What are Restricted Stock Units (RSUs)?

Restricted Stock Units (RSUs) are a promise from your employer to give you company shares on a future date, provided you are still there when that date arrives. The “restricted” part is the condition: you own nothing at grant, and the shares become yours only once the award vests and settles.

RSUs have become the default form of equity compensation at large public companies, largely because they are worth something as long as the stock has any value at all. A stock option can expire worthless if the share price falls below the strike price. An RSU cannot, which makes it easier for both sides to price as part of an offer.

How RSU Vesting Works

A grant is split across a vesting schedule, and each tranche is delivered once the applicable vesting and settlement conditions are met. The most common arrangement at public companies is four-year vesting with a one-year cliff: nothing at all for twelve months, then a quarter of the grant, then the remainder in quarterly or monthly increments.

Say you are granted 4,000 RSUs on a four-year schedule with a one-year cliff. You receive nothing for the first year, 1,000 shares on your first anniversary, and then roughly 250 shares each quarter for the next three years. Leave in month eleven and you get nothing.

Private companies frequently add a second condition, usually called double-trigger vesting. Time-based vesting has to be satisfied and a liquidity event such as an acquisition or public offering has to occur before shares are actually delivered. This protects employees from owing tax on shares they cannot sell, but it also means your vested-on-paper equity may stay unusable for years, and many double-trigger grants expire if no liquidity event happens within a set period.

Grants also stack. A refresh grant issued each year overlaps with earlier ones, so a few years in you have several schedules vesting at once. That produces lumpy, uneven income that is easy to underestimate when planning. You can model each grant with the RSU Grant income type in ProjectionLab, entering each vest’s amount through the Advanced Change Over Time editor.

How RSUs Are Taxed

RSUs are generally taxed as ordinary income when the shares are settled or delivered, not when the units are granted and not when you later sell the shares. At public companies, settlement usually occurs when the award vests, so the taxable amount is the fair market value delivered on that date. Private-company and deferred-settlement awards can vest before the taxable settlement event. The income lands on your W-2 as wages, usually reflected in Box 1 and sometimes itemized in Box 14.

If 250 shares settle while the stock trades at $80, you have $20,000 of ordinary income that year, exactly as if your employer had paid you a $20,000 bonus.

That income is also subject to payroll tax. Social Security applies at 6.2% until your total wages reach the annual wage base ($184,500 for 2026), Medicare applies at 1.45% with no cap, and an additional 0.9% Medicare tax applies to wages above $200,000 for single filers or $250,000 of combined wages for married couples filing jointly. Employers withhold it on wages above $200,000 regardless of filing status, so a two-earner couple can end up over- or under-withheld.

RSU Tax Withholding

Most employers cover the tax by holding back a portion of the vesting shares, an arrangement usually called share withholding or sell to cover. Federal withholding on this kind of supplemental wage is commonly done at a flat 22%, rising to 37% on supplemental wages above $1 million in a year.

If your marginal rate is 32% or 35%, withholding at 22% leaves a shortfall on every vest, and the shortfalls add up across four quarterly vests into a balance due in April, possibly with an underpayment penalty. The fix is either additional withholding elsewhere in your pay or quarterly estimated payments. You can see which brackets a year’s vests land in with ProjectionLab’s tax analytics.

After Vesting

Once shares are delivered and taxed, your cost basis is generally the fair market value included in wages, the same figure already taxed as income. Anything that happens afterward is a capital gain or loss.

Sell immediately after settlement and there is usually little additional gain or loss, which is why selling then is generally tax-neutral rather than tax-costly. Hold and sell later, and the difference between the sale price and your basis is a capital gain, short term if you held a year or less and long term beyond that.

A broker’s Form 1099-B may show a blank, zero, or otherwise incomplete basis for shares acquired through equity compensation. Filing that figure without checking can mean paying tax twice on the same money, once as wages and again as a phantom capital gain. Compare the form with the employer or broker’s supplemental equity statement and make any required basis adjustment on Form 8949.

RSUs vs. Stock Options

The two get grouped together as “equity,” but they behave differently enough that comparing offers on headline value alone is misleading.

RSUs are steadier and harder to lose; options carry more risk and more upside. Early-stage startups tend toward options, where a low strike price can turn into a large multiple. Established public companies tend toward RSUs, where predictability matters more to both sides.

RSUs vs. Restricted Stock Awards

A restricted stock award (RSA) is actual stock issued to you at grant, subject to forfeiture until it vests. An RSU is only a contractual promise, with no shares in existence until vesting.

That distinction drives one practical consequence. Because an RSA transfers actual stock at grant, the recipient can make an 83(b) election within 30 days, paying tax up front on the value so that later appreciation is treated as capital gain. RSUs cannot use an 83(b) election, because no stock has been transferred yet. A separate provision, the 83(i) election, lets some employees of eligible private companies defer RSU tax for up to five years, but the qualifying conditions are narrow.

The Concentration Problem

Vested RSUs leave you holding shares in the company that also pays your salary. Your income, your equity, and often your health coverage all depend on the same employer. A downturn at that company can hit all three at once.

One approach is to set a rule in advance, such as selling at each vest and diversifying the proceeds, or capping company stock at a fixed share of your portfolio. A rule decided ahead of time is easier to follow than a judgment call made while watching the price.

Frequently Asked Questions

What does RSU stand for? Restricted Stock Unit. It is a commitment from an employer to deliver company shares to you once vesting conditions are met.

How are RSUs taxed? As ordinary income on the fair market value of the shares when they are settled or delivered, commonly the vesting date, reported as wages on your W-2 and subject to Social Security and Medicare tax. Any later change in value is a capital gain or loss when you sell.

What is the RSU tax rate? There is no separate rate. Vested RSUs are taxed at your ordinary income rate, whatever bracket the added income falls into. Employers commonly withhold at a flat 22%, which is lower than the marginal rate many RSU recipients actually pay.

Should I sell my RSUs as soon as they vest? Selling as soon as the shares are delivered is usually close to tax-neutral, since your basis equals the value already taxed as income. The decision is therefore about concentration rather than taxes: holding is equivalent to using your after-tax bonus to buy more of your employer’s stock.

How can I reduce taxes on RSU income? The vest itself is taxed as wages once shares are delivered, so the levers sit around it. Pre-tax contributions to a 401(k) or health savings account (HSA) lower the taxable wages the vest stacks onto. Holding shares more than a year after delivery turns later appreciation into long-term capital gains, and donating appreciated shares held more than a year can avoid tax on that gain.

What happens to my RSUs if I leave the company? Unvested RSUs are generally forfeited, unless your plan accelerates vesting for events such as retirement, disability, or an acquisition. Already-vested shares are yours and go with you. This is why departure timing relative to your next vest date matters, and why a pending vest is a standard thing to negotiate over when changing jobs.

What is the difference between an RSA and an RSU? An RSA is actual stock granted up front and subject to forfeiture until vested, and it is eligible for an 83(b) election. An RSU is an unfunded promise with no shares until vesting, and it is not eligible for 83(b).

Do RSUs pay dividends? Not usually before vesting, since you do not own the shares yet. Some plans credit dividend equivalents that pay out when the units vest, generally taxed as ordinary income. Once shares are delivered, they pay dividends like any other share.