If part of your employee compensation comes from restricted stock units (RSUs), then you’ll want to understand the tax implications of this valuable and increasingly popular form of equity compensation.

RSU tax treatment isn’t overly complicated (unlike other forms of equity compensation) but there are some key things to be aware of in order to manage your tax burden effectively.

There are essentially three potential tax implications with RSUs to understand: Withholding taxes, capital gains tax, and getting pushed into a higher tax bracket.

So when will you pay tax on RSUs and how much?

It all depends on the number of RSUs, the vesting schedule, stock price, and how long you hold your shares once fully vested. Here, we break down what you might expect from a tax perspective and when.


This is the date on which your company promises you a certain number of restricted shares of stock. Although the shares are promised, you’ll still earn them over a vesting period determined by your company. This vesting period could be months or years, or it may be tied instead to a performance objective.

Tax implications: As of the grant date, the shares are simply promised and not yours—yet. That means you’ve realized zero income on the shares and won’t owe any tax.

There is an exception to this: the Section 83(b) election. This is a provision under the Internal Revenue Code (IRC) that gives an employee the option to pay taxes on the total fair market value of restricted shares at the time of granting, rather than at the time of vesting.

This would allow you to pre-pay your tax liability (what would be taxed as compensation at vesting) on a low valuation. There is a caveat to this strategy: If the value of the shares decline rather than increase, you may ultimately overpay in taxes. This option may or may not make sense for you. Be sure to discuss with your tax advisor.


On this date, the shares are yours, meaning they are no longer restricted. Vesting schedules vary by company, but a typical schedule is that 25% of shares vest per year.

Tax implications: RSUs are taxed as income in the tax year that they vest, and you’re required to include the full value of vested RSUs as ordinary income. The income tax that you’ll pay equates to the number of shares vested that year times the market value of the shares.

Most employers will withhold taxes on vested shares. In some companies, the way this works is that your employer would tender the number of shares required to cover the withholding tax, and the remaining shares would pass to you. Typically, this won’t be at your W-4 rate but instead at the flat IRS rate for supplemental income (22% in 2022 on supplemental wages up to $1 million; 37% for supplemental wages over $1 million). Note that if your RSU income is taxed at 22% and you’re in a higher tax bracket, you may owe additional tax when you file.

This tax “event” will also include Social Security, Medicare, state and local taxes (where applicable), in addition to the federal income tax.

If you were to sell your shares immediately upon being fully vested, and the price of the security has not changed, you would not pay any capital gains tax in that year, just the income tax.

Of course, you may opt to hold your shares rather than selling them. Here are the potential tax implications if you:


If you hold your shares for less than a year after they become fully vested, you’ll pay short-term capital gains tax when you sell. (If you incur a capital loss, it will be treated accordingly.) Short-term gains are taxed according to income tax rates.


Holding shares for more than a year, then selling, will subject you to long-term capital gains tax when sold. You’ll pay the capital gains rate in effect for the year in which you sell the shares.

The capital gains tax applies to anything above the value of your shares at vesting. This means capital gains won’t apply to any portion on which you’ve already paid income tax.

Would you like to learn more about RSU tax strategies you can use to reduce your tax bill? Contact us to find out how you can make the most of this valuable form of compensation.