How Are RSUs Taxed?

Restricted stock units (RSUs) are generally taxed as wage income when they vest and the shares are delivered or made available to you. The taxable amount is usually the shares’ fair market value at that time, even if you keep them instead of selling them. Your employer may withhold taxes from the vesting event, but withholding is only a payment toward your tax bill and may not equal what you ultimately owe. After vesting, the shares generally have a cost basis equal to that same fair market value, so a later sale creates a separate capital gain or loss on the change in value. As a result, RSUs can create tax obligations before you receive cash from selling shares, while holding them leaves you exposed to changes in your employer’s stock price. The IRS explains the general tax treatment of stock-based compensation and how RSU income may be reported on Form W-2 in its stock-based compensation guidance.

When Are Rsus Taxed?

Receiving an RSU grant is generally not a taxable event. Tax usually applies when the units vest and the shares are delivered or otherwise made available to you. Vesting often depends on remaining employed through specified dates, although an award may have other conditions. Your plan documents explain the vesting schedule and settlement terms, which determine when the shares are delivered and how the award is handled.

At vesting, the fair market value of the shares is generally included in your taxable wages for the year. Federal income tax withholding may apply, as can Social Security and Medicare taxes where applicable. State and local income taxes may also apply. For context, FICA and federal income tax are separate taxes, so wage withholding for one does not replace the other.

A Hypothetical Vesting Example

Suppose 200 RSUs vest when the stock is worth $50 per share. Their fair market value at vesting is $10,000, which is generally treated as wage income. You may owe tax on that compensation even if you do not sell any shares.

To meet withholding requirements, an employer may withhold shares or sell some through a sell-to-cover transaction. You may therefore receive fewer shares in your brokerage account than vested. The amount withheld is a payment toward your tax liability, not necessarily the final amount you owe. Withholding may use a flat supplemental wage rate that is lower than your effective or marginal tax rate. A large vesting event or substantial other income can therefore leave you with additional tax to pay.

Federal income tax withholding on wages is a prepayment rather than a calculation of your final tax bill. The article on federal income tax withholding explains how withholding fits into payroll taxes.

What Happens When You Sell Vested Shares?

After vesting, the shares generally have a cost basis equal to their fair market value on the vesting date. When you sell, the difference between that basis and the sale proceeds is generally a capital gain or loss. This separates the value already taxed as compensation from any subsequent change in the stock price.

For example, if the 200 shares in the previous example were worth $10,000 at vesting and later sold for $12,000, the $2,000 increase may be a capital gain. If they sold for $8,000, the $2,000 decrease may be a capital loss. The sale does not generally cause the full proceeds to be taxed again as wages.

The holding period begins after vesting. Shares sold one year or less after vesting generally produce short-term capital gains or losses. A gain on shares held for more than one year may qualify for long-term capital gains rates. Keep the vesting date and sale date because the time between them affects the tax treatment.

What Risks Come with Holding RSU Shares?

Keeping vested shares means retaining exposure to your employer’s stock. The price can rise or fall, and both your compensation and your investment portfolio may be affected by the same company. If shares worth $10,000 at vesting later fall to $6,000, the $10,000 was still generally included in wage income at vesting. The later $4,000 decline is a separate capital loss and does not erase the wage income.

When deciding whether to sell all or some of the shares, consider your cash needs, risk tolerance, overall financial plan, and existing investment in employer stock. Selling shares can provide cash to cover taxes or reduce concentration risk. Holding them leaves you exposed to future price movements.

How Do Rsus Appear on Tax Forms?

Form W-2

The value of vested RSUs is generally included in wage income on Form W-2. It may appear in Boxes 1, 3, and 5 depending on the applicable wages and limits. An employer may also identify RSU income in Box 14. The IRS discusses W-2 reporting of RSU income for nonresident aliens in its IRS stock-based compensation guidance. Review your W-2 rather than assuming the award will appear only on a separate tax document.

Brokerage Records for Share Sales

If you sell vested shares, your brokerage will generally report the transaction. Keep records of the vesting date, the number of shares vested, their fair market value at vesting, and any shares withheld or sold to cover taxes. Also retain the date and price of each later sale. These details help you report the correct basis and avoid treating compensation already reported as wages as untaxed sale proceeds.

Can You Defer Tax on Rsus?

Some employees of private corporations may be able to defer income taxation on qualified stock received through certain broad-based equity programs. Under Section 83(i), eligible employees may elect to defer income tax for up to five years from vesting on qualified stock attributable to eligible RSUs or stock options. The election is available only when specific requirements are met, so it is not a standard option for every employee or every RSU award.

IRS Publication 525 describes the rules for this type of deferral. Eligibility and election deadlines depend on the requirements that apply to the program and the employee.

How Can You Prepare for RSU Taxes?

• Read your plan documents to confirm vesting dates, settlement terms, and the withholding process.
• Save records showing the number of shares and their fair market value at vesting.
• Compare withholding with your likely tax liability because the amount withheld may not equal the amount ultimately due.
• Review your W-2 to confirm that RSU wage income is included.
• Keep brokerage confirmations and cost-basis records for later sales. Track the vesting date to determine whether a sale is within or beyond the one-year holding period.
• Consider taxes and investment risk together when deciding whether to hold or sell the shares.

*This article is for general informational purposes only and is not legal advice.