How Much Tax Do You Pay on Your RSUs?

Restricted Stock Units (RSUs) are a form of compensation where an employer gives an employee shares of company stock. These shares come with a vesting schedule, meaning the employee must work for the company for a specified period before gaining full ownership. Unlike a cash bonus, the value of this compensation is tied to the company’s stock performance. This form of equity is a grant of shares that are restricted until vesting requirements are met, at which point they become the employee’s property to hold or sell.

Taxation at Vesting

The first taxable event for Restricted Stock Units occurs on the vesting date. This is the moment the shares officially become your property, and their value is recognized as income by the IRS. The total value is considered ordinary income, similar to your salary, and is subject to federal income tax, Social Security, and Medicare taxes (FICA).

To determine the amount of taxable income, you multiply the number of vested shares by the fair market value (FMV) of a single share on the vesting date. For example, if 100 shares vest when the stock’s price is $50 per share, you have realized $5,000 of ordinary income. This $5,000 is then added to your other earnings to determine your total income for the year.

Employers are required to withhold taxes on this RSU income. The most common method is “sell-to-cover,” where the company’s broker automatically sells a portion of the vested shares to cover the tax liability. The federal withholding rate for this supplemental income is a flat 22% for amounts up to $1 million, and 37% for amounts exceeding that threshold. State and local taxes will also be withheld.

Continuing the example, to cover a 22% federal tax ($1,100) and an assumed 8% state tax ($400), a total of $1,500 in taxes would be due. At $50 per share, the broker would sell 30 of your vested shares. You would then receive the remaining 70 shares. Other methods include paying the withholding with cash or having the company withhold the shares themselves, known as net issuance.

The ordinary income from your vested RSUs and the taxes withheld are reported on your annual Form W-2. The income is included in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages and tips). The taxes withheld are included in Box 2 (Federal income tax withheld), Box 4 (Social Security tax withheld), and Box 6 (Medicare tax withheld).

Taxation Upon Sale of Shares

A second taxable event occurs when you sell the shares you acquired through vesting. This event relates to capital gains or losses, and the tax depends on how the stock’s price has changed and how long you held the shares. The tax you paid at vesting is accounted for in this new calculation, ensuring you are not taxed twice on the same value.

The cost basis is essential for calculating tax on a sale. For RSUs, the cost basis per share is the fair market value of the share on the date it vested, the same value used to calculate your ordinary income. To determine your capital gain or loss, you subtract your total cost basis from the total proceeds you receive from the sale. The formula is: (Total Sale Proceeds) – (Total Cost Basis) = Capital Gain or Loss.

The length of time you hold the shares after they vest determines the tax rate. If you hold the shares for one year or less before selling, the profit is a short-term capital gain and is taxed at your regular ordinary income tax rate. If you hold the shares for more than one year and a day, the profit qualifies as a long-term capital gain, which is taxed at lower rates of 0%, 15%, or 20%, depending on your taxable income.

Imagine you received 70 shares after withholding, with a cost basis of $50 per share (total cost basis of $3,500). If you sell all 70 shares six months later when the price is $60, your proceeds are $4,200. The resulting $700 gain is a short-term capital gain. If you sold them for $40 per share, you would have a $700 capital loss, which can be used to offset other capital gains.

Reporting RSU Income and Sales on Your Tax Return

You will rely on your Form W-2, which shows the ordinary income you recognized at vesting, and Form 1099-B from your brokerage, which details the proceeds from any shares sold. A frequent complication arises with Form 1099-B. Brokerage firms often report an incorrect cost basis for shares acquired through an RSU plan, commonly listing it as $0. This is because the broker may not have information about the ordinary income you already recognized and paid tax on at vesting.

If you use the incorrect $0 basis reported on the 1099-B, you will pay tax on the entire value of the sale, not just the capital gain. To avoid this, you must manually correct the basis on your tax return. This correction is done on Form 8949, “Sales and Other Dispositions of Capital Assets.”

The IRS provides specific instructions for this situation. On Form 8949, you will report the sale as shown on the 1099-B and then enter the correct cost basis in column (e). The correct basis is the fair market value on the vesting date multiplied by the number of shares sold. The totals from all your transactions on Form 8949 are then summarized on Schedule D, “Capital Gains and Losses,” which is filed with your Form 1040.

State and Local Tax Considerations

The income you recognize when your RSUs vest is subject to state and local income taxes. These taxes are withheld at the time of vesting along with federal taxes, often through the sell-to-cover process. The amount of state tax withheld is based on the supplemental wage withholding rules for the state where you perform your work.

Taxation can become more complex if you move between states. If you live in one state when the RSUs are granted but move to another before they vest, you may have a tax liability in both states. Many states have rules that require you to allocate the income based on the time you worked in each state between the grant and vesting dates.

When you later sell your vested shares, any capital gain is taxed by the state where you reside at the time of the sale. Because each state has its own specific regulations, it is important to review the guidance from the tax agencies for the states in which you have worked and lived.