RSU Meaning: What Restricted Stock Units Are and How They Are Taxed

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

An RSU (restricted stock unit) is your employer’s promise to give you shares of company stock, or their cash value, once you meet a vesting condition, usually staying employed for a set period. You pay nothing to receive the shares and there is no strike price. When the units vest and the shares are delivered, their full market value counts as wage income on your W-2, taxed the same way as salary.

That is the whole definition. The planning questions start after it: how much tax the vest really costs, why the default withholding is usually too low at your income, and whether to keep the shares or sell them on the day they arrive.

What “restricted stock unit” means, word by word

• Restricted: you cannot sell, transfer or borrow against the units until they vest. If you leave before then, unvested units are normally forfeited.
• Stock: what you eventually receive is ordinary company shares (some plans can settle in cash instead).
• Unit: before vesting you own a bookkeeping entry, not a share. You have no vote and usually no dividends, though some plans pay “dividend equivalents” on unvested units.

Legally, an RSU is an unfunded, unsecured promise to deliver shares later. Under the Treasury regulations, a promise like that is not “property” until the shares are actually transferred to you (Treas. Reg. §1.83-3(e)). That one technical point explains most of how RSUs are taxed, and why the 83(b) election you may have heard about does not apply to them.

How RSU vesting works at public and private companies

Your grant agreement sets the schedule. Common patterns:

• Time-based vesting: units vest in pieces over several years, often with a “cliff” (nothing vests until the first anniversary, then a chunk vests at once) and quarterly or semiannual vests after that. Some employers back-load the schedule so more vests in later years. Read your own agreement rather than assuming a standard split.
• Performance vesting: the number of units that vest depends on company or individual targets.
• Double-trigger vesting: common at private companies. Units need both the time condition and a liquidity event (an IPO or acquisition) before shares are delivered. Until then there is usually no tax and no shares you can sell. See our guide to RSUs at private companies.

There can be a short gap between the vest date and the day shares land in your brokerage account. That delay is covered in what to do when RSUs are vested but not released.

How RSUs are taxed at vest, and why 22% withholding falls short

When shares are delivered, the number of shares times the market price that day is wages. Your employer adds it to Box 1 of your W-2, along with the Social Security and Medicare wage boxes, so yes, RSU income is reported on your W-2. Many employers also note the amount in Box 14, but that is optional.

Your employer must withhold on it as supplemental wages. For 2026, the optional flat federal rate is 22%, and supplemental wages above $1,000,000 in a calendar year face mandatory 37% withholding (IRS Publication 15 (2026)). Most companies withhold by keeping back some of the vesting shares, called withhold to cover or sell to cover (compared in withhold to cover vs sell to cover).

The problem for a household earning $750,000 or more: withholding is not the tax owed. For 2026, a married couple filing jointly reaches the 35% federal bracket at $512,450 of taxable income and the 37% bracket at $768,700 (IRS Rev. Proc. 2025-32). If your RSUs are taxed at 35% or 37% but withheld at 22%, you owe the difference in April, and possibly an underpayment penalty.

After delivery, the shares are ordinary stock. Your cost basis is the value that was already taxed as wages. Any later rise or fall is a capital gain or loss, short-term if you sell within a year of delivery, long-term after that.

Worked example: a $300,000 RSU vest for a $900,000 household

Assumptions (illustrative, for the 2026 tax year): a married couple filing jointly. One spouse works at a Bay Area biotech with a $350,000 salary and $300,000 of RSUs vesting during 2026. The other is a physician earning $250,000. Total W-2 wages are $900,000. They take the 2026 standard deduction of $32,200, so federal taxable income is $867,800, or $567,800 before the RSUs. For California we assume taxable income of $600,000 before the RSUs and $900,000 after, and use the 2025 rate schedule because the 2026 schedule had not been published as of September 2026. The Washington column shows the same wages for a family living in Washington.

Federal income tax withheld at 22% is $66,000. The federal income tax actually due on the vest is $106,982, so this family is about $41,000 short at the federal level alone, before looking at California withholding. The fix is not complicated: a W-4 adjustment to add withholding on the salary, or estimated payments after each large vest. It just has to be done on purpose, ideally in the first quarter, not discovered in April.

Two state notes. California taxes RSU wages at ordinary rates, and the 1% Behavioral Health Services Tax applies once California taxable income exceeds $1,000,000, taking the top rate to 13.3% (FTB 2025 rate schedules). California also has no lower rate for long-term capital gains (FTB). Washington has no individual income tax for 2026, but a 9.9% income tax on AGI over $1,000,000 takes effect January 1, 2028 (WA DOR), and the state’s 7% capital gains tax already applies to long-term gains on stock above the annual standard deduction ($278,000 for 2025, the latest published figure) (WA DOR). WA Cares is 0.58% of wages with no cap, unless you hold an approved exemption (WA Cares Fund).

RSUs compared with other equity pay

The 83(b) deadline is 30 days after the property is transferred (IRS Publication 525). Because an RSU is not property until delivery, there is nothing to elect on. For more detail on the “no strike price” point, see do RSUs have a strike price.

The real decision: keep the shares or sell at vest

Since the vest is taxed exactly like a cash bonus, a useful test is: if your employer had paid you $300,000 in cash, would you use it to buy $300,000 of company stock? If the answer is no, holding the shares is the same as making that purchase.

For a family whose salary, bonus, unvested grants and career all depend on one company, selling at vest and diversifying is often the lower-risk default. Holding can make sense when the position is small relative to net worth, or when there is a specific reason written down in advance. Either way, decide the rule before the vest, not on the day the price is moving. Our investment risk management work starts with exactly this question.

Common RSU mistakes at this income level

1. Treating 22% withholding as the tax bill. At a 35% or 37% federal bracket, plus California, the gap can be tens of thousands of dollars per year.
2. Paying tax twice on the same income. Brokers often report RSU shares on Form 1099-B with a zero or missing cost basis. If you do not correct the basis on Form 8949, you pay capital gains tax on income already taxed on your W-2 (Form 8949 instructions). See how to report RSUs on your tax return.
3. Counting unvested RSUs as net worth. They are forfeited if you leave and their value moves with the stock. Plan on what has vested.
4. Letting the position grow by default. Each vest that is not sold adds to concentration in your employer.
5. Filing an 83(b) for RSUs. It does not apply, as covered above.

What to document for your kids

Your children will see the outcome of these choices, the house, the school, the sale that funded the 529, but not the reasoning. A one-page Decision Memo that records your sell-or-hold rule, why you chose it, and what would make you change it is the kind of thinking a FamilyKnowledge® Library is built to keep. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.”

Questions families ask about RSUs

Are RSUs reported on my W-2?

Yes. The value of shares delivered at vest is included in Box 1 wages and in the Social Security and Medicare wage boxes of your W-2 for the year they vest. Shares withheld for taxes are included too. You will also get a Form 1099-B when you sell, and that is where basis errors creep in, so keep your vest confirmations.

Can you keep RSUs after leaving the company?

Shares that have already vested and been delivered are yours to keep or sell. Unvested units are usually forfeited on the day you leave, though some plans accelerate vesting on retirement, disability, death, layoff or an acquisition. Your plan document and grant agreement control, so read them before setting a departure date.

Is an RSU the same as owning stock?

Not until vesting. Before then you hold a promise, with no vote and usually no dividends. After delivery the shares are ordinary stock, with a cost basis equal to the value taxed as wages. Our RSU vs common stock guide goes further.

Next step

Pull your vesting schedule for the next 12 months, add up the expected value, and compare 22% of it with your actual marginal rate. If the gap is large, fix withholding or schedule estimated payments now. If you want a second set of eyes on the numbers, our tax management team covers RSU planning as part of the Tax & Wealth Assessment.

This is general education, and the right move depends on your family’s full picture.

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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