By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.
The full form of RSU is Restricted Stock Unit. An RSU is your employer’s promise to give you a share of company stock (or its cash value) once you meet a condition, usually staying employed through a vesting date. You pay nothing for it, you own nothing until it vests, and the value of the shares on the day they are delivered is taxed as wages and shows up on your W-2.
That definition is simple. What it means for a household earning $750,000 to $3 million in California or Washington is not, because each vest is a pay raise that your withholding usually under-taxes and that often lands in one stock you already depend on for your salary. This guide explains the term, the tax mechanics, and a worked example at that income level.
What each word in “Restricted Stock Unit” means
- Restricted: you cannot sell, transfer or keep the award until the conditions are met. Leave before the vesting date and the unvested units are typically forfeited.
- Stock: the award is measured in shares of your employer’s stock, so its value moves with the share price between grant and vest.
- Unit: you hold a bookkeeping entry, not a share. Under Treasury Regulation §1.83-3(e), an unfunded, unsecured promise to pay in the future is not “property”, so nothing is taxed at grant (eCFR, 26 CFR 1.83-3). You also have no shareholder rights until shares are delivered.
A typical public-company grant vests over four years, often quarterly after a one-year cliff. Many private companies use “double-trigger” RSUs that also need a liquidity event (an IPO or acquisition) before shares are delivered. We cover that version in RSUs at private companies.
RSUs versus restricted stock and stock options
People searching “define restricted stock” are often mixing up two different awards. The difference matters most for the 83(b) election.
| RSU | Restricted stock | Stock option (NSO or ISO) | |
|---|---|---|---|
| What you hold before vest | A promise to deliver shares | Actual shares, subject to forfeiture | A right to buy shares at a fixed price |
| Cost to you | Nothing | Usually nothing or a nominal price | The strike price when you exercise |
| When ordinary income tax hits | When shares are delivered at vest | At vest, or at grant if you file an 83(b) | NSO: at exercise. ISO: generally not at exercise for regular tax, but AMT may apply |
| 83(b) election available | No | Yes, within 30 days of transfer | Only for early-exercised options |
| Can it be worth zero | Only if the stock goes to zero | Only if the stock goes to zero | Yes, if the price stays below the strike |
The 30-day 83(b) deadline is described in IRS Publication 525 under “Restricted Property”. Advice to “file an 83(b) for your RSUs” is wrong: RSUs are not property until delivery, so the election does not apply. Because RSUs have no purchase price, they also have no strike price.
Are RSUs included in your W-2?
Yes. The fair market value of the shares on the delivery date is compensation, reported with your salary in your W-2 wages and subject to Social Security (up to the $184,500 wage base for 2026), Medicare and state payroll taxes. Your employer withholds by selling or holding back some of the shares. For 2026, federal withholding on supplemental wages is typically a flat 22%, rising to a mandatory 37% on supplemental wages above $1,000,000 in the calendar year (IRS Publication 15).
Withholding is not the tax you owe. In the 35% and 37% federal brackets, 22% withholding usually leaves a balance due in April. The shares you keep then have a cost basis equal to their value at vest, so a later sale is taxed only on the change in price, as a capital gain or loss. Brokerage 1099-Bs often show a basis of zero for RSU shares; the fix is covered in how to report RSUs on your tax return.
Worked example: a $200,000 vest for a California family
Assumptions (illustrative): married filing jointly, two children under 10, South San Francisco. One spouse is a biotech scientist with a $350,000 salary; the other is a physician earning $350,000. In 2026 the scientist has 1,000 RSUs vest at $200 a share, so $200,000 of extra wages and $900,000 of household wages in total. To keep the math visible we use the 2026 federal standard deduction of $32,200 and ignore pre-tax 401(k) deferrals and other deductions.
- Federal income tax on the vest. Taxable income rises from $667,800 to $867,800. The first $100,900 of the vest is taxed at 35% (up to the $768,700 start of the 37% bracket) and the remaining $99,100 at 37%. That is $35,315 plus $36,667, or about $71,982.
- Federal withholding. At the 22% supplemental rate the employer withholds $44,000, leaving roughly $27,982 to cover through estimated payments, a higher W-4 withholding or a check in April.
- Payroll taxes. The scientist’s salary already passed the $184,500 Social Security wage base, so no Social Security tax applies to the vest. Medicare is 1.45% plus 0.9% Additional Medicare Tax because household wages exceed the $250,000 joint threshold: 2.35% of $200,000, or $4,700. California SDI at 1.3% on all wages adds $2,600.
- California income tax. Using the 2025 joint schedule (2026 has not been published), this slice of income runs through the 9.3%, 10.3% and 11.3% brackets: about $20,255 before California’s small standard deduction. California taxes any later gain on the shares at the same ordinary rates; it has no lower capital gains rate.
Total tax on the $200,000 vest: roughly $99,500, close to half. For simplicity, assume the family keeps all 1,000 shares (in practice some are usually held back for withholding), holds them for more than a year after vest and sells at $240. The $40,000 gain is taxed federally at 20% plus the 3.8% Net Investment Income Tax at this income (about $9,520) and again by California as ordinary income.
The same vest in Washington
Move the family to Seattle and make the scientist a tech employee with the same numbers. Federal tax and Medicare are identical. Washington has no wage income tax in 2026, so the state income tax line is zero. WA Cares adds 0.58% of wages ($1,160) unless the employee is exempt. Total: about $77,800, roughly $21,700 less than in California.
Two Washington points matter for this reader. A later sale of the shares can fall under the state’s 7% capital gains tax, but only on long-term gains above the standard deduction ($278,000 for 2025, the latest published). And Washington has enacted a 9.9% income tax on AGI over $1,000,000 starting January 1, 2028 (Washington DOR), so a household whose vests push it past $1 million should plan for that from 2028.
The decision each vest forces
Every vest gives the family a choice it often makes by default: keep the shares or sell them. Holding vested RSUs is economically the same as receiving $200,000 in cash and using it to buy your employer’s stock. If you would not make that purchase with cash, holding is a decision to concentrate, not a neutral one.
A short checklist we use with families:
- How much of your net worth is already tied to this employer, counting unvested RSUs, ESPP shares and your salary?
- Is the April balance due funded? Many families set aside the gap from step 2 above at each vest, not in March.
- Is the money earmarked? A home down payment, a 529, or a taxable account in a diversified portfolio are all common destinations. Families planning to use RSUs for a down payment often sell after vest and hold the cash in savings, since a stock drop before closing can shrink the budget; ask your lender how it treats RSU shares and RSU income, because policies vary.
- Which shares do you sell? Shares sold soon after vest have little gain, so selling them often costs far less tax than people expect.
For the mechanics of the withholding choice, see withhold to cover vs sell to cover, and for valuing an unvested grant, how to calculate RSU value. Concentration questions sit within our investment risk management work, and vest-year tax projections within tax management.
Common mistakes with RSUs
- Treating 22% withholding as the full bill. In the example above it covers about 61% of the federal income tax on the vest.
- Double-counting income at sale. Using a zero cost basis from a 1099-B taxes the vest value of the shares sold a second time.
- Filing an 83(b) for RSUs. It does not apply.
- Letting vests pile up. Four years of quarterly vests can quietly make one stock the largest asset the family owns.
- Ignoring the state. A California family pays state tax on the vest and on any later gain; a Washington family needs to watch the 2028 income tax and the capital gains tax.
What to write down for your kids
Children under 12 will not follow a vesting schedule, but they will one day inherit the shares, or the habits around them. Write a one-page rule for your RSUs: what percentage you sell at each vest, where the proceeds go, and why. Review it once a year. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.” A documented vest rule is a small, concrete piece of that process, and it belongs in your FamilyKnowledge® Library.
Frequently asked questions
What does RSU stand for?
RSU stands for Restricted Stock Unit. It is a promise from your employer to deliver company shares, or their cash value, after you meet a vesting condition such as staying employed for a set period. You do not own shares or have voting or dividend rights until the units vest and the shares are delivered to your brokerage account.
Are RSUs taxed twice?
No, when reported correctly. The value at vest is taxed once as wages. After that, only the change in price between vest and sale is taxed, as a capital gain or loss. RSUs look taxed twice when a brokerage form shows a zero cost basis and the return is not adjusted, which taxes the vest value a second time.
Do I lose unvested RSUs if I leave my job?
Usually yes. Unvested units are typically forfeited when you leave, though some plans accelerate vesting on death, disability, retirement or an acquisition. Your grant agreement and plan document set the rules, so read them before choosing a departure date, especially if a large vest is a few weeks away.
Next step: pull up your equity portal, list every vest scheduled for the next 12 months, and estimate the federal gap at each one using the method above. If you want a second set of eyes on the numbers, the Bright Advisers Tax & Wealth Assessment includes a vest-year projection and is the usual first step into our Age Five Family Office™.
This is general education, and 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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