Equity Compensation

RSU 101

Everything you need to know about Restricted Stock Units, from how vesting and taxation work to strategies for managing concentration risk and optimizing after-tax proceeds.

RSU 101

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What Are RSUs?

Restricted Stock Units are a promise from your employer to deliver shares of company stock upon vesting
Unlike stock options, RSUs have value even if the stock price drops because there is no strike price
RSUs are the most common form of equity compensation at large publicly traded technology companies
You do not own any shares or receive dividends until the RSUs actually vest and settle

How RSU Vesting Works

RSUs typically vest over three to four years, with some companies using a one-year cliff
Vesting schedules vary by company, with some using equal quarterly vesting and others backloading later years
Each vesting event is treated as ordinary income equal to the number of shares times the stock price that day
Vesting is contingent on continued employment, so unvested RSUs are forfeited upon departure
Some companies offer refresher grants annually, creating overlapping vesting schedules over time

Tax Treatment at Vesting

RSUs are taxed as ordinary income at the fair market value on the date they vest
Your employer will withhold federal, state, and payroll taxes, often by selling a portion of the shares
The default federal supplemental withholding rate is 22%, which may be insufficient for high earners
Any shortfall between withholding and your actual tax rate must be paid at filing time or via estimated taxes
The cost basis for future capital gains is set at the fair market value on the vesting date

Withholding Shortfall Problem

At 22% federal withholding, employees in the 32% to 37% bracket will owe additional tax at filing
State taxes add further liability, with California at up to 13.3% and New York City at up to 12.7% combined
A $200,000 RSU vesting could result in a $15,000 to $30,000 shortfall depending on your tax bracket
Set aside cash from each vest or increase estimated tax payments quarterly to avoid underpayment penalties

Selling Strategies

Sell at vest converts RSUs immediately to cash, eliminating concentration risk and locking in the known value
Holding for one year after vest converts future gains from ordinary income to long-term capital gains rates
A systematic selling plan such as selling 25% per quarter balances diversification with potential upside
Consider your total net worth allocation to company stock including unvested RSUs when deciding what to sell
Rule of thumb: limit single-stock exposure to no more than 10% to 15% of your investable portfolio

Key Takeaways

RSUs are taxed as ordinary income at vesting, and default withholding often does not cover your full liability
Track your vesting schedule and plan for the cash flow impact of taxes owed at each vesting event
Develop a written selling discipline before the shares vest to avoid emotional decision-making
Factor in unvested RSUs as part of your overall asset allocation and concentration risk assessment
A financial advisor can help model tax-efficient strategies for managing ongoing RSU income

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What Are RSUs?

Restricted Stock Units are a promise from your employer to deliver shares of company stock upon vesting
Unlike stock options, RSUs have value even if the stock price drops because there is no strike price
RSUs are the most common form of equity compensation at large publicly traded technology companies
You do not own any shares or receive dividends until the RSUs actually vest and settle

How RSU Vesting Works

RSUs typically vest over three to four years, with some companies using a one-year cliff
Vesting schedules vary by company, with some using equal quarterly vesting and others backloading later years
Each vesting event is treated as ordinary income equal to the number of shares times the stock price that day
Vesting is contingent on continued employment, so unvested RSUs are forfeited upon departure
Some companies offer refresher grants annually, creating overlapping vesting schedules over time

Tax Treatment at Vesting

RSUs are taxed as ordinary income at the fair market value on the date they vest
Your employer will withhold federal, state, and payroll taxes, often by selling a portion of the shares
The default federal supplemental withholding rate is 22%, which may be insufficient for high earners
Any shortfall between withholding and your actual tax rate must be paid at filing time or via estimated taxes
The cost basis for future capital gains is set at the fair market value on the vesting date

Withholding Shortfall Problem

At 22% federal withholding, employees in the 32% to 37% bracket will owe additional tax at filing
State taxes add further liability, with California at up to 13.3% and New York City at up to 12.7% combined
A $200,000 RSU vesting could result in a $15,000 to $30,000 shortfall depending on your tax bracket
Set aside cash from each vest or increase estimated tax payments quarterly to avoid underpayment penalties

Selling Strategies

Sell at vest converts RSUs immediately to cash, eliminating concentration risk and locking in the known value
Holding for one year after vest converts future gains from ordinary income to long-term capital gains rates
A systematic selling plan such as selling 25% per quarter balances diversification with potential upside
Consider your total net worth allocation to company stock including unvested RSUs when deciding what to sell
Rule of thumb: limit single-stock exposure to no more than 10% to 15% of your investable portfolio

Key Takeaways

RSUs are taxed as ordinary income at vesting, and default withholding often does not cover your full liability
Track your vesting schedule and plan for the cash flow impact of taxes owed at each vesting event
Develop a written selling discipline before the shares vest to avoid emotional decision-making
Factor in unvested RSUs as part of your overall asset allocation and concentration risk assessment
A financial advisor can help model tax-efficient strategies for managing ongoing RSU income

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The information above is for educational purposes only and does not constitute investment advice, a recommendation, or a solicitation to buy or sell any security. Any historical figures are for illustration only, and past performance does not guarantee future results. Tax laws, regulations, and contribution limits change frequently, the details here may become outdated. Individual circumstances vary. Consult a qualified financial advisor, CPA, or attorney for guidance specific to your situation. Rubric Advisors is registered with the California DFPI; registration does not imply a certain level of skill or training.

RSU 101

What Are RSUs?

How RSU Vesting Works

Tax Treatment at Vesting

Withholding Shortfall Problem

Selling Strategies

Key Takeaways

What Are RSUs?

How RSU Vesting Works

Tax Treatment at Vesting

Withholding Shortfall Problem

Selling Strategies

Key Takeaways

Related Topics

What Happens to RSUs When Your Company Gets Acquired

Stock Options 101

Tender Offer Decision Framework

RSU 101

What Are RSUs?

How RSU Vesting Works

Tax Treatment at Vesting

Withholding Shortfall Problem

Selling Strategies

Key Takeaways

What Are RSUs?

How RSU Vesting Works

Tax Treatment at Vesting

Withholding Shortfall Problem

Selling Strategies

Key Takeaways

Related Topics

What Happens to RSUs When Your Company Gets Acquired

Stock Options 101

Tender Offer Decision Framework