By Harry Prabandham · Updated September 27, 2026
Equity Compensation
RSUs Explained: Vesting, Withholding, and Selling Decisions
An RSU is a promise to deliver company shares once vesting conditions are met. The value is taxed as wages at vesting, and withholding often falls short.
RSUs Explained: Vesting, Withholding, and Selling Decisions
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What is an RSU?
- A restricted stock unit is an employer's promise to deliver shares, or their cash value, once you meet vesting conditions.
- There is no purchase price, so an RSU keeps some value as long as the stock is worth more than zero.
- Vesting usually depends on continued employment; unvested units are generally forfeited when you leave.
- Private companies often use double-trigger RSUs, which also require a liquidity event such as an IPO or acquisition before shares settle.
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Full Guide
What is an RSU?
- A restricted stock unit is an employer's promise to deliver shares, or their cash value, once you meet vesting conditions.
- There is no purchase price, so an RSU keeps some value as long as the stock is worth more than zero.
- Vesting usually depends on continued employment; unvested units are generally forfeited when you leave.
- Private companies often use double-trigger RSUs, which also require a liquidity event such as an IPO or acquisition before shares settle.
When are RSUs taxed?
- For most RSUs, shares are delivered at vesting and their market value is W-2 wage income, subject to income tax, Social Security, and Medicare.
- Social Security tax stops at the 2026 wage base of $184,500, while Medicare continues, with an extra 0.9% on wages above $200,000.
- Your cost basis is the value at vesting; a later sale produces a capital gain or loss measured from that point.
- Shares held more than one year after vesting qualify for long-term capital gains rates on any post-vest gain.
Why does withholding often fall short?
- Employers commonly withhold federal tax on RSUs at a flat 22% supplemental rate, which is below the 32% to 37% brackets many tech employees are in.
- Once your supplemental wages for the year exceed $1 million, the excess must be withheld at 37%.
- California withholds 10.23% on stock compensation, below its 12.3% top bracket plus a 1% surcharge on income over $1 million.
- Quarterly estimated payments or a cash reserve can cover the gap; the prior-year safe harbor is 110% of last year's tax if AGI exceeded $150,000.
Is holding vested RSUs different from buying the stock?
- Economically, keeping vested shares is similar to receiving cash and choosing to buy your employer's stock with it.
- Selling right at vest usually creates little additional tax, because the basis equals the price you were just taxed on.
- Holding for long-term treatment only affects gains after vesting; the vest-date value is ordinary income either way.
- Framing it this way helps separate the tax question from the question of how much single-stock risk you want.
How do trading windows and 10b5-1 plans affect selling?
- Many companies restrict employee sales to open trading windows between earnings blackout periods.
- Shares withheld or sold to cover taxes at vesting are usually handled automatically, even during blackouts.
- A Rule 10b5-1 plan schedules future sales in advance; most employees face a 30-day cooling-off period before the first trade.
- Officers and directors face a longer cooling-off period of 90 to 120 days and additional reporting.
Key takeaways
- RSUs are taxed as wages when shares are delivered, and the vest-date value becomes your basis.
- Flat 22% federal withholding often leaves a balance due for higher earners; plan for it in advance.
- Keeping vested shares is an investment decision, largely separate from the tax treatment.
- Count unvested RSUs when judging concentration, and confirm tax details with a CPA.
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