How Are RSUs Taxed?

Restricted stock units are taxed at two moments. As ordinary income when they vest, then as capital gains on any growth when you sell. Never twice on the same dollar.

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The first sign is usually the W-2. Somebody opens it in February, looks at Box 1, and finds a number thirty or forty thousand dollars larger than the salary they know they were paid. Nothing was stolen and nothing was counted twice. The shares that vested last year are in there, folded in with the wages, and that is where the whole story starts.

Are RSUs included on your W-2?

Yes. The full value of the shares on the day they vest is reported as wages in Box 1 of your W-2, mixed in with your salary rather than listed on a line of its own. That is why your W-2 can read far higher than the salary in your offer letter.

The vested value also flows into Boxes 3 and 5, because RSUs are wages for Social Security and Medicare too, and the tax withheld against them lands in Boxes 2, 4 and 6 alongside everything else.

Two boxes cause most of the confusion, and both are informational:

• Box 14 often shows the RSU amount with a label like "RSU" or "RSU VEST". The label is chosen by your employer and varies. It is a courtesy note, not a separate item of income.
• Box 12, code V relates to nonstatutory stock option income. Some payroll systems use it loosely.

Do not add either of them to your wages. The RSU income is already inside Box 1. Adding Box 14 on top is the single most common self-preparation error we see on an equity-comp return, and it makes you pay tax twice on money you have already been taxed on once.

A check you can run in a minute, without a formula. Take your gross salary for the year and add the vest-date value of everything that vested. If that lands close to Box 1, your W-2 is behaving normally and the extra is not a mistake. If Box 1 is meaningfully higher than that, something else is in there and it is worth finding out what.

What happens at grant, vesting, and sale?

The life of an RSU: your company promises you shares for sticking around. So you do, and soon enough, et voilà, the shares land in your hands. It is nice; you own a piece of the company you helped build. But a lot of the time cash is better, so you decide to sell your stock units. Three things happened along the way, and only two of them were taxable. Let us go over it.

1. Grant. Nothing happens. Your company says "stay a year and you'll get 100 shares." Right now that is just a promise and some words. Can't tax words, so there is nothing to tax. The rule that taxes property you receive for your work, IRC §83, only fires when real property changes hands, which is why you can't make the famous §83(b) election on RSUs the way you can with real restricted stock. There is no property to elect it on. Smart people trip on this constantly.
2. Vesting. The first taxable event. A year passes; congratulations on your first work anniversary. Here are the shares they promised you, and they are yours now. The government looks at their fair market value that day and calls it exactly what it is: pay. So it is taxed, and it is taxed as ordinary income, right on your W-2, mixed in with your salary.
3. Selling. Taxed only on the growth. Whenever you sell, you are taxed only on what the shares gained after vesting, at capital-gains rates. Recall it was already taxed at fair market value in step 2, so any gain on top of that is taxed, and any loss below it is a capital loss for your account to apply.

What happens when RSUs vest?

Vesting is the main event. The day your RSUs vest, the fair market value of those shares becomes ordinary income. If 100 shares vest at $50, that is $5,000 of wages to you, the same as if your employer had handed you a $5,000 bonus. This is §61(a)(1) ("gross income means compensation for services") working with §83(a) (you received property; here is its value; it counts now), firing precisely at vesting because the shares are finally property transferred to you and no longer at risk of forfeiture. It lands on your W-2 and it is taxed like the wages it is: federal income tax, Social Security, and Medicare all apply.

Two separate things are quietly happening at vesting. First, that $5,000 becomes your cost basis, and it is the very same §83 that does it. Treas. Reg. §1.83-4(b) sets your basis at exactly the amount you just took into income (on top of the $0 you paid out of pocket), which §1012 then treats as your cost. Think of it as a receipt stapled to the shares saying "already taxed: $5,000." Hold onto that idea; it is what keeps you from being taxed twice when you sell. Second, your holding period starts ticking now, at vesting, not at grant. That clock decides whether your future sale is taxed at the low rate or the high one.

Why are RSUs taxed so high? The 22% withholding gap

They usually are not taxed at a higher rate than the rest of your income. It feels that way because of what gets withheld, and that is a genuinely different thing.

The withholding trap is the part that actually costs people money: the tax your employer withholds when your RSUs vest usually is not enough. They withhold by selling off a chunk of the shares ("sell to cover"), which feels like it is handled, and it often falls short of what you will really owe.

By default, employers withhold federal income tax on RSU vesting at the flat 22% supplemental-wage rate (it jumps to 37% only on supplemental pay above $1 million in a year). That is fine, but only if 22% is your tax rate. Again, it usually is not. Most equity-comp employees are in the 32%, 35%, or 37% bracket. So the company withholds 22%, your real rate is 35%, and that delta does not disappear. It becomes a bill you owe when you file, often with an underpayment penalty stapled on top for good measure.

On a $200,000 vest, 22% withholding covers $44,000. If your real marginal rate is 35%, the tax is $70,000. That is a $26,000 shortfall waiting for you in April, on income you already "paid tax on."

The fix is not complicated, but it has to be done before the bill lands: make a quarterly estimated tax payment to close the gap, ask payroll to withhold extra, or set the money aside deliberately. This one item is why most people with meaningful RSUs should be running the numbers the year the shares vest, not the following April. Run your own numbers with our free RSU tax calculator, and if you want the deadline and the mechanism, that is its own article.

How short does 22% fall? We ran the numbers.

Every article about RSUs tells you 22% withholding usually is not enough. Almost none of them tell you by how much. So we took the bracket math behind our own calculator and pushed it through 145 scenarios per filing status: base wages from $120,000 to $400,000 in $10,000 steps, against vests of $25,000, $50,000, $100,000, $150,000 and $200,000.

For a single filer, 22% came up short in all 145. Not most of them. All of them.

On a $100,000 vest, a single filer's true federal tax on that income averages 32.4% against the 22% withheld. Average shortfall: $10,430. The smallest gap anywhere in the range was still $2,134.

Married filing jointly is gentler, because the same income sits lower in a joint bracket. 22% still fell short in 123 of the 145 runs. Below roughly $140,000 of base wages a couple can break even or come out slightly over-withheld, and the gap widens from there as wages climb.

The more useful number is where it turns. A single filer with a $100,000 vest is already under-withheld once base wages pass roughly $60,000. That is well below where most people assume the problem starts. If you are waiting to earn serious equity-comp money before checking, you are already past the line.

None of this is exotic math. It is arithmetic nobody runs until April. Running it in the year the shares vest is a standard part of what an Enrolled Agent does on an equity-comp return, alongside correcting the $0 cost basis on your 1099-B and sizing the estimated payments that keep an underpayment penalty off the bill.

Method: 145 scenarios per filing status, single and married filing jointly. Base wages $120,000 to $400,000 in $10,000 increments, against vests of $25,000, $50,000, $100,000, $150,000 and $200,000. Federal income tax only, 2026 brackets and standard deduction, comparing the marginal federal tax on the vested amount against flat 22% supplemental withholding. FICA, state and city tax excluded. Same calculation engine as the RSU tax calculator, so any row here can be reproduced.

How are RSUs taxed when you sell?

When you sell, only the growth is taxed. You are taxed only on what the shares gained since vesting, not the whole sale price. Say they do well and you sell for $8,000. Did you make $8,000? No. You already owned $5,000 of that, taxed at vesting. The only new thing is the $3,000 of growth, and that is all you are taxed on. Selling is governed by §1001: your gain is the sale price minus your basis. $8,000 − $5,000 = $3,000.

What rate that $3,000 gets taxed at comes down to the clock that started at vesting. Held the shares more than a year after they vested? It is a long-term capital gain at the lower rates under §1(h) (the one-year period is defined in §1222). Sold within a year of vesting? It is a short-term gain, taxed at your ordinary rate, the same high rate as your wages. That single decision, hold twelve months or don't, can be the difference between a 15% to 20% rate and a 37% one.

And this is exactly where the "RSUs are taxed twice" myth is born: your broker often reports your cost basis as $0 on Form 1099-B, which makes the IRS think your whole $8,000 sale was profit. It is not. You fix the basis on Form 8949 and the phantom tax evaporates. We wrote the full walkthrough here: Are RSUs taxed twice? And if a return you already filed missed that correction, it is usually still recoverable by amending the prior year.

Private-company RSUs vest differently (double-trigger)

If your company is still private, a startup or pre-IPO, your RSUs usually carry a double trigger. They do not vest on time alone. Two things have to happen: you have to put in the time and the company has to have a liquidity event, like going public or getting acquired. Until both happen, there is no income and no tax, even if you have "worked the years."

The catch: when the liquidity event finally hits, years of vesting can land as ordinary income all at once, often in the same year you can finally sell. That is a large, lumpy tax bill in a single year, and it makes the withholding gap above far more dangerous. If you hold private-company RSUs and an IPO is on the horizon, that is a conversation to have before the event, not after.

What do you actually owe on RSUs?

Granted: nothing. Vested: taxed as ordinary income on the value that day (watch the withholding gap). Sold: taxed only on the growth, long-term if you held a year past vesting, short-term if you didn't. Two taxable moments, two different things, every dollar counted exactly once.

State taxes on RSUs, and the trap when you move

RSU taxes do not stop at federal. RSUs are wages, so wherever you owe income tax on your paycheck, you owe it on your vested shares too.

And there is a rule that surprises people years after they have moved away, which matters here more than most places, because a good share of the equity-comp employees in the Metroplex arrived from somewhere that taxes income. Leaving the state does not cancel the state's claim on shares you earned there. RSUs are pay for work performed across the whole grant-to-vest period, and states allocate that income by the workdays you spent inside their borders during that period. Vest two years after moving, and the old state still taxes the slice tied to the days you worked there.

California: 10.23% withheld, and it follows you to Texas

California is the one we get asked about most, for the obvious reason.

Two things are going on and they compound. First, California withholds stock and bonus income at a flat 10.23%, while a high earner's California marginal rate runs 9.3% to 12.3%, with another 1% on income above $1 million. So California under-withholds at vesting for precisely the same reason the federal 22% does. Second, California allocates vested RSU income by California workdays during the vesting period, and it is thorough about it.

Put those together and you get the situation we see constantly. Someone earns a grant in the Bay Area, moves to Texas, and watches the remaining tranches vest as a Texas resident with no state income tax on wages. Then a California return still needs filing, on the portion of each vest tied to the days worked in California, and the flat 10.23% that was withheld back then was short even at the time.

The move saves you the tax on future work. It does not save you the tax on the work you already did there.

Getting the workday allocation right is the whole job, and it is arithmetic rather than judgment: count the days in each state across the grant-to-vest window, apply the fraction to each vest. Tedious, entirely doable, and worth doing carefully, because both states will accept a number and only one of them is correct.

New York taxes vested RSUs as wages

Live or work in New York when your RSUs vest, and New York taxes that income like your salary, at your marginal state rate. A New York City resident pays city tax on top of that. Straightforward. It is the next rule that catches people off guard.

The move-away trap: New York allocation

Here is the one almost nobody warns you about, and it is the same shape as the California rule above. New York taxes the slice of RSU income you earned while working in New York, even after you have moved out of New York. Vest two years after leaving? New York still taxes the portion tied to the days you worked in New York during the vesting period, allocated by those workdays.

So people who move to Texas or Florida, watching their RSUs vest, are surprised by a bill from New York. If you earned equity in New York and left, this is the number to get right, and it is the kind of thing a preparer who has not seen it before will simply not look for.

New York City

New York, New York. So good they named it twice, and you can end up paying it twice as well. NYC layers its own resident income tax on your RSUs, up to 3.876%, on top of state and federal. It hits residents only: work in the city but live outside it and you skip the city tax, though the state allocation rule above still follows you. For a NYC resident, the combined federal, state, and city bite on a vesting event runs well past the flat 22% your employer withheld.

Frequently asked questions

So go back to Box 1.

That number was never a mistake. It is your salary plus the shares, valued on the day they landed, added up by a payroll system doing exactly what it was told. Every question in this article is one question about what happens to it next: whether enough was withheld against it, whether it becomes your basis, whether a state you left still wants a piece of it.

The number was right. The withholding wasn't.