Restricted Stock Units (RSUs): How RSU Taxes Work and How to Plan Around Vesting
Restricted stock units, or RSUs, are one of the most common forms of equity compensation for executives and employees of public companies, and increasingly for those at private companies as well. An RSU is a promise from your employer to deliver shares of company stock, or sometimes their cash value, once certain conditions are met, usually continued employment through a vesting date.
RSUs are straightforward compared with stock options, since there is no purchase price and no exercise decision. But they create taxable income on a schedule you do not control, and they can quietly build a large position in a single company. Planning around vesting dates is where tax planning and wealth management meet.
Start Here: A Complimentary Wealth and Tax Review
If RSUs make up a growing share of your pay, it helps to look at them alongside your full financial picture. Compound offers a complimentary, no-obligation wealth and tax review. A review may include:
Your vesting schedule: upcoming vest dates and the estimated income each may create
Withholding: whether the tax withheld at vesting is likely to cover what you owe
Concentration: how much of your net worth depends on one company's stock
Other equity awards: stock options, ESPP shares, and deferred compensation
Request your wealth and tax review.
How Restricted Stock Units Work
When RSUs are granted, you receive the right to future shares, not the shares themselves. Common vesting structures include:
Time-based vesting: shares vest in installments over several years
Cliff vesting: a larger portion vests after an initial waiting period
Performance-based vesting: the number of shares depends on company or individual results
Double-trigger vesting: common at private companies, where shares vest only after both a service requirement and a liquidity event, such as an IPO or sale, are met
Unvested RSUs are generally forfeited if you leave the company, though terms vary and some plans include provisions for retirement, disability, or a change in control. Reading your grant agreement is worthwhile.
How RSU Taxes Work
The basic rule for RSU taxes is simple: when shares vest and are delivered, the fair market value of those shares is generally taxed as ordinary income, just like a cash bonus. It appears on your W-2 and is subject to income and payroll taxes.
Several details matter:
Withholding may fall short. Employers often withhold federal tax on vested RSUs at a flat supplemental rate. For higher earners, that rate may be lower than their actual marginal rate, which can lead to a balance due in April or the need for estimated payments.
Your cost basis. The value taxed at vesting becomes your cost basis in the shares.
After vesting. Any later change in value is a capital gain or loss when you sell. The holding period for long-term treatment begins at vesting.
No election to accelerate. The election that lets some restricted stock holders recognize income early generally does not apply to RSUs.
State taxes. If you lived or worked in more than one state during the vesting period, more than one state may claim part of the income.
As with ESPP shares, brokerage tax forms may not show the correct cost basis. Making sure the basis matches the income already reported on your W-2 can help avoid paying tax twice on the same income.
The Key Question: Sell at Vest or Hold?
A useful way to think about it: once RSUs vest, you have already paid ordinary income tax on their value. Holding the shares is economically similar to receiving a cash bonus and using it to buy your employer's stock. Selling right away generally creates little additional tax, because your basis equals the value at vesting.
Some people hold for long-term capital gains on future growth, or because they believe in the company. Others sell regularly to diversify. The right answer depends on your goals, other holdings, cash needs, and risk tolerance. Executives may also face trading windows, ownership guidelines, or pre-arranged trading plans that shape when they can sell.
Equity Compensation Planning: Building a Strategy
Good equity compensation planning treats RSUs as part of a multi-year plan rather than a series of one-time surprises. Items worth discussing include:
A vesting calendar that shows expected income by year, so tax planning can happen in advance.
Estimated tax payments or adjusted withholding in years with large vests.
A diversification plan that sets how much company stock you are comfortable holding.
Offsetting income through retirement plan contributions or, for those who are charitably inclined, gifts of appreciated shares to a donor-advised fund.
Coordination with other awards, such as stock options and ESPP purchases, which have different tax rules.
Major life goals, such as a home purchase, education, or early retirement, that RSU proceeds may help fund.
For executives at private companies, double-trigger RSUs may lead to a large amount of income in the year of a liquidity event. See financial planning for younger executives in private companies and financial planning for early-career executives. Those with significant holdings may also find value in high net worth financial planning.
To see how proceeds reinvested in a diversified portfolio may grow under different assumptions, use the Compound calculator. Results are hypothetical and for illustration only.
Coordinating RSUs, Taxes, and Investments
RSUs sit at the intersection of your paycheck, your tax return, and your investment portfolio. Compound brings wealth management and tax planning and preparation together so vesting events are planned for, not just reported. We work with executives and professionals throughout Wisconsin, including Milwaukee, Madison, Brookfield, Waukesha, Green Bay, and Appleton, as well as surrounding areas.
Have RSUs vesting soon? Request a complimentary wealth and tax review.
Frequently Asked Questions
How are restricted stock units taxed?
The value of shares at vesting is generally taxed as ordinary income. Later gains or losses are taxed as capital gains or losses when you sell.
Why do I owe more RSU taxes than were withheld?
Employers often withhold at a flat supplemental rate, which may be lower than your actual marginal rate. Adjusting withholding or making estimated payments may help.
Should I sell my RSUs when they vest?
It depends on your goals and how much company stock you already hold. Selling at vest generally creates little additional tax and reduces concentration risk, while holding adds exposure to one company.
What happens to unvested RSUs if I leave my job?
They are generally forfeited, though terms vary. Some plans have provisions for retirement, disability, or a change in control. Check your grant agreement.
What is equity compensation planning?
It is the process of coordinating RSUs, stock options, and other awards with your tax plan, investment strategy, and life goals over multiple years.
Compound is a registered investment adviser. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. Tax laws are complex and subject to change, and equity award terms vary by employer and grant agreement. Strategies discussed may not be suitable for everyone, and there is no guarantee that any strategy will achieve its objectives or reduce taxes. Calculator results are hypothetical, are not guarantees of future results, and do not reflect any actual investment. Investing involves risk, including possible loss of principal. Diversification does not ensure a profit or protect against loss. Please consult your tax, legal, and financial professionals before acting on any information in this article. For more information, see Compound's Form ADV, available at adviserinfo.sec.gov.
About Compound Wealth
Compound Wealth serves individuals, families, and business owners seeking a coordinated approach to financial planning. By bringing together tax planning, accounting, wealth management, and business transition services, the firm helps clients consider how financial decisions may affect multiple areas of their overall planning strategy.
