A Complete Guide to RSUs: Vesting, Taxes, and Selling Your Shares

By Jeff Audi, Tax Advisory Manager

Restricted stock units, commonly known as RSUs, are a unique form of stock-based compensation often paid to executives and key employees. Put simply, RSUs represent compensation in the form of company stock, rather than by more traditional methods such as salaries, bonuses, or fringe benefits.

Companies mainly leverage restricted stock units as an incentive to attract and retain top talent. The rationale is that by offering stock ownership to employees, they are more motivated to proliferate productivity and profitability. If the company performs well and its stock price increases, employees will recognize a financial benefit – a symbiotic relationship for all parties involved.

The RSU “lifecycle” has three phases:

1. Granting: A conditional promise made by a company to deliver shares of stock to the employee
2. Vesting: The activation of the employee’s stock ownership rights
3. Selling: Once vested, the employee decides what to do with their shares

Understanding the full lifecycle of RSUs, including the unique tax implications at each stage, is an important part of your financial plan.

The Granting of RSUs

When a company grants you an RSU, it is simply making a conditional promise to deliver shares of company stock to you in the future – you do not own the shares yet. The specific conditions of receiving those shares depend on the terms of your grant, which could be:

• Time-based: The employee must remain employed at the company as of a specified date before the stock will be delivered.
• Milestone-based: The company or employee must complete a specific action before the stock will be delivered, such as the company undergoing an initial public offering (IPO), or the employee completing a certain project. The timing of this event could be known or unknown at the time of the grant, depending on its terms.

If the terms of a grant are time-based or milestone-based, they are called “single-trigger RSUs,” whereas grants that are both time-based and milestone-based are called “double-trigger RSUs.” Generally, there are no immediate tax implications upon the granting of RSUs.

The Vesting of RSUs

This stage activates the employee’s stock ownership rights; in other words, the stock is finally yours. When the RSUs vest and are settled, the value of those shares is generally treated as ordinary income for tax purposes. The amount of taxable income is calculated as follows:

(Number of shares transferred) x (Fair market value per share)

The good news is that taxes are withheld automatically – including federal income taxes, state income taxes (if applicable), and FICA taxes – and the remaining cash or stock will be delivered to you, the employee.

The downside is that the amount of withheld federal income tax may not be sufficient to cover your federal tax bill. This occurs when your marginal tax rate is greater than the federal withholding rate on supplemental wages like RSUs. The federal withholding rate for amounts less than $1 million is 22%.

Here is what this could look like in a real-life scenario:

Suppose a single taxpayer with no dependents has $300,000 of taxable income from only wages. At that income level, they are situated in the 35% federal marginal tax bracket and their 2026 tax due would be $73,769*.

Now the taxpayer receives another $100,000 of RSU income, increasing their taxable income to $400,000*. They remain in the 35% federal marginal tax bracket, so their 2026 tax due would be $108,769. Thus, this $100,000 of RSU income added $35,000 to their total federal tax bill.

Because RSUs are generally subject to a 22% supplemental wage withholding rate, this $100,000 of RSU income will only have $22,000 in federal income tax withheld. In essence, this transaction leaves a $13,000 withholding “shortfall” between the amount held and the federal tax owed, resulting in an unexpected balance due to the IRS come tax time.

*Without regard to the Additional Medicare Tax on earned income

This same problem may or may not transpire at the state level. For example, for Georgia residents, it generally will not be a problem because Georgia’s flat 4.99% individual income-tax rate is the same as the 4.99% withholding rate on supplemental wages.

On the other hand, for California residents, it will be a problem because the California state withholding rate on supplemental wages is 10.23%, but the maximum California state marginal tax rate (excluding the 1% mental health services tax on taxable income over $1 million) is 12.3%.

If you’ve recently had RSUs vest or if you expect RSUs to vest in the near future, it is extremely important to notify your tax accountant. In certain situations, specific measures can be taken to quantify, minimize, or even completely offset forthcoming tax bill(s).

The Selling of RSUs

The final stage of the RSU life cycle only applies if vested RSUs are deposited as shares, rather than sold and delivered to you as cash. At this point, once your shares have vested, they are yours to either hold onto or sell. You might choose to:

• Hold onto the stock purely out of company loyalty or because you believe the stock’s price will continue to climb.
• Divest to reduce single-stock exposure and mitigate overall risk within your investment portfolio
• Sell the stock to generate cash to fund other important financial goals

No matter what your goals are, deciding when to sell your shares can be complicated and should be discussed with your financial advisor.

From a tax standpoint, the tax treatment of selling RSUs depends on when the sale occurs.

• Within one year of vesting: The gain (the selling price less the value of the shares at vesting) will generally be treated as a short-term capital gain and taxed at ordinary income tax rates.
• After one year since vesting: The gain will generally be treated as a long-term capital gain and may be taxed at preferential federal rates. If the stock price has increased substantively since vesting, this option will likely result in a lower federal tax liability.

The most important thing to keep in mind with restricted stock units is to be proactive. These equity awards can be a tremendous way to build wealth or foster financial security. Tactful and prudent RSU-related tax planning is a fundamental step in developing a healthy financial plan.

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Should you have additional questions, please contact the Chicory Wealth Tax Team at [email protected].