How RSUs are actually taxed (simpler than feared)
Restricted stock units have none of the exotic tax character of options: on vest day, the market value of the vested shares is ordinary income — added to your W-2, taxed exactly like salary, subject to Social Security (under the wage cap) and Medicare. There's no election to make, no AMT interaction, nothing to time. If 400 shares vest at $150, you earned $60,000 that day, full stop. Your cost basis in the shares becomes $150 — only growth after vest is capital gain. The complexity people feel isn't the tax rule; it's the two operational gaps below.
Gap #1: the withholding shortfall
Employers withhold RSU income at the IRS flat supplemental rate — 22% (37% only above $1M of supplemental wages) — usually by auto-selling a slice of the vest ("sell-to-cover"). But RSU recipients earning $200-500k sit in the 32-35% federal brackets plus state tax. On a $60,000 vest for a 35%-bracket earner, withholding covers $13,200 of a $21,000 income-tax bill — a $7,800 hole per vest, times four vests a year, discovered the following April, sometimes with an underpayment penalty attached. The fixes are mechanical: a per-vest set-aside (this calculator's last row), extra salary withholding via W-4 line 4(c) — which counts as paid evenly across the year no matter when it happens — or quarterly estimated payments. The same 22%-vs-bracket logic applies to cash bonuses (bonus calculator); RSUs just involve bigger numbers more often.
Gap #2: holding by default
After sell-to-cover, the remaining shares sit in your brokerage account — and inertia holds them. Recognize what holding is: there is no tax benefit to holding a vested RSU. The income tax was charged at vest either way; holding only changes what happens to growth (long-term capital gains after a year) versus decline (a capital loss capped at $3,000/year of deductibility against income). The clarifying question: if the company paid this vest in cash, would you buy your employer's stock with all of it? If not, holding the shares is the same decision wearing camouflage. And the concentration risk is correlated: the scenario where the stock drops 40% has meaningful overlap with the scenario where layoffs hit — income and portfolio failing together (the diversification logic applies double to employer stock). The standard playbook — sell on vest, pay the tax gap, invest the rest in broad index funds — is boring precisely because it's right for most people. A deliberate, sized position (5-10% of net worth, chosen on purpose) is defensible; 60% of net worth in employer stock by inertia is not a strategy.
Vest-day mechanics worth knowing
- Sell-to-cover is the default, not the only option — some plans allow paying withholding in cash (keeping all shares) or selling everything at vest. Same-day sales have essentially zero capital gain: proceeds ≈ basis.
- The W-2 does the reporting. Vest income appears in Box 1 automatically. What trips people is the 1099-B from the broker showing the sale with a missing or zero basis — file it uncorrected and you'll pay income tax on the same dollars twice. The basis is the vest-day value; brokers list it in the "supplemental" section.
- Vests can't be timed, but sales can. If you do hold, the one-year clock from vest converts further growth to long-term rates (0/15/20%). This only matters for the growth, not the vest value — don't let a $2,000 rate difference on gains hold a $60,000 concentrated position hostage.
- Quiet periods and 10b5-1 plans: employees with material information face trading windows; auto-sale-on-vest elections and 10b5-1 plans execute regardless — one more argument for the automatic sell.
- Job change or layoff: unvested RSUs are typically forfeited — they're compensation for future service, not property. Factor that into offer comparisons: a $150k salary + $100k/yr vesting schedule is not $250k of certainty (the take-home calculator handles the cash; discount the equity by your tenure odds).
Fitting RSUs into the plan
Treat vests as what they are — lumpy salary — and route them like a raise rather than a windfall: tax set-aside first, then the same priority order as any dollar (match, HSA, debt, index funds — the order of operations). Households whose RSUs are a large income share should budget on salary alone and treat vests as acceleration — grant values reset, stocks swing, and a lifestyle built on peak-vest income is the tech-industry version of the lifestyle creep trap.