RSU Tax Planning: How to Handle Restricted Stock Units

RSU (Restricted Stock Unit): A grant of company stock that vests over time according to a schedule (typically 4 years with a 1-year cliff). At vesting, the shares become yours and the full fair market value is taxable as ordinary income. RSUs don't require any cash payment — unlike stock options, you receive shares at no cost when they vest.

Supplemental Withholding Rate: The federal income tax withholding rate applied to RSU income at vest. The IRS requires a flat 22% withholding for supplemental wages up to $1M (37% above that). For high earners in the 35-37% marginal bracket, 22% withholding is insufficient — you'll owe additional tax at filing unless you make estimated tax payments.

Cliff Vesting: A vesting schedule where no shares vest until a minimum tenure is reached, then a larger block vests at once. The classic tech vesting schedule is '4-year vest with 1-year cliff': 0% after month 11, 25% after month 12, then monthly or quarterly vesting for the remaining 75% over three years.

How RSU Taxes Actually Work

Restricted stock units are the most common form of equity compensation in tech, and they’re also one of the most frequently misunderstood.

Here is the fundamental fact: RSUs are taxed as ordinary income when they vest. The full fair market value of the shares on the vest date is compensation. It appears on your W-2. It’s subject to federal income tax at your marginal rate, state income tax, and FICA taxes (up to applicable wage bases).

This happens regardless of whether you sell the shares. If your RSUs vest when the stock is at $80/share and you receive 500 shares, you have $40,000 of ordinary income on that date, full stop. Holding the shares doesn’t defer the income — it just means you’ve chosen to maintain a position that’s now at your cost basis.

The Withholding Problem

Your employer withholds taxes on RSU income, but typically not enough for high earners. The federal supplemental withholding rate is 22% for most employees (37% for income above $1M). If you’re in the 35-37% marginal tax bracket, you’re being withheld at 22% on income that will be taxed at 35-37%.

On $200,000 in RSU vests:

Withheld at 22%: $44,000
Owed at 37%: $74,000
Gap: $30,000 in additional federal tax due at filing

Add state income tax (California is 13.3% for high earners) and the under-withholding gets more severe. High earners with substantial RSU income frequently owe significant additional taxes at filing that they didn’t budget for.

The fix: make quarterly estimated tax payments that cover the gap between withholding and actual liability.

Sell vs. Hold After Vesting

After vesting, shares have a cost basis equal to the vest-date price. Any appreciation from that point forward is a capital gain — short-term if you sell within 12 months, long-term if you hold 12+ months.

The decision to sell or hold is a real investment decision:

Sell immediately: Locks in post-tax value, eliminates concentration risk, allows reinvestment in target allocation
Hold 12+ months: Converts future appreciation to long-term capital gains (saving 15-17% vs. short-term rates), but maintains concentration risk and requires conviction the stock will appreciate

For most high earners, the default should be sell on vest — or sell within a few months on a consistent schedule. The reason: your RSU income is already concentrated in your employer. Your job, your salary, your benefits, and your equity all depend on one company. Adding a buy-and-hold investment position on top compounds that concentration.

The 12-month hold strategy is appropriate if you have specific conviction about appreciation AND your total employer stock exposure (across all accounts) is already below 10-15% of liquid net worth.

Managing Concentration Risk

Even with a policy of selling RSUs on vest, employees at large tech companies can accumulate substantial employer stock exposure through ESPP shares, previously held RSU lots, and 401(k) company stock funds.

Tracking your total employer stock exposure across all accounts — not just your brokerage, but also your equity comp platform, 401(k), and any ESPP shares — requires seeing everything in one place. A wealth aggregator shows you the concentration by ticker across all connected accounts.

The target: no single stock above 10-15% of liquid net worth. If you’re above that threshold, a systematic selling plan (selling X shares per month, selling a percentage of each vest, harvesting concentrated lots during pullbacks) is the path to reduction.

The Tax Planning Calendar

For employees with quarterly RSU vesting, the tax calendar looks like:

January-March: Model estimated Q1 RSU income, set up Q1 estimated tax payment
April 15: Q1 estimated tax payment due + prior year filing
April-June: Model Q2 vest income
June 15: Q2 estimated tax payment due
And so on through the year

Getting ahead of this calendar — making estimated payments before vest events rather than after — avoids underpayment penalties and the surprise of a large tax bill in April.

Q&A

Are RSUs taxed as ordinary income or capital gains?

RSUs are taxed as ordinary income at vest, at your marginal federal and state rate. The fair market value of shares on the vest date appears on your W-2 as income, regardless of whether you sell. After vesting, shares have a cost basis equal to the vest-date price. Any subsequent appreciation (if you hold the shares) is taxed as capital gains — short-term if sold within 12 months of vesting, long-term if held 12+ months.

Q&A

How much extra tax do I owe when RSUs vest?

Employers withhold 22% on RSU income for most employees (or 37% for income above $1M). If you're in the 35-37% tax bracket, you're under-withheld by 13-15% of the vest value. On $100,000 of RSU vests, you could owe $13,000-$15,000 in additional federal tax at filing, plus state taxes. Make estimated quarterly tax payments when RSU income is significant to avoid underpayment penalties.

Like what you're reading?

Try Thalvi free — no credit card required.

Want to learn more?

Learn More

Should I sell RSU shares immediately when they vest?

For most people, selling immediately on vest is the right default. The shares are already ordinary income whether you sell or hold. Selling on vest locks in the post-tax value and eliminates concentration risk. Holding makes sense only if you have strong conviction the stock will appreciate more than your other investment options, AND you're comfortable with the concentration that creates. Most financial planners recommend treating RSUs like a cash bonus — sell them and invest in your target allocation.

If I sell RSUs immediately, do I avoid capital gains tax?

Nearly. If you sell on the day the shares vest, any difference between the vest price and sale price is a small gain or loss from that day's movement. The vest value itself is ordinary income regardless. Selling immediately minimizes capital gains by keeping the holding period near zero and the appreciation minimal.

What's the 12-month hold strategy for RSUs?

If you hold RSU shares for 12+ months after the vest date, the appreciation from vest price to sale price becomes long-term capital gains (23.8% for most high earners) rather than short-term capital gains (up to 40.8% combined rate). The strategy is: hold if you expect the stock to appreciate, understand that the vest value is still ordinary income, and be comfortable with the concentration risk during the holding period.

How do I handle RSU taxes if my employer doesn't withhold enough?

Make estimated quarterly tax payments (Form 1040-ES) that cover the additional liability beyond withholding. The calculation: vest value × (your marginal rate - 22%) = estimated additional tax per vest event. Pay this quarterly to avoid underpayment penalties. Alternatively, elect to withhold at a higher rate on supplemental income if your employer's payroll system allows it.

How do RSUs affect my estate if I die before they vest?

Unvested RSUs at death may vest immediately, vest on the original schedule, or be forfeited, depending on your company's plan documents. The shares that vest receive a stepped-up cost basis to fair market value on the date of death, potentially eliminating capital gains tax. This is worth reviewing in your estate plan if you have significant unvested grants.

Keep reading

Equity Compensation Planning for Tech Women

RSU, NSO, ISO, ESPP — four types of equity compensation, different tax treatments, different planning strategies, and how to manage concentration risk across all of them.

How to Optimize Taxes on Stock Options

ISO vs NSO tax treatment, AMT exposure on incentive stock options, and exercise timing strategies to minimize your tax liability on company stock options.

How Women in Tech Should Manage RSUs and ESPP

RSU cliff vesting, ESPP 15% discount, concentration risk, when to sell, when to hold, and how to track equity comp as part of a complete financial picture.

Kubera Alternative: Wealth Tracking Designed for Women Investors

Looking for a Kubera alternative? Thalvi offers the same multi-asset wealth aggregation at a lower price point, with women-specific design and educational context Kubera lacks.