How RSUs are taxed

Understanding when and how restricted stock units are taxed, including federal and state tax implications.

TL;DR

•RSUs are taxed as ordinary income when they vest, not when they're granted. The value at vesting is added to your W-2 income.
•RSUs are taxed at your marginal income tax rate (not capital gains rate). Your employer typically withholds 22% federal (or 37% if over $1M) plus state tax and FICA.
•State tax on RSUs depends on where you live and work when they vest. States without income tax (Texas, Florida, Washington) don't tax RSUs at the state level.

When RSUs are taxed

Restricted Stock Units (RSUs) are taxed when they vest, not when they're granted. At vesting, the fair market value of the shares is treated as ordinary income and subject to:

Your employer typically withholds taxes at vesting by selling a portion of your shares (called a "sell-to-cover" transaction) or by withholding from your regular paycheck.

Federal income tax
State income tax (if applicable)
Social Security tax (up to the wage base limit)
Medicare tax (1.45% plus 0.9% for high earners)

Tax rates on RSU vesting

RSUs are taxed as ordinary income at your marginal tax rate, not at the lower capital gains rate. This means if you're in the 24% federal tax bracket, your RSUs are taxed at 24% (plus state tax and FICA).

Key Point

RSUs are always taxed as ordinary income at vesting, regardless of whether you sell the shares immediately or hold them. Any appreciation after vesting is subject to capital gains tax when you sell.

The withholding rate on RSUs is typically 22% for federal income tax (or 37% for amounts over $1 million), plus state tax and FICA. This may not match your actual tax rate, so you may owe additional tax or receive a refund when you file.

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Federal vs. state tax

Federal tax on RSUs is straightforward: the value at vesting is ordinary income. State tax depends on where you live and work when the RSUs vest.

If you move states during the year, you may owe tax to multiple states. Some states have special rules for equity compensation, so it's important to understand your state's specific requirements.

States without income tax (like Texas, Florida, or Washington) don't tax RSUs at the state level, but you still pay federal tax and FICA.

Withholding on RSUs

Employers typically use one of two methods to withhold taxes on RSUs:

The sell-to-cover method is more common because it doesn't impact your regular paycheck. However, it means you receive fewer shares than the number that vested.

Sell-to-cover: Sells a portion of your vested shares to cover taxes. You receive the remaining shares.
Withhold from paycheck: Withholds taxes from your regular paycheck, which can significantly reduce your take-home pay for that period.