consider non-qualified deferred compensation plans if offered and appropriate for your situation.
These moves reduce the taxable income that RSU vesting stacks on top of other income.
- Decide: Sell at Vest or Hold?
Many advisors recommend a default “sell-at-vest” approach for diversification reasons. If your company handed you a cash bonus equal to the vest value, would you immediately use all of it to buy more company stock? Holding creates (or increases) single-stock concentration risk on top of the employment risk you already carry.
Selling near vesting locks in the already-taxed value with minimal additional capital gain and frees capital for a diversified portfolio. Hold only if you have strong, independent conviction in the stock and concentration remains within your overall risk tolerance many planners suggest keeping employer stock well below 10–15% of investable assets. We often recommend keeping individual stock concentration below 5% of your total net worth.
If you do hold, track holding periods carefully so future sales can qualify for long-term capital gains rates.
- Use Specific Identification and Tax-Lot Management
When selling shares from multiple vesting dates, you can often choose which lots to sell (specific identification) rather than defaulting to the first in first out method (FIFO). Prioritizing higher basis lots can minimize current taxable gains. Confirm your broker supports specific ID and that the selection is properly documented on trade confirmations.
- Harvest Capital Losses
If you have other investments that have declined, realize those losses to offset capital gains from RSU sales (and up to $3,000 of ordinary income per year). Coordinate carefully around vesting dates and wash-sale rules.
Additional information on tax loss harvesting can be found here: Tax Loss Harvesting
- Charitable Giving of Appreciated Shares
If you are charitably inclined and hold shares that have appreciated significantly after vesting (and that you have held more than one year), donating the shares directly to a qualified charity or donor-advised fund can be powerful. You generally avoid recognizing the capital gain and may deduct the full fair market value (subject to AGI limits). This is often more tax-efficient than selling and donating cash.
- Coordinate Timing Across Years
Large vesting events or sales can push you into higher brackets, trigger more Net Investment Income Tax, or affect other phase-outs. Where possible, spread sales, accelerate deductions into high-income years, or time discretionary income into lower-income years. Multi-year tax projections are especially useful for executives with substantial equity compensation.
- Address State Taxes and Residency
State taxation of RSU income can be complex, particularly if you move or work across state lines. Some states source income based on where services were performed. High-tax states warrant extra planning around the timing of vesting and sales.
Common Mistakes to Avoid
- Assuming the 22% withholding is sufficient.
- Holding every share by default and building excessive concentration.
- Ignoring cost basis when brokers report $0 basis on Form 1099-B (you must adjust for the compensation income already reported).
- Failing to plan for cash needs if shares cannot be sold immediately due to blackout periods or lockups.
- Overlooking the interaction between RSU income and other tax items (AMT is less common with RSUs than with incentive stock options, but overall income still matters).
Putting it into Practice
Effective RSU management starts with a clear picture of your vesting calendar, expected values, current concentration, overall financial plan, and multi-year tax outlook. The optimal approach depends on your tax bracket, risk tolerance, liquidity needs, charitable goals, and conviction in the company stock.
RSUs are valuable compensation, but without intentional planning they can create unnecessary tax drag and portfolio risk. Working with a fee-only financial advisor and tax professional who understands equity compensation can help you turn RSU awards into lasting after-tax wealth.
About the Author
Joseph M. Favorito, CFP® is a Certified Financial Planner® as well as the founder and managing partner at Landmark Wealth Management, LLC, a fee-only SEC registered investment advisory firm. He specializes in helping individuals and families develop comprehensive financial strategies to achieve their long-term goals.