Restricted Stock Units are one of the most common forms of equity compensation in tech and finance. They are also one of the most misunderstood — particularly the gap between what your employer withholds and what you actually owe. This guide walks through the lifecycle: how RSUs are taxed at vest, why the 22% default withholding usually under-shoots, and how to think about selling versus holding.

How RSUs Are Taxed at Vest

RSUs are taxed as ordinary compensation income on the vesting date. The fair market value of the shares on that date — typically the closing price — multiplied by the number of shares delivered is added to your W-2 income just like a bonus or extra salary. This event has nothing to do with whether you sell the shares or not.

Federal, state, and FICA all apply. Your employer must withhold something on this income, and almost all employers default to the IRS supplemental wage rate of 22% for federal withholding. They also withhold state income tax at your state's supplemental rate (which can be different from the regular income tax rate), Social Security at 6.2% up to the annual wage base ($176,100 in 2026), and Medicare at 1.45% on all earnings.

The mechanics of withholding typically involve sell-to-cover: the broker automatically sells enough shares on the vest date to cover the tax bill, and the rest of the shares are deposited into your brokerage account. You don't receive cash for the sold shares — they were withheld at vest.

Why the 22% Default Leaves You Underwithheld

The 22% supplemental rate matches the 22% federal bracket — meaning if your true marginal rate is in that bracket, you're roughly even. But many RSU recipients are paid well above that bracket. A software engineer at a public tech company often clears $200K base + $100K in RSU vests, which puts the RSU income squarely in the 32% or 35% federal bracket. The employer still withholds at 22%.

The math: a $50,000 RSU vest in the 32% bracket creates a $16,000 federal liability, but only $11,000 is withheld. The $5,000 gap shows up at tax filing as a balance due — sometimes accompanied by an underpayment penalty if you didn't catch it in time. The IRS levies that penalty when total withholding (across all sources) plus estimated payments falls short of safe-harbor thresholds.

Three options to close the gap: (1) increase your W-4 federal withholding for the rest of the year, (2) make a Q4 estimated tax payment via Form 1040-ES by January 15, or (3) ask payroll to withhold at a higher supplemental rate on future vests (some payroll systems support this).

Sell at Vest vs Hold for Long-Term Capital Gains

The most common question after an RSU vest is whether to sell immediately or hold the shares for long-term capital gains treatment. The trade-off is straightforward: holding ≥ 12 months qualifies any further appreciation for the long-term capital gains rate (typically 15%, sometimes 20% for high earners with 3.8% NIIT). Selling within a year of vest treats any gain as short-term — taxed at your ordinary marginal rate, which for most RSU holders is well above 15%.

The case for selling at vest is simpler. You've already paid ordinary income tax on the FMV. Selling realizes zero further gain because your cost basis equals the vest price. You convert paper wealth into cash, reduce concentration risk in your employer's stock, and gain optionality to diversify. Most financial planners default to recommending sell-at-vest unless you have a specific thesis for holding.

The case for holding rests on belief that the stock will appreciate meaningfully and that the 17-percentage-point spread between ordinary and long-term rates is worth the single-stock risk for 12 months. The historical track record of concentrated single-stock positions is mixed: for every winning name, plenty of holders rode RSUs back below their vest price. If you do hold, set rules in advance ("sell once shares reach 1.3× vest price, regardless of momentum") rather than relying on judgment after the fact.

RSUs vs Stock Options

RSUs and stock options are different instruments with different tax treatment, but they're often confused. An RSU is a grant of actual shares delivered on vest — there is no exercise step and no strike price. The tax event is the vest itself.

Stock options give you the right to buy shares at a fixed strike price. Non-Qualified Stock Options (NSOs) are taxed at exercise on the spread (FMV − strike), exactly like RSUs are taxed at vest. Incentive Stock Options (ISOs) have a more complex regime: no regular tax at exercise (subject to AMT), and the spread plus appreciation qualifies for long-term capital gains rates if you hold for at least 1 year from exercise and 2 years from grant — a 'qualifying disposition'.

For RSU holders comparing to ISOs, the practical difference is: RSUs always create ordinary income at vest, no exception, but they also have no out-of-pocket cost. ISOs require cash to exercise but can deliver capital-gains treatment on the entire spread. Both have their place; the right choice depends on your conviction in the stock and your tax situation.

Common RSU Tax Mistakes to Avoid

Forgetting to track withholding shortfalls. The 22% default is widespread — Lyft, Meta, Google, Snowflake, and most other public tech employers use it. If you're in the 32%+ bracket, plan for the gap from day one, not at tax-filing time.

Selling within a year of vest and surprised by the tax bill. Short-term capital gains are taxed at ordinary rates — there's no preferred treatment. If you sell three months after vest and the stock went up, you owe your full marginal rate on the appreciation, on top of the ordinary income tax on the vest itself.

Double-counting cost basis. Your broker's 1099-B sometimes reports cost basis as $0 (the grant price) instead of the FMV at vest. If you accept this number, you'll pay tax on the same income twice — once as ordinary income on the W-2 and again as a capital gain on the 1099-B. Always adjust cost basis to the FMV at vest when you file.

Not coordinating with espp and other equity. Many RSU recipients also hold ESPP shares, options, or prior vesting tranches. Each event has its own tax treatment. A unified plan — when to sell, when to hold, when to make estimated payments — beats one-at-a-time decisions.