When Do RSUs Become Taxable?

Before we get into how RSUs are taxed, it’s important to understand when they actually count as income. RSUs don’t become yours (or “vest”) all at once. Companies usually set up vesting schedules so that you earn your shares gradually over time.

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Types of Vesting

Single Trigger Vesting

At a public company, RSUs typically vest based on time. For example, 25% might vest after one year, and the rest monthly or quarterly after that. Once the shares vest, you will owe taxes — even if you don’t sell them.

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Double Trigger Vesting

For most private companies, RSUs vest in two parts:

• You work there long enough to meet the time requirement, and
• The company has a liquidity event (like an IPO or acquisition)

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Until both things happen, your RSUs don’t count as income, and you don’t owe any tax yet.

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How RSUs Are Taxed at Vesting

Once your RSUs vest, their value becomes ordinary income—just like your salary or bonus. This means you pay the same federal, state, and payroll taxes on RSUs as you do on a paycheck.

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What is ordinary income? It’s income that’s taxed at your regular tax rates, not special rates like long-term capital gains.

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Here’s an example:
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You vest 1,000 RSUs on March 1.
The stock is trading at $50 per share that day.
You now have $50,000 of additional income.
This amount gets added to your W-2 and taxed just like wages.

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How RSU Taxes Are Withheld

Because RSU income is considered supplemental income, companies use flat withholding rates:

• Federal withholding: 22% (or 37% if you receive over $1 million in supplemental income in a year)
• California state withholding: 10.23%
• Social Security: 6.2% (up to a certain income limit)
• Medicare: 1.45%

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So, the total withholding might look something like this:

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At first glance, it might seem like 40% is being withheld—which feels like it should cover your tax bill. But here’s why that’s not always enough.

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Withholding May Not Match What You Actually Owe

Many clients assume that if their company withholds 40% or more, they’re in the clear. But that’s not always true.

Your final tax bill depends on your effective tax rate—which is the average rate you pay across all your income, not just RSUs. If that average rate is higher than the 22% federal withholding, you’ll still owe more when you file.

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Example:

Let’s say your effective federal tax rate is 30%, but only 22% was withheld on your RSUs.

On a $50,000 RSU vest, you’d owe $15,000 to the IRS—but only $11,000 was withheld. That means you’ll owe an extra $4,000 when you file your return.

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What Is an Effective Tax Rate?

Understanding this concept helps make sense of why RSU withholdings often fall short.

Your effective tax rate is your total federal tax bill divided by your taxable income. It’s your true average tax rate—not the highest bracket you’re in.

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For example, even if you’re in the 37% marginal bracket, your effective rate might be around 28–30%.

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It’s common to assume that all your income is taxed at the top bracket, but that’s not how the U.S. tax system works. Only your last dollars earned are taxed at your highest rate.

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Paying RSU Taxes: Sell to Cover vs. Paying in Cash

When your RSUs vest, you have two ways to cover the taxes:

1. Pay in Cash – Use personal funds to pay the withholding taxes.
2. Sell to Cover – Have your company automatically sell some shares to cover the taxes.

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“Sell to cover” is the default method at most companies. It helps avoid a big cash payment upfront.

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Selling RSUs Later: What Happens at Tax Time?

After vesting, your RSU shares are yours to hold or sell. If you sell them later, you may owe capital gains tax—but only on the amount the shares have increased since vesting.

Here’s how to calculate the gain:

• Cost basis = the price per share on the day your RSUs vested
• Capital gain = sale price – cost basis

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Example:

Your RSUs vested at $50/share and you sell later at $60/share.

Your capital gain is $10/share.

If you sell within 1 year of vesting → short-term gain, taxed at your ordinary income rate

If you hold more than 1 year → long-term gain, taxed at lower rates

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💡 Watch out: Brokerage tax forms (like the 1099-B) often don’t include the correct cost basis, making it look like you had more gain than you did. At Fifteenth, we help correct this so you’re not double taxed.

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How Fifteenth Can Help

At Fifteenth, we specialize in helping tech professionals make sense of equity compensation. Here’s how we support clients with RSUs:

• Review your RSU vesting and sale history to ensure proper tax treatment
• Run personalized forecasts so you know what tax you’ll owe by April 15
• Advise on whether quarterly tax payments are needed to avoid IRS penalties
• Correct cost basis errors on your tax return to prevent overpayment

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Questions about your RSUs or a recent vesting event?

Let’s walk through it together—so you can focus on building your wealth, not worrying about taxes.

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