RSU Taxation: The Complete Guide

Federal tax on RSUs

Federal tax is straightforward: the value of vested RSUs is ordinary income, taxed at your marginal federal income tax rate. This applies regardless of where you live or work.

Example: You vest $100,000 in RSUs and you're in the 24% federal bracket. You pay $24,000 in federal income tax, plus Social Security (6.2% up to wage base) and Medicare (1.45% + 0.9% for high earners).

State tax on RSUs

State tax depends on where you live and work when the RSUs vest. This is where it gets complex:

• Residency-based: Most states tax RSUs based on where you're a resident when they vest
• Work location: Some states tax based on where you perform work
• No state tax: States like Texas, Florida, and Washington don't tax RSUs at the state level
• High-tax states: California (up to 13.3%) and New York (up to 8.82%) can significantly impact RSU take-home pay

Withholding rates vs. actual tax rates

Employers typically withhold at a flat 22% for federal income tax (or 37% for amounts over $1 million), plus state tax and FICA. This may not match your actual marginal tax rate.

Example: You vest $200,000 in RSUs. Your employer withholds 22% federal ($44,000), but you're actually in the 32% bracket. You'll owe an additional $20,000 when you file, plus state tax differences.

What affects your final tax

• Your total annual income: RSUs are added to your salary, bonus, and other income, which may push you into higher brackets
• Deductions and credits: These reduce your taxable income and final tax liability
• Other income sources: Investment income, side income, or spouse's income affects your overall tax bracket
• AMT (Alternative Minimum Tax): High earners may be subject to AMT, which can increase tax liability

1. Assuming withholding equals final tax

Many professionals see the withholding on their RSU vesting and assume that's their final tax. In reality, high earners often owe significantly more when filing, especially if they're in high-tax states or have other income sources.

Solution: Use tax planning tools or work with a tax professional to estimate your actual tax liability. Set aside cash to cover potential tax bills.

2. Not accounting for state tax differences

If you work remotely or move states, you may owe tax to multiple states. Some states have special rules for equity compensation, and state tax credits may not fully offset multi-state tax liability.

Solution: Understand your state's tax rules for RSUs. If you move states, consult a tax professional to understand multi-state tax implications.

3. Underestimating the impact of multiple vesting events

If you have multiple RSU grants vesting throughout the year, each vesting event is taxed separately, but they're all added to your annual income. The cumulative effect can push you into much higher tax brackets than any single vesting event suggests.

Solution: Plan for the cumulative impact of all vesting events. Use our total compensation calculator to see how multiple vesting events affect your overall tax burden.

4. Not planning for estimated tax payments

If you have large RSU vesting events and your withholding doesn't cover your tax liability, you may need to make estimated tax payments throughout the year to avoid underpayment penalties.

Solution: The IRS requires you to pay at least 90% of your current year's tax liability or 100% of last year's liability (110% if AGI over $150,000). If RSU vesting pushes you over these thresholds, make estimated payments.

5. Ignoring AMT (Alternative Minimum Tax)

High earners with large RSU vesting events may be subject to AMT, which can significantly increase tax liability. AMT disallows many deductions and uses different tax rates.

Solution: If you're a high earner with substantial RSU income, work with a tax professional to understand AMT implications and plan accordingly.