RSU Tax Withholding: How Restricted Stock Units Are Taxed (2026)

Restricted Stock Units (RSUs) are among the most common forms of equity compensation — but when they vest, many employees are surprised by how much of the share value disappears to taxes. Understanding exactly how RSU withholding works, what determines the amount withheld, and what happens at filing helps you plan for the real after-tax value of your equity grants.

RSU Vesting as Ordinary Income

When your RSUs vest, the IRS treats the fair market value of the shares on the vesting date as ordinary wage income. This income appears on your W-2 in the same box as your regular salary. There is no special RSU tax rate — vested RSU income is taxed as wages, subject to federal income tax, Social Security, and Medicare withholding just like any other paycheck. Your employer or plan administrator handles the withholding through your regular payroll system.

The Supplemental Withholding Rate

Federal income tax on RSU vesting is typically withheld at the IRS supplemental wage flat rate — the same rate used for separately paid bonuses. See IRS Publication 15 for the current rate. This rate applies to supplemental wages up to $1 million in a calendar year; amounts above $1 million are withheld at the highest marginal rate. The supplemental rate is a withholding shortcut — it may be less than your actual marginal rate if you are in a high bracket.

FICA on RSU Vesting

Social Security (6.2%) and Medicare (1.45%) apply to RSU vesting income. Medicare applies to the full vest value with no wage ceiling. Social Security applies up to the annual wage base. If your regular salary plus prior vest income has already reached the Social Security wage base before a later vest in the year, no additional Social Security is withheld on that later vest. High earners should also be aware of the Additional Medicare Tax (0.9%) that applies to wages above $200,000 for single filers.

California: An Additional State Layer

For employees working in California — a common situation for tech-sector RSU recipients — state income tax withholding also applies to RSU vesting income. For a single filer earning a base salary of $120,000 in California, the engine shows annual state income tax of approximately $9,335 on base wages alone. RSU vesting income adds to the California taxable wage base and increases state withholding proportionally.

Sell-to-Cover Mechanics

Under the sell-to-cover method, your broker sells a fraction of the vesting shares on the vesting date and remits the proceeds to your employer to satisfy the withholding obligation. You receive the remaining shares net of taxes. The number of shares sold depends on the vesting-date market price and the total withholding amount. You do not control which shares are sold or the exact price — it is a market transaction executed at or near market open on the vesting date.

The Underwithholding Gap for High Earners

If your combined salary and RSU vesting income places you in the 32% or 37% federal bracket for the year, the supplemental flat-rate withholding on RSU vests will fall short of your actual tax liability on that income. This gap — the difference between the flat withholding rate and your marginal rate — is owed when you file your return. Employees with significant annual RSU vesting often make IRS Form 1040-ES quarterly estimated payments mid-year to cover this gap and avoid an underpayment penalty.

After-Vesting: Holding vs. Selling

Shares delivered to you after sell-to-cover have a cost basis equal to the fair market value on the vesting date — the same amount reported as ordinary income on your W-2. Selling immediately produces minimal additional gain or loss (just the difference from the vesting-date price to the sale price, often cents). Holding for more than one year can convert future appreciation to long-term capital gains rates, which are lower than ordinary income rates for most filers. The tradeoff is concentration risk: holding a single employer's stock carries more risk than a diversified portfolio.

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Frequently Asked Questions

How are RSUs taxed when they vest?

When RSUs vest, the fair market value of the shares on the vesting date is treated as ordinary wage income and added to your W-2. Federal income tax is withheld at the IRS supplemental wage rate (see IRS Publication 15 for the current rate), and Social Security and Medicare also apply. State income tax depends on the state where you work on the vesting date.

What is the sell-to-cover method for RSU taxes?

Sell-to-cover is the most common RSU settlement method. When shares vest, your employer or broker automatically sells enough shares to cover the tax withholding obligation — federal, FICA, and state — and delivers the remaining shares to your brokerage account. You do not receive a cash bonus; a fraction of the vested shares are liquidated to pay the withholding.

Why does RSU supplemental withholding often not cover the full tax owed?

The supplemental withholding rate is a flat rate set by the IRS — it is not your marginal rate. If your total annual income (salary plus RSU vesting) places you in a higher federal bracket than the supplemental rate, the withholding on your RSUs will fall short of your actual liability. The gap becomes due when you file your return. High earners with significant RSU vesting often make quarterly estimated tax payments to cover this.

What is the tax basis of RSU shares after vesting?

Your cost basis for RSU shares is the fair market value on the vesting date. This is the same amount reported as ordinary income on your W-2. If you hold the shares after vesting and sell them later at a gain, the gain is the difference between the sale price and your vesting-date basis. Gains on shares held more than one year qualify for long-term capital gains rates; gains on shares held one year or less are taxed as ordinary income.

Figures and methods are based on official-source data encoded in the calculator. Not tax advice. Review the methodology and consult a qualified professional for your situation.