The Complete RSU Guide: Vesting, Taxes, and What to Do at Each Vest

An RSU grant is a promise: stay employed, hit the vest date, and the company delivers shares. The promise resolves the moment those shares hit your account. The IRS treats the fair market value on that date as ordinary wages under IRC §83(a). Your employer withholds payroll taxes, reports the income on Box 1 of your W-2, and you now own a chunk of stock with a cost basis equal to the vest-date price.

That is the entire mechanical story. The hard part is what comes next. Every quarter, you get a fresh block of shares and an identical choice: hold or sell. The default answer for most people is sell on vest, because you would never take an equivalent cash bonus and buy your own employer’s stock with it. The better answer depends on your concentration, your tax bracket, and whether your company is public, pre-IPO, or running a double-trigger plan where the tax hit lands in a tender offer or IPO window.

This guide walks through the mechanics at vest, the withholding gap that surprises most employees in April, the concentrated-position problem that builds quietly over four years, and the decision framework for each quarterly slug of shares.

What actually happens on the vest date

On vest, three things happen on the same day. The shares become yours. The fair market value gets added to your W-2 as ordinary wages. And your employer sells or withholds a portion to cover payroll tax.

Most public-company plans use a net-share settlement: if 100 shares vest and the company withholds at 22%, you receive 78 shares and the other 22 shares worth of cash goes to federal tax. State tax, Social Security (6.2% on wages up to $176,100 in 2025), and Medicare (1.45% plus the 0.9% additional Medicare tax above $200k) come out of the same bucket.

Your cost basis in the shares you keep equals the vest-date closing price. That matters later. If you sell the day you vest, you get a capital gain or loss of roughly zero, only the bid-ask spread and any price move during the trading day. Sell a year later at double the price, and you have a long-term capital gain on the appreciation above basis, not on the full proceeds.

Pre-IPO companies typically use double-trigger RSUs. The first trigger is the time-based vest. The second is a liquidity event, usually the IPO or a qualifying tender. Until both triggers fire, no income hits your W-2 and no tax is due. When they do fire, the full value of every vested share lands as ordinary income in one tax year. That is the IPO tax cliff, and it is why pre-IPO employees at mature private companies often owe six or seven figures of federal tax in a single April.

The supplemental withholding gap

RSU income is supplemental wages under IRS rules. Supplemental wages get withheld at flat statutory rates, not at your marginal rate. In 2025, the rate is 22% on the first $1 million of supplemental wages per calendar year and 37% on everything above $1 million.

This works out fine for employees whose ordinary income tax bracket happens to be 22%. It does not work out fine for a senior engineer making $300,000 of base plus $200,000 of RSU vests. That person sits in the 32% or 35% federal bracket on the marginal RSU dollars, but the company withheld at 22%. The 10 to 13 percentage-point gap is real money, and it shows up as a tax-due bill in April.

The fix is either (a) elect additional withholding through your W-4, (b) make estimated quarterly payments to avoid the underpayment penalty under IRC §6654, or (c) rely on the safe harbor of paying 110% of last year’s liability if your AGI exceeded $150k. Most employees pick option (c) without realizing it, then get blindsided the year their income jumps.

Scenario	Gross RSU vest	Withheld at 22%	True marginal rate	Shortfall
24% bracket	$100,000	$22,000	$24,000	$2,000
32% bracket	$200,000	$44,000	$64,000	$20,000
35% bracket	$500,000	$110,000	$175,000	$65,000
Above $1M YTD	$1,500,000	$330k + 37% on $500k	37% all the way	Usually none

The shortfall narrows above $1 million of supplemental wages because the 37% flat rate matches the top bracket almost exactly. The people most at risk are the ones earning $250k to $900k of RSU income. They get the worst of both worlds: under-withheld at 22%, and sitting in the 32% or 35% bracket.

The concentration problem

After four years of quarterly vests, a typical tech employee has accumulated 16 tranches of company stock. If the price is flat, the position is worth roughly one year of total comp. If the price has tripled, the position is worth three years of total comp, and the employee is now three-to-four deep in a single-stock bet on their own employer.

The rational benchmark is this: you would not take a cash bonus and voluntarily buy your employer’s stock with it. Holding vested RSUs is economically equivalent to that trade. Every dollar you hold past the vest date is a dollar you are choosing to keep in company stock rather than diversify. That choice can be correct. It is often not made deliberately.

The most common default rule worth considering is sell-to-cover plus sell-the-rest. The vest triggers a mandatory sell-to-cover for tax; you then sell the remaining shares at the same time and redeploy into a diversified portfolio. Your cost basis resets on every vest, so selling on the vest date means near-zero capital gains. The tax cost of diversifying out is effectively zero if you do it immediately.

If you want to hold some, the structured approach is to pick a percentage (say 25% of vested shares) and hold that indefinitely while selling the rest. That caps the concentration without forcing a binary decision every quarter.

Double-trigger RSUs and the IPO cliff

Double-trigger plans exist because a pre-IPO company cannot reasonably ask employees to pay tax on illiquid shares that have no market. The second trigger defers the taxable event until liquidity exists.

The liability accumulates quietly. A senior engineer at a late-stage private company who joined four years ago might be sitting on $2 million of vested-but-not-settled RSUs at the current 409A. When the IPO prints, all of that lands as ordinary income in one year. Federal alone is $740k at the 37% bracket. State adds another $100k to $260k depending on where you live. Supplemental withholding at 22% covers $440k. The underwithholding gap on an IPO year routinely runs $300k to $500k for senior employees.

Planning moves that help: make a Q4 estimated tax payment in the IPO year, not April of the following year, to avoid the underpayment penalty. If the IPO is in H1, increase W-2 withholding for the second half of the year to use the safe harbor, which treats withholding as paid evenly across the year regardless of timing. Line up liquidity (margin, HELOC, secondary sale through a pre-arranged 10b5-1 plan) to cover the tax hit without forced selling during a blackout.

The vest-date decision framework

At every vest, ask four questions in order.

Is the price higher or lower than your target risk tolerance for company-stock concentration? If holding another tranche pushes you above, say, 20% of net worth in one stock, the default is sell.

Do you have a specific thesis for holding past the vest date that you would not apply to an outside stock? Being bullish on your employer is not a thesis; it is a feeling. A thesis is “I think the stock is mispriced relative to the comps at a 14x forward multiple” or “I am waiting for a lock-up expiration that will clear overhang.” Most employees do not have a thesis. They have loss aversion.

Are you in a trading window, or are you subject to blackout? If you are an insider or covered by the company’s blackout policy, the decision is moot until the window opens. Set up a 10b5-1 plan so the default action is automatic sales on each vest, which removes the decision from blackout timing.

What is the tax cost of selling now versus later? On a vest-date sale, near zero. On a sale one year later, it depends on the price move. Long-term capital gain rates (0%, 15%, 20%, plus 3.8% NIIT above $200k single MAGI) are lower than ordinary rates, but waiting for LTCG treatment only helps if the stock goes up or stays flat. If it drops, you held for nothing.

The honest answer for most holders is: sell at vest, diversify, and revisit only if a real thesis shows up.

Frequently asked

Is RSU income taxed twice? No. It is taxed as ordinary income at vest and then as capital gain or loss on any price movement between vest and sale. Your basis in the shares is the vest-date value you already paid ordinary tax on.

Can I defer RSU income? Public-company single-trigger RSUs, no. The income is fixed on the vest date under IRC §83. A few executive plans allow 409A-compliant deferral elections made before the grant year, but that is a narrow path with strict rules.

What happens if I leave before a vest date? Unvested RSUs are forfeited under almost every plan. Vested shares are yours. Some plans have clawback provisions for cause-based termination; read the grant agreement.

Do I need to file an 83(b) election on RSUs? No. The 83(b) applies to restricted stock (actual shares subject to forfeiture), not to RSUs. An RSU is a contract right to receive shares, which is not “property” under §83 until settlement.

How do I avoid the underwithholding trap? Either bump your W-4 withholding, make quarterly 1040-ES payments, or use the safe harbor of paying 110% of last year’s total tax. The IRS does not care which path you take, only that you hit one of them.

Next step

Run the numbers on your own situation before the next vest. The supplemental withholding calculator models the gap between what your employer withholds and what you actually owe. If the gap is five figures, talk to a fiduciary planner before April. The penalty for underpayment plus the cash-flow hit of a surprise tax bill is usually worse than the cost of an hour of advice.