How Are Stock Grants Taxed? RSUs, PSUs, Restricted Stock and Options

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

Most stock grants are taxed as ordinary wage income when the shares become yours, not when the grant is announced. For RSUs and PSUs that moment is vesting and delivery: the market value of the delivered shares is added to your W-2, and any growth after that is a capital gain or loss when you sell. Restricted stock and stock options follow different timing rules, and that difference is where most surprises come from.

For a household already earning $750,000 or more in California or Washington, the grant type matters less than two things: the marginal rate the vest lands in, and how far your employer’s withholding falls short of it.

When each type of stock grant is taxed

The word “grant” covers several different instruments. Each has its own taxable event.

The IRS rules for restricted property, options and the 83(b) election are in IRS Publication 525. One point the original version of this page got wrong: an 83(b) election is not available for RSUs or PSUs. Under Treas. Reg. §1.83-3(e), an unfunded promise to deliver shares later is not “property” until the shares are delivered. The election applies to restricted stock and early-exercised options, and must be filed within 30 days of the transfer. Our guide to drafting an 83(b) election letter covers the mechanics.

How PSUs are taxed, and why they surprise people

PSUs are taxed like RSUs, with one extra variable: you do not know how many shares you will receive until the board certifies the performance result. A grant of 2,000 target shares might pay out anywhere from zero to a multiple of target, depending on the plan document. Nothing is taxable during the performance period. Tax is due on the number of shares actually delivered, at their market value on the delivery date.

Three features catch senior employees off guard:

• The vest is lumpy. A three-year PSU cycle lands in one tax year. A strong payout can add several hundred thousand dollars of wages in a single month.
• Dividend equivalents. If the plan credits dividend equivalents during the performance period, they are typically paid out with the shares and treated as wages too.
• Withholding does not adjust for your bracket. Your employer treats the vest as supplemental wages and usually withholds at a flat federal rate, regardless of how high your household income is.

Federal withholding versus the tax you actually owe

For 2026, employers may withhold federal income tax on supplemental wages such as RSU and PSU vests at a flat 22%, or use the aggregate method instead. Once supplemental wages from one employer pass $1,000,000 in the calendar year, withholding on the excess is a mandatory 37%, regardless of your W-4 (IRS Publication 15, 2026).

For a married couple filing jointly, the 35% bracket starts at $512,450 of taxable income and the 37% bracket starts at $768,700 for 2026 (Rev. Proc. 2025-32). A family at our readers’ income level is usually in one of those two brackets. That makes 22% withholding a 13 to 15 point gap on every vested dollar, which shows up as a balance due in April and, if large enough, an underpayment penalty.

Payroll taxes apply as well. Medicare tax is 1.45% on all wages with no cap, plus the 0.9% Additional Medicare Tax on joint wages above $250,000 for 2026. Social Security tax (6.2%) stops once one person’s wages pass $184,500 for 2026, which many of our readers reach by spring. The siblings to this page explain withhold-to-cover versus sell-to-cover and how the vest shows up as income.

Worked example: a $360,000 PSU vest in California and Washington

Assumptions, for illustration only: a married couple filing jointly with two children, ages 4 and 8. One parent is a scientist at a Bay Area biotech, the other a physician. Base salaries total $900,000, and each salary is above the $184,500 Social Security wage base. Federal taxable income before the PSU is $830,000, already in the 37% bracket. California taxable income before the PSU is $880,000. The Washington column assumes the same family and pay, living in Washington. California 2026 brackets were not yet published when we checked, so the example uses the 2025 schedule.

In 2026 a PSU grant of 2,000 target shares is certified at 150%, so 3,000 shares are delivered at $120. That is $360,000 of wages.

How the California figure is built: $11,542 at 10.3% (up to $891,542), $348,458 at 11.3% (up to $1,240,000), and the 1% Behavioral Health Services Tax on the $240,000 of taxable income above $1,000,000. California SDI is 1.3% of all wages for 2026 with no cap (EDD). In Washington, the WA Cares premium is 0.58% of all wages unless the employee holds an approved exemption (WA Cares Fund).

The withholding gap is the practical problem. At the 22% flat rate, federal withholding on this vest is $79,200 against $133,200 of federal tax, a shortfall of $54,000 on one event. The family’s fix is usually a larger estimated payment in the quarter of the vest, or asking payroll whether a higher withholding election is available for the plan.

What happens when you sell the shares

Your cost basis is the value already taxed as wages, here $120 a share, or $360,000. Sell right away and there is little or no further gain. Hold more than one year and sell at $150, and the $90,000 gain is long-term.

• Federal: for 2026, the 20% long-term rate applies to joint taxable income above $613,700, and the 3.8% Net Investment Income Tax applies above $250,000 of modified AGI. On $90,000 that is $21,420.
• California: there is no lower rate for capital gains (FTB). The gain is taxed as ordinary income. In a sale year when the family’s other California taxable income is $880,000, the $90,000 is taxed at 10.3% and 11.3% on the 2025 schedule, about $10,055.
• Washington: no wage income tax in 2026, but a 7% tax on long-term capital gains above the annual standard deduction ($278,000 for 2025, the latest published) and 9.9% on taxable gains above $1,000,000 (WA DOR). Washington has also enacted a 9.9% income tax on AGI above $1,000,000 starting January 1, 2028 (WA DOR), so multi-year PSU cycles that vest in 2028 or later need a fresh look.

Holding vested shares is an investment decision, not a tax decision. If you would not buy $360,000 of your employer’s stock with cash today, the tax rules rarely justify keeping it. For a biotech or tech employee whose salary, bonus and unvested grants already depend on one company, concentration is usually the larger risk.

Options are different: exercise is the taxable event

With an NSO, the spread between the market price and the exercise price is wages in the year you exercise. With an ISO, there is no regular income tax at exercise, but the spread is an AMT adjustment. Publication 525 explains that ISO shares must be held more than two years from grant and more than one year from exercise for the whole gain to be capital gain. For 2026, the joint AMT exemption is $140,200 and begins to phase out at $1,000,000 of AMT income, at 50 cents per dollar. Many of our readers are close to or past that line, so ISO exercises need to be modeled before the year ends. See tax on cashless exercise of stock options for the option side in more depth.

The decisions a family actually has to make

1. Cover the gap. Before each large vest, estimate the difference between 22% withholding and your real marginal rate, and plan the estimated payment.
2. Sell or hold. Decide in advance what share of each vest is sold on delivery. A written rule removes the temptation to wait for a better price.
3. Watch the state move. A move between California and Washington during a vesting period raises sourcing questions. Get advice before the move, not after.
4. Use the proceeds on purpose. Large vests are often the funding source for 529 plans, a donor-advised fund or estate planning steps. Our tax management and investment risk management work starts here.

Common mistakes with stock grant taxes

• Treating the withheld shares as the full tax paid.
• Double-counting income on the 1099-B because the broker reports a lower cost basis than the value already on your W-2.
• Assuming an 83(b) election can be made for RSUs or PSUs.
• Forgetting that California taxes long-term gains at full ordinary rates.
• Holding vested shares for the long-term rate while the concentration risk grows.

What to write down for your children

Equity compensation is one of the few areas where a family’s wealth can grow quickly without anyone deciding much. Write a short note on how you treat vests: what you sell, what you keep, why, and what the money is for. Years from now, that note will teach your children more about judgment than the account balance will. Conversations fade. Documentation compounds.

Frequently asked questions

Are PSUs taxed differently from RSUs?

The tax treatment is the same: wages on the value of shares delivered, then capital gain or loss on later growth. The difference is uncertainty. You do not know the share count until the performance result is certified, and the payout often lands in a single year after a multi-year cycle. That makes PSU vests harder to plan and more likely to push income into the 37% federal bracket.

Is a stock grant taxed when I receive the grant letter?

Usually not. RSUs, PSUs and stock options are generally not taxed at grant. Restricted stock is not taxed at grant either unless you choose to file an 83(b) election within 30 days, which moves the taxable event to the grant date at the then-current value. The election is not available for RSUs or PSUs.

This is general education, and the right move depends on the family’s full picture. If a large vest is coming, the Tax & Wealth Assessment is a practical first step to see the withholding gap and the sell-or-hold decision in your own numbers.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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