Restricted stock units look like the easy kind of equity pay. There's no exercise price, nothing to decide on vesting day, and your employer even sells some of the shares to cover the tax. That last part is where most of the trouble starts.
The tax on an RSU isn't complicated. It's just front-loaded and under-collected. The full value of the shares counts as salary on the day they vest, and the amount your employer holds back for tax is set by a flat rate that has nothing to do with your actual bracket. For a lot of people with meaningful grants, the result is a bill in April they didn't see coming.
This article walks through what happens on a vesting date, puts numbers on the withholding gap using the 2026 brackets, and covers the reporting error that catches people when they finally sell.
When an RSU becomes income
An RSU is a promise to give you shares later, usually on a vesting schedule tied to staying employed. Nothing happens for tax purposes when it's granted. You can't make an 83(b) election to be taxed early, either; that option exists for restricted stock, not restricted stock units.
On the vesting date, the shares become yours. Their market value that day is ordinary income, exactly as if your employer had paid you a cash bonus and you'd used it to buy the stock. It goes on your W-2 in Box 1 with the rest of your pay, and it's subject to income tax, Social Security and Medicare.
That's the whole income event. Everything after vesting is an ordinary investment: if the shares go up, you have a capital gain when you sell, and if they go down, a capital loss.
How the tax gets paid
Most plans handle the tax by "selling to cover" or "net settling." The plan holds back enough shares to pay the withholding, sends that money to the IRS on your behalf, and deposits the rest in your brokerage account.
The catch is the rate. RSU income counts as supplemental wages, and employers almost always withhold federal income tax on supplemental wages at a flat 22%. Once your supplemental wages for the year pass $1 million, the rate on the excess jumps to a mandatory 37%. Between those two, there's nothing in the system that looks at your salary, your spouse's income or your actual bracket.
If you're in the 22% bracket or lower, 22% is about right. If you're in the 24% bracket it's a little short. In the 32%, 35% or 37% brackets, it's well short, and the difference shows up when you file.
The withholding gap, in dollars
Take a single filer earning a $180,000 salary. In 2026, 1,000 RSUs vest at $90 a share, so $90,000 of extra wages lands on the W-2.
Without the RSUs, taxable income after the $16,100 standard deduction is $163,900, sitting in the 24% bracket. The RSU income stacks on top. The first $37,875 of it fills the rest of the 24% bracket, which ends at $201,775. The remaining $52,125 is taxed at 32%. Federal income tax on the RSUs comes to $9,090 plus $16,680, so $25,770.
The plan withheld 22% of $90,000, which is $19,800. That leaves $5,970 owed at filing, on top of whatever else the year brings, and possibly an underpayment penalty. The 22% rate covers the slice of RSU income in the 24% bracket reasonably well. Everything that spills into the 32% bracket is under-withheld by ten cents on the dollar.
Bigger grants make it worse, not better, because more of the income lands in the higher brackets. A married couple where both spouses have equity pay can be badly under-withheld even when neither grant looks large on its own, since each employer withholds as though its grant were the only income in the house.
Closing the gap before April
There are three practical fixes. Some plans let you choose a higher withholding rate on vesting shares, so check your plan portal first. You can also raise the extra withholding on your regular paycheck through a new W-4, which has a handy quirk: the IRS treats paycheck withholding as if it were paid evenly through the year, so a December increase can cover a shortfall from a March vest. Or you can make quarterly estimated payments.
To avoid an underpayment penalty, your total payments generally need to reach 90% of this year's tax or 100% of last year's. If last year's adjusted gross income was over $150,000, that second figure becomes 110%. In a year with a big jump in vesting income, the prior-year test is usually the easier one to hit.
Payroll tax: Social Security stops, Medicare doesn't
RSU income also gets Social Security and Medicare tax, withheld at vesting. Social Security is 6.2% but only on wages up to $184,500 in 2026. In the example, the salary already uses up most of that, so only $4,500 of the RSU income gets the Social Security tax at all.
Medicare has no cap. It's 1.45% on every dollar, plus an extra 0.9% on wages over $200,000. Your employer withholds that extra 0.9% once your pay from that job passes $200,000, regardless of filing status, which is why it sometimes needs correcting on the return for married couples.
One more payroll point. If you change jobs mid-year and both employers withhold Social Security, you can end up paying more than the annual maximum. The excess comes back as a credit on your return. It doesn't come back automatically, though, so check the W-2s.
Your cost basis, and the 1099-B that gets it wrong
Your cost basis in RSU shares is their value on the vesting date, the same figure that went onto your W-2 as wages. In the example, that's $90 a share. Sell at $90 and there's no gain. Sell at $100 and there's a $10 gain per share, short-term or long-term depending on whether you held for more than a year after vesting.
The trouble is the broker's 1099-B. For RSU shares, brokers often report the cost basis as zero, or leave the box blank and mark it as not reported to the IRS. Enter that as-is and your tax software treats the entire sale price as gain. You'd pay tax on the same $90 a share twice: once as wages at vesting, once as a capital gain at sale.
The fix is the same as for ESPP shares. Report the sale on Form 8949 with the correct basis, which most brokers show on a supplemental statement that comes with the 1099-B, and use the adjustment code the form instructions call for. If you've sold RSU shares in past years and never checked, look at whether your reported gains were suspiciously close to your sale proceeds. Amended returns are possible for three years.
Sell at vesting, or hold?
Here's the part that surprises people. Selling RSU shares the day they vest costs nothing in extra tax. Your basis is the vesting-day price, so a same-day sale produces no gain. The income tax was already triggered by the vesting itself, and it's due whether you sell or not.
That makes the decision unusually clean. Keeping the shares is economically identical to receiving a cash bonus and using all of it to buy your employer's stock. In the example, the plan's federal withholding alone takes 220 of the 1,000 shares (state and payroll withholding take a few more), which leaves 780 shares worth $70,200.
So the useful question isn't "should I sell my RSUs?" It's "if my employer handed me $70,200 in cash today, would I put all of it into the company's stock?" Most people say no straight away. They already depend on the company for their salary, their bonus and probably more unvested grants. Holding the vested shares too means a bad year for the company hits their job and their savings at the same time.
There are reasonable exceptions. If the shares are a small part of your net worth, or you'd genuinely buy the stock anyway, holding is a legitimate choice. Just make it on purpose. And if you hold for more than a year after vesting, any further gain is long-term, so there's a modest tax reason to wait on shares you've already decided to keep. It's rarely a reason to keep shares you'd otherwise sell.
When a position has already grown large, our article on reducing a concentrated stock position covers the ways to bring it down without one enormous tax bill.
Edge cases worth knowing
Wash sales around vesting dates. A vesting is an acquisition of shares. If you sell company stock at a loss within 30 days before or after a vest, some or all of that loss can be disallowed as a wash sale, with the disallowed amount added to the basis of the new shares. People with quarterly or monthly vesting trip over this all the time. Time loss sales away from vesting dates, and away from ESPP purchases too.
Retirement-eligible employees. Some plans keep vesting your RSUs after you retire once you reach a certain age and years of service. For those plans, Social Security and Medicare tax can come due as soon as you become eligible, even though the shares, and the income tax, arrive later on the normal schedule. It shows up as a strange FICA-only line on a pay stub. It's correct, just unexpected.
Private companies. Pre-IPO companies usually issue "double-trigger" RSUs, which need both time-based vesting and a liquidity event, such as an IPO or acquisition, before anything is taxable. That spares you a tax bill on shares you can't sell. It also means years of vesting can become taxable all at once when the event happens, often in one large lump.
Dividend equivalents. If your company pays dividends, unvested RSUs sometimes earn dividend equivalents. These are wages, not qualified dividends, and they're taxed at your ordinary rate.
Moving states. When you've worked in more than one state during a vesting period, each state may tax a share of the income based on where you worked. Your W-2 might show several state lines, and getting the allocation right is worth checking.
What to actually do
Before the year starts, list your vesting dates and estimate the value of each one. Work out roughly where the income will land in the brackets and compare it with what 22% withholding will collect. If there's a gap, close it with a higher plan withholding rate, a W-4 change or estimated payments.
On each vesting date, decide whether you'd buy the shares with cash. If not, sell them. There's no tax reason to wait.
At tax time, check every 1099-B that includes RSU shares and make sure the basis matches the vesting-day value. It's the single most common way people overpay on equity compensation, and it takes about ten minutes to fix.