By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.
Restricted stock units (RSUs) are a promise from your employer to give you company shares later, once you meet a vesting condition, usually staying employed for a set period. Nothing happens for tax purposes when the grant is made. When the units vest and the shares are delivered, their full market value is taxed as wages, your employer withholds tax by holding back or selling some shares, and the rest land in your brokerage account as ordinary stock with a cost basis equal to that day’s price.
There is no strike price and nothing to exercise. For a California or Washington household with RSUs worth several hundred thousand dollars a year, the real questions are how much tax the vest actually costs, why withholding usually falls short, and how much company stock the family wants to keep holding.
The life of an RSU grant: grant, vest, delivery, sale
- Grant. Your offer letter or annual refresh says you are granted, for example, $400,000 of RSUs. The company converts that to a number of units using a share price set in the plan. You own nothing yet and owe no tax.
- Vesting. A common time-based schedule is four years, with a first chunk after one year (the “cliff”) and the rest quarterly or monthly. Some grants also need a performance goal or, at private companies, a liquidity event before they count as vested. The exact rules are in your grant agreement and plan document.
- Delivery. When units vest and shares are delivered, the value of the shares that day is wage income. Under Treasury Regulation §1.83-3(e), an unfunded promise to deliver shares is not “property”, so the tax hits at delivery, not at grant (eCFR).
- Sale. From then on the shares are ordinary stock. Selling them creates a capital gain or loss measured from the price at vest. Gains on shares held more than one year after vest are long-term.
Two things families often get wrong at this stage. First, an 83(b) election is not available for RSUs; it applies to restricted stock and early-exercised options, not to a promise of future shares. Second, until shares are delivered you typically have no voting rights and no dividends, although some plans credit “dividend equivalents” that are paid out with the shares and taxed as wages. For more detail on these points, see do RSUs have a strike price.
How RSUs are taxed at vest, and why 22% withholding is not your tax bill
RSU income is wages. It shows up in Box 1 of your W-2 along with your salary, and it is subject to federal income tax, Medicare tax, and, in California, state income tax and SDI.
For withholding, employers treat RSU income as supplemental wages. For 2026, the federal optional flat rate is 22%, and supplemental wages over $1,000,000 in a calendar year are withheld at a mandatory 37% (IRS Publication 15, 2026). Withholding is a prepayment, not the tax owed. A married couple filing jointly reaches the 35% federal bracket at $512,450 of taxable income and the 37% bracket at $768,700 for 2026, so most families in our range owe 35% to 37% on each extra dollar of RSU income while only 22% is withheld.
Payroll taxes work differently from what many people expect. Social Security tax (6.2%) stops once your wages for the year pass the 2026 wage base of $184,500, so for a high earner most RSU vests carry no Social Security tax at all. Medicare tax (1.45%) has no cap, and the 0.9% Additional Medicare Tax applies to joint wages over $250,000 for 2026.
Worked example: a $950,000 Bay Area household with quarterly vests
Assumptions (illustrative): married filing jointly, California residents, two children under 10. One spouse earns a $550,000 salary at a biotech company and has $400,000 of RSUs vesting in 2026, in four quarterly vests of about $100,000 each. Taxable income after the 401(k) deferral and itemized deductions is about $880,000, and we assume California taxable income is about the same. At that level the whole $100,000 vest sits above $768,700, so it falls entirely in the federal 37% bracket for 2026, and entirely in California’s 10.3% bracket ($742,958 to $891,542 for joint filers on the 2025 schedule, the latest the FTB has published).
| On one $100,000 vest | Rate | Amount |
|---|---|---|
| Federal income tax actually owed (37% bracket, 2026) | 37% | $37,000 |
| Federal tax withheld at vest (2026 supplemental rate) | 22% | $22,000 |
| Federal shortfall | $15,000 | |
| California income tax owed (10.3% bracket, 2025 schedule) | 10.3% | $10,300 |
| Medicare, including Additional Medicare Tax (2026) | 2.35% | $2,350 |
| California SDI (2026, no wage cap) | 1.3% | $1,300 |
| Social Security (salary already above $184,500) | 0% | $0 |
| Total tax on the vest | about 51% | $50,950 |
Across four vests, this family is short about $60,000 of federal tax alone ($15,000 x 4) by April, before any California shortfall. They can cover it by raising salary withholding on a new Form W-4, by making estimated payments, or by selling enough extra shares at each vest to set the cash aside. The mistake to avoid is treating the net shares as if the tax is settled.
If the same household lived in Seattle, the vest would carry no state income tax for 2026, although Washington wages generally carry the WA Cares Fund premium of 0.58%, with no wage cap (WA Cares Fund). Washington taxes long-term capital gains instead: 7% on gains above the standard deduction ($278,000 for 2025, the latest published figure), and 9.9% on taxable gains above $1,000,000 (WA Department of Revenue). Washington has also enacted a 9.9% income tax on AGI over $1,000,000 starting January 1, 2028, so a Washington family whose vests push AGI past $1 million may want to plan for that change now (WA DOR).
After vest: cost basis, holding and the double-tax trap
The shares you keep have a cost basis equal to their value at vest, the same amount that was already taxed on your W-2. If you sell later, only the change in price since vest is a capital gain or loss. In California there is no lower rate for long-term gains; they are taxed as ordinary income (FTB). Federally, holding more than a year after vest moves the gain to long-term rates (15% up to $613,700 of taxable income and 20% above, MFJ, for 2026), plus the 3.8% net investment income tax once MAGI is over $250,000.
The most common filing error is double tax. Brokers often report RSU shares on Form 1099-B with a cost basis of zero or leave it blank. If you or your preparer accept that number, the vest value gets taxed again as a gain. The fix is to report the correct basis on Form 8949 with the adjustment code the instructions describe (Form 8949 instructions). Our guide on how to report RSUs on your tax return walks through it line by line.
What happens to RSUs if you leave the company
Shares already delivered are yours and stay in your brokerage account. Unvested units are usually forfeited on the day you leave, unless your grant agreement says otherwise. Some plans accelerate vesting on death, disability, retirement or a sale of the company, and some private-company grants have different rules. Read the plan before you set a resignation date: moving your last day by a few weeks to clear a quarterly vest can be worth tens of thousands of dollars. If your employer is private, see RSUs at private companies.
The decision families actually face: keep or sell vested shares
Once tax is handled, the question is concentration. Your salary, bonus, unvested RSUs and often your ESPP already depend on one company. Holding vested shares adds to that bet. A useful test: if you received the vest as cash instead, would you buy this much of your employer’s stock today? If not, selling at vest is usually the simpler choice, because the shares carry little or no gain yet, so the sale itself creates almost no extra tax.
A short decision checklist for each vest:
- Was enough tax set aside, or does the family need to sell extra shares to cover the April balance?
- What share of your household net worth is in employer stock after this vest, counting unvested units?
- Is there a near-term cash need (home, school tuition, a 529 contribution) that these shares should fund?
- Are you under a trading window or blackout that limits when you can sell?
Our investment risk management and tax management work starts from exactly these questions.
What to write down for your kids
Your children will not remember the vest dates. They may remember whether their parents had a rule for company stock and stuck to it. Write one page: how you decide what to keep, what you sell, and why. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.”
Common questions about RSUs
Do RSUs show up on my W-2?
Yes. The value of shares delivered at vest is wages, so it is included in Box 1 of your W-2 with your salary, along with Medicare wages. Many employers also list it separately in Box 14 for reference. The tax withheld on the vest is included in the withholding boxes, so you do not report RSU income a second time when you file.
Do you exercise RSUs?
No. Exercising applies to stock options, where you pay a strike price to buy shares. RSUs have no purchase price. Shares are delivered automatically when the units vest, and the employer withholds tax at that point, often by selling some of the shares (sell to cover). See what sell to cover means.
Next step: pull your grant agreements and your last pay stub, list every 2026 vest, and compare 22% withholding with your real marginal rate. This is general education; the right move depends on your family’s full picture.
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.
Connect on LinkedIn → · About KevinThis is part of how we approach Tax Management for high-income W-2 families at Bright Advisers.
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