Executive Summary
How are RSUs taxed and when does taxation occur?
RSUs are taxed as ordinary income on the vesting date, based on the fair market value (FMV) of shares at that specific moment. Unlike stock options where you control exercise timing, RSUs impose a mandatory tax event the moment they vest. The taxable amount is calculated as: Number of Vested Shares × FMV on Vesting Date.
The bottom line: When your RSUs vest, you owe ordinary income tax on the full FMV of those shares in that tax year, even if you never sell them.1
Critical Warning: If your effective tax rate exceeds the statutory withholding rate—common for employees with taxable income above $250,000 (single) or $500,000 (married filing jointly)—you will likely owe additional taxes and face underpayment penalties. Most employers do not permit RSU withholding adjustments, making this a widespread tax planning issue requiring professional guidance.2
The taxation of RSUs represents one of the most misunderstood aspects of equity compensation. Unlike stock options, where you control the exercise timing and can strategically defer taxation, RSUs impose a mandatory tax event the moment they vest. For high-earning employees, this can result in substantial tax bills that exceed the automatic withholding amount, leading to underpayment penalties if not properly managed.
Related Guides: For comparing stock option types, see our ISO vs NSO guide. For Section 83(b) elections (which don't apply to RSUs but do apply to restricted stock), see our Section 83(b) guide. For AMT planning with stock options, see our AMT planning guide.
Understanding RSUs: The Basics
What Are Restricted Stock Units?
Restricted Stock Units are a form of equity compensation that grants employees the right to receive shares (or cash equivalent) upon satisfaction of vesting conditions. Unlike restricted stock awards (RSAs), which grant actual shares immediately, RSUs represent a contractual promise to deliver shares in the future.[2]
The key distinction is ownership: you do not own shares or have any rights to them until vesting occurs. This fundamental fact has critical tax implications, particularly regarding IRC Section 83(b) elections and the timing of tax liability.
Common Vesting Structures
RSU vesting schedules vary by company but typically follow predictable patterns:[5]
Time-Based Vesting: A specified percentage of RSUs vest at regular intervals over a defined period. The most common structure is a 4-year grant with a 1-year cliff vest, followed by monthly or quarterly vesting thereafter. For example:
- Year 1: 25% vests (cliff)
- Years 2-4: Remaining 75% vests monthly (6.25% per month)
Cliff Vesting: A larger percentage vests on a single date, typically after one year of service, with subsequent vesting occurring at regular intervals.
Performance-Based Vesting: RSUs vest upon achievement of specified company or individual performance metrics, adding uncertainty to the vesting timeline.
Figure 1: [Description to be added]
The RSU Taxation Trigger: Vesting Date
When Taxation Occurs
The vesting date is the sole trigger for income tax liability on RSUs.[2] This is the critical distinction that separates RSU taxation from other equity awards. Unlike stock options, where you control the exercise timing and can defer taxation indefinitely, RSUs impose a mandatory tax event the moment vesting conditions are satisfied.
The taxable amount is calculated using a straightforward formula:
Taxable Ordinary Income = Number of Vested Shares × FMV on Vesting Date
Numerical Example:
Sarah, an Amazon employee, receives an RSU grant of 1,000 shares with a 4-year vesting schedule (25% cliff after year 1, then monthly thereafter). On the first vesting date (12 months after grant), 250 shares vest when Amazon stock trades at $180 per share.
Taxable Income = 250 shares × $180 = $45,000
Sarah must report $45,000 as ordinary income on her tax return for the year of vesting, regardless of whether she sells the shares, holds them, or the stock price subsequently changes.
The Vesting Date vs. Settlement Date
For most public companies, vesting and settlement occur on the same date, meaning you receive actual shares (or cash) immediately upon vesting.[3] However, some companies implement a delivery lag, where shares are delivered after vesting occurs.
Critical distinction: If settlement is delayed beyond the vesting date, the FMV on the delivery date (not the vesting date) typically determines the taxable income amount.[3] This creates potential tax planning opportunities or risks depending on stock price movement between vesting and settlement.
Example with Delivery Lag:
Amy's RSUs vest on December 1 when the stock trades at $150 per share. However, her company's settlement procedures result in share delivery on December 15, when the stock has appreciated to $160 per share. The taxable income is calculated using the December 15 FMV of $160, not the December 1 vesting-date FMV of $150.
Figure 2: [Description to be added]
Tax Withholding and Supplemental Income Treatment
Mandatory Withholding Rates
RSUs are classified as supplemental income and subject to mandatory federal withholding at statutory rates that differ from your regular payroll withholding:[3]
| Supplemental Pay Amount | Federal Withholding Rate |
|---|---|
| Less than $1,000,000 | 22% |
| $1,000,000 or more | 37% |
Additionally, RSUs are subject to FICA taxes (Social Security and Medicare) at standard rates (6.2% for Social Security, 1.45% for Medicare, plus 0.9% additional Medicare tax for high earners).[1]
The Withholding Insufficiency Problem
The 22% federal withholding rate creates a critical tax planning issue for high-earning employees. This withholding rate is often substantially lower than the employee's actual marginal tax rate.[3]
Example of Withholding Shortfall:
Consider Michael, a senior engineer with a base salary of $200,000 and $300,000 in RSU vesting during the year. His total taxable income is $500,000, placing him in the 37% federal tax bracket (2024 tax tables). Additionally, he owes state income tax of 10% in his state of residence.
RSU Vesting Amount: $300,000
Federal Withholding (22%): -$66,000
State Withholding (10%): -$30,000
FICA Withholding (7.65%): -$22,950
Total Withholding: -$118,950
Actual Tax Liability (37% + 10% + 7.65%): $154,950
Underpayment: $35,000
Michael faces a $35,000 tax bill in April, plus potential underpayment penalties if he did not make sufficient estimated tax payments throughout the year.
Withholding Adjustment Limitations
Most employers do not permit employees to adjust RSU tax withholding at vesting.[3] While some companies offer this flexibility, it is operationally cumbersome and not the industry norm. This limitation means employees cannot increase withholding to match their actual tax liability, creating a structural underpayment problem.
Practical Solution: High-earning employees should work with a CPA or tax advisor to determine whether increasing regular payroll withholding or making quarterly estimated tax payments is necessary to avoid penalties.[5]
Figure 3: [Description to be added]
Income Tax vs. FICA Tax Timing Mismatches
The Deferred Settlement Complication
Some companies structure RSUs with deferred settlement dates that occur after vesting, allowing employees to defer income tax recognition to a later year. However, this deferral does not extend to FICA taxes.[4]
Under IRC Section 409A regulations, if RSUs are not settled within two and a half months of the end of the year in which vesting occurred, they are treated as nonqualified deferred compensation. In this scenario:[1]
- Income tax withholding is deferred until the year of actual settlement or payment
- FICA tax withholding is required in the year of vesting, when the RSU is no longer subject to substantial risk of forfeiture
This creates a timing mismatch where employees must pay FICA taxes on vesting but defer income taxes until settlement—a counterintuitive result that complicates tax planning.
Example of Deferred Settlement:
David receives RSUs that vest on December 31, 2025, but the settlement agreement specifies that shares will be delivered on June 30, 2026. The RSU agreement is structured to comply with IRC Section 409A by settling within two and a half months of year-end (by March 15, 2026).
In this case:
- FICA taxes are withheld in 2025 (year of vesting)
- Income taxes are withheld in 2025 (year of vesting and settlement)
- Shares are delivered in 2026
However, if the settlement date were delayed to July 1, 2026 (beyond the two-and-a-half-month window):
- FICA taxes are withheld in 2025 (year of vesting)
- Income taxes are deferred until 2026 (year of settlement)
- Shares are delivered in 2026
Retirement Eligibility Exception
For FICA purposes, RSUs become taxable when they are no longer subject to substantial risk of forfeiture, which generally means vesting has occurred.[4] However, a critical exception applies: if an employee is already retirement-eligible at the time of grant or becomes retirement-eligible before the stated vesting date, the RSU is subject to FICA tax immediately upon becoming retirement-eligible—even if income tax deferral applies.
This creates a situation where FICA taxes may be due years before income taxes, requiring careful monitoring of retirement eligibility status.
Post-Vesting Taxation: Capital Gains Treatment
Cost Basis and Holding Period
Once RSUs vest and you receive shares, the FMV on the vesting date becomes your cost basis for capital gains purposes.[4] The holding period for long-term capital gains treatment begins on the vesting date (or settlement date if different).
If you hold the vested shares for more than one year and subsequently sell them at a price higher than the vesting-date FMV, the appreciation is taxed at long-term capital gains rates (0%, 15%, or 20% depending on income level), not ordinary income rates.[4]
Common Misconception: The One-Year Holding Period
A widespread misconception exists that holding RSU shares for one year after vesting provides a tax advantage. This is incorrect.[2]
The ordinary income tax on the vesting-date FMV is already locked in and cannot be reduced by holding the shares. The one-year holding period only affects subsequent appreciation beyond the vesting-date FMV.
Example Clarifying the Misconception:
Jennifer receives 1,000 RSUs that vest on January 15, 2025, when the stock trades at $100 per share. She is taxed on $100,000 of ordinary income in 2025.
Scenario A: Sell immediately
- Sale price: $100 per share
- Ordinary income tax: $100,000 (at vesting)
- Capital gain/loss: $0
- Total tax: Ordinary income tax only
Scenario B: Hold for 18 months, sell at $120
- Ordinary income tax: $100,000 (at vesting in 2025)
- Capital gain: $20,000 (appreciation from $100 to $120)
- Capital gains tax: $20,000 × 15% = $3,000 (long-term rate)
- Total tax: Ordinary income tax + $3,000 capital gains tax
Scenario C: Hold for 6 months, sell at $120
- Ordinary income tax: $100,000 (at vesting in 2025)
- Capital gain: $20,000 (appreciation from $100 to $120)
- Capital gains tax: $20,000 × ordinary rate (short-term, taxed as ordinary income)
- Total tax: Ordinary income tax + short-term capital gains tax
The ordinary income tax of $100,000 is identical in all scenarios. The only difference is the tax treatment of appreciation beyond the vesting-date FMV. Holding for one year provides a tax advantage only on that appreciation, not on the original vesting-date value.
Double-Trigger vs. Single-Trigger RSUs
Single-Trigger RSUs (Public Companies)
Single-trigger RSUs are taxed upon vesting and settlement, without any additional liquidity event requirement.[2] This is the standard structure for public company employees, where vesting is the sole trigger for taxation.
The advantage of single-trigger RSUs is predictability: you know exactly when taxation will occur based on the vesting schedule. The disadvantage is that you may owe substantial taxes without having liquidity to pay them if the stock price declines or you cannot sell shares due to trading restrictions.
Double-Trigger RSUs (Private Companies)
Double-trigger RSUs require two events for taxation and settlement: time-based vesting plus a liquidity event such as an IPO, acquisition, or secondary transaction.[2]
The IRS requires that RSUs remain subject to a "substantial risk of forfeiture" to defer taxation. This means there must be a genuine possibility that the employee will not receive the shares due to:
- Company failure or bankruptcy
- Employee departure before vesting
- Failure of a liquidity event to occur
Tax Advantage of Double-Trigger RSUs:
The primary advantage is tax deferral combined with liquidity. Employees defer taxation until the liquidity event occurs, at which point they can sell shares immediately to cover tax obligations. This eliminates the problem of owing taxes without having cash to pay them.
Example of Double-Trigger RSU Benefit:
Marcus receives 10,000 RSUs at a private startup with a 4-year vesting schedule and a double-trigger provision requiring an IPO or acquisition for settlement. The RSUs vest over four years, but no taxation occurs because the substantial risk of forfeiture (no liquidity event) remains.
In Year 4, the company is acquired at $50 per share. Marcus's 10,000 vested shares are worth $500,000. He is taxed on $500,000 of ordinary income in the year of acquisition, but he simultaneously receives $500,000 in cash (or acquirer stock) from the sale, providing liquidity to pay the tax bill.
The Waiver Problem: IRS Scrutiny
A critical issue arises when companies issue multiple waivers of the second trigger, allowing employees to receive shares without a liquidity event occurring.[2]
If a company repeatedly waives the liquidity requirement, the IRS may determine that the "substantial risk of forfeiture" has been eliminated for \ * all* time-vested RSUs, not just those receiving waivers. This could trigger supplemental income tax liability on all RSU holders for all vested shares—even those who did not participate in secondary transactions.
Practical Implication: Private company employees should carefully monitor whether their company is issuing waivers, as this could create unexpected tax liability for all shareholders.
IRC Section 83(b) Elections and RSUs
Why 83(b) Elections Don't Apply to RSUs
A common misconception is that employees can make an IRC Section 83(b) election for RSUs to accelerate taxation and lock in a lower FMV for tax purposes.[3]
This is not permitted. You cannot make an 83(b) election for RSUs because you do not own or have any rights to shares before vesting occurs. The 83(b) election applies only to equity awards where you receive actual shares at grant (such as restricted stock awards), not to contractual promises to deliver shares in the future.
Restricted Stock Awards vs. RSUs
The distinction is critical:
| Feature | Restricted Stock Award (RSA) | Restricted Stock Unit (RSU) |
|---|---|---|
| Ownership at Grant | Yes—you own shares immediately | No—you own nothing until vesting |
| 83(b) Election Available | Yes—can accelerate taxation to grant date | No—not applicable |
| Taxation Trigger | Vesting date (or grant date if 83(b) elected) | Vesting date only |
| Forfeiture Risk | Shares returned to company if you leave | No shares to forfeit; contract terminates |
Employer Tax Deductions and Timing
Employer Deduction Amount
The employer is entitled to a tax deduction equal to the amount of ordinary income recognized by the employee.[1] If an employee recognizes $100,000 of ordinary income upon RSU vesting, the employer receives a $100,000 deduction.
Deduction Timing
The timing of the employer's deduction depends on whether RSUs are settled in shares or cash, and when settlement occurs relative to vesting
Footnotes
Disclaimer: This guide discusses legal tax optimization strategies only. Tax evasion is illegal and is never recommended. This content is for educational purposes and does not constitute tax, legal, or financial advice. Tax laws vary by jurisdiction and change frequently. Always consult a qualified tax professional (CPA, tax attorney, enrolled agent) before making decisions based on this information. The authors accept no liability for actions taken based on this content.
Last Updated: January 26, 2026
Research Team: VestingStrategy Editorial Team
Primary Sources
| Source | Type | URL |
|---|---|---|
| IRS Publication 525 | Publication | https://www.irs.gov/publications/p525 |
| IRS Publication 550 | Publication | https://www.irs.gov/publications/p550 |
| Treasury Regulation § 1.83-1 | Regulation | https://www.law.cornell.edu/cfr/text/26/1.83-1 |
| Fidelity RSU Tax Guide | Reference | https://www.fidelity.com/learning-center/personal-finance/rsu-tax-guide |
| Charles Schwab RSU Guide | Reference | https://www.schwab.com/learn/story/rsu-taxes |