Updated for 2026
Restricted stock units are ordinary wages the moment they vest, and your employer will almost certainly withhold 22% against them. If you are in the 32% or 35% bracket, that default leaves you roughly 10 to 13 cents short on every dollar — a bill that arrives in April with an underpayment penalty attached. The arithmetic below uses the 2026 rates.
- An RSU is taxed as ordinary compensation when the shares are delivered at vesting, at their full market value that day. Nothing is taxed at grant.
- Withholding on that income is 22% up to $1,000,000 of supplemental wages in the year and 37% above it, under the rules in Publication 15.
- There is no section 83(b) election for an RSU. The regulations exclude an unfunded promise from the definition of property, so there is nothing to elect on.
- Your cost basis is the vesting-day value. The single most expensive filing error with RSUs is paying tax on that value twice.
Restricted stock units are the most common form of equity compensation and the most commonly mishandled, because the tax event happens on a date nobody chooses and the withholding that goes with it is a flat rate rather than a calculation.
Two things follow from that, and they account for most of the surprises. The amount withheld is usually too small. And the shares that land in your brokerage account carry a basis that your broker frequently reports as zero.
The short answer, and where the IRS says it
An RSU is a promise to deliver shares later. Until the shares are actually delivered, there is nothing to tax, because Treasury Regulation § 1.83-3(e) defines property for section 83 purposes to exclude “an unfunded and unsecured promise to pay money or property in the future.”
When the units vest and the shares are transferred, section 83 applies. The market value of the shares on that date, less anything you paid for them, is compensation. IRS Publication 525 treats it the way it treats any other taxable compensation from an employer: it goes in box 1 of your Form W-2 alongside your salary, and it is subject to Social Security and Medicare tax at the same time.
Why there is no 83(b) election on an RSU. A section 83(b) election accelerates tax on restricted stock — shares you already own but could forfeit. An RSU is not stock; it is a contractual promise, and the regulation above says a promise is not property. Restricted stock and restricted stock units are different instruments, and the election belongs only to the first.
What this looks like on an actual return
If you read nothing else, read this. One vest, and the gap the 22% rate leaves behind.
A single filer with a $260,000 salary and $180,000 of RSUs vesting during 2026.
| On the vest | Amount |
|---|---|
| Market value of the shares delivered | $180,000 |
| Added to box 1 of Form W-2 | $180,000 |
| Federal income tax withheld at the supplemental rate | $39,600 (22%) |
| Marginal federal rate this income actually lands in | 35% |
| Federal income tax actually owed on it | $63,000 |
| Shortfall, federal only | $23,400 |
Total income of $440,000 puts this filer in the 35% bracket for 2026, which runs from $256,225 to $640,600 for a single filer. Every dollar of the vest is taxed at 35% while 22% was withheld against it. State tax has not been touched yet, and in California it would add roughly another $18,000.
The one-line version. The 22% figure is a payroll default, not an estimate of your tax rate. Nobody at your employer is checking whether it is close. Figures are illustrative and rounded.
The 2026 numbers that decide what your RSUs cost
| 2026 | |
|---|---|
| Supplemental withholding rate, first $1,000,000 of supplemental wages | 22% |
| Supplemental withholding rate above $1,000,000, mandatory | 37% |
| 35% bracket begins — single | $256,225 |
| 37% bracket begins — single | $640,600 |
| 35% bracket begins — married filing jointly | $512,450 |
| 37% bracket begins — married filing jointly | $768,700 |
| Social Security tax stops above this much wage | $184,500 |
| Additional Medicare tax of 0.9% starts at wages of | $200,000 single, $250,000 joint |
| Net investment income tax on later gains | 3.8% above the same thresholds |
| Long-term capital gain stays at 15% up to | $545,500 single, $613,700 joint |
Two of these lines interact with a vest in ways worth knowing. If your salary already exceeds $184,500, the RSU income carries no further Social Security tax, only Medicare — so a late-year vest costs less in payroll tax than an early-year one. And your employer withholds the 0.9% additional Medicare tax automatically once your wages pass $200,000, so that piece, at least, takes care of itself.
Sell-to-cover, and why the default is usually wrong
Most plans default to selling enough shares at vesting to cover withholding — typically at that same 22%. The shares you keep have a cost basis equal to the vesting-day price, and a holding period that starts the next day.
That gives you a clean decision point that many people never notice they are making:
- Sell everything at vesting. There is essentially no gain or loss, because basis equals the value you were just taxed on. You have converted equity into cash at the price the IRS already used. This is the neutral choice, not the aggressive one.
- Hold. You now own a concentrated position in your employer’s stock, bought at that day’s price, in an account where a decline is a capital loss usable at $3,000 a year against ordinary income. Holding for more than a year converts future appreciation to long-term rates — but only the appreciation. The compensation element was fixed at vesting and cannot be converted.
The mistake to avoid is holding by default. A vest is the one moment when selling costs nothing in tax terms, and declining to sell is an active decision to concentrate.
22% is a withholding rate, not a calculation. Where a vest is large relative to salary, the shortfall is worth estimating before the next quarterly payment rather than in April. How the firm handles equity compensation.
The double-taxation trap on Form 1099-B
This is the error we correct most often, and it is worth real money.
When you sell shares from a vest, the broker reports the sale on Form 1099-B. For shares acquired through equity compensation, brokers are frequently permitted to report cost basis excluding the compensation element — which often shows up as a basis of zero, or as the amount you paid, which for an RSU is nothing.
If that figure is carried onto Schedule D unchanged, the full sale price becomes capital gain, and you pay tax a second time on income already taxed as wages on your W-2. The correction is made on Form 8949 with adjustment code B, substituting the correct basis: the market value on the vesting date.
How to spot it. Sell shares the day they vest and the 1099-B should show a gain of roughly zero. If it shows a gain equal to the entire proceeds, the basis is wrong on the form, not on your return.
California, and other states that treat RSUs unkindly
California taxes RSU income as ordinary compensation at rates reaching 12.3%, plus the additional 1% mental health services tax on income above $1,000,000. There is no preferential state rate for capital gains, so the hold-versus-sell decision saves nothing at the state level.
The harder issue is mobility. If you worked in California for part of the period between grant and vesting and elsewhere for the rest, California claims the portion attributable to services performed there. FTB Publication 1004 sets out the allocation as a ratio of California workdays to total workdays between grant and vesting.
That has two consequences people are routinely caught by. Leaving California does not clear the tax on units granted while you lived there. And a new state may tax the same income, leaving you to claim a credit rather than an exclusion. New York applies a comparable workday allocation for people who move in or out.
What to do about it
- Work out the gap before the vest, not after. Multiply the vest value by your actual marginal rate, subtract 22%, and that difference is what you owe outside of payroll.
- Cover it with an estimated payment or extra withholding. Additional withholding on salary is generally treated as paid evenly across the year, which is the cleaner fix for a large late-year vest.
- Use the safe harbor. Paying 110% of last year’s total tax through withholding and estimates avoids the underpayment penalty regardless of how much this year’s income rises. For a year with an unusually large vest, that is normally the cheapest certainty available.
- Check the basis on every 1099-B. Every year, on every equity sale.
- Decide about concentration deliberately. A useful test: if the shares arrived as cash instead, would you buy this much of your employer’s stock with it?
- If you moved states, keep the workday record. Reconstructing where you were between a grant and a vest three years later is far harder than logging it as you go.
- If you are at a private company, ask whether section 83(i) applies. It lets qualified employees defer income on qualified stock for up to five years, but only where the employer granted options or RSUs to at least 80% of its U.S. employees that year, and it excludes 1% owners, the chief executive and chief financial officer, and the four highest paid officers. FICA is still due at vesting either way.
Frequently asked questions
Are RSUs taxed as ordinary income or as capital gains?
Ordinary income. When the units vest and the shares are delivered, the market value that day is compensation, reported in box 1 of your Form W-2 and taxed at your regular rate along with Social Security and Medicare tax. Capital gain treatment only ever applies to what happens to the shares afterward: the difference between the sale price and the vesting-day value. If you sell at vesting there is essentially no gain at all, because the two figures are the same.
What tax rate applies to RSUs?
Your marginal rate, not the withholding rate. Payroll withholds a flat 22% on supplemental wages up to $1,000,000 in a year and a mandatory 37% above that. For 2026 the 35% bracket starts at $256,225 for a single filer and $512,450 on a joint return, so anyone above those figures is under-withheld by 13 points on the vest. Add state tax, and in California the combined marginal rate on RSU income can exceed 45%.
When exactly are RSUs taxed — at grant or at vesting?
At vesting, when the shares are actually delivered. Nothing is taxed at grant, because Treasury Regulation § 1.83-3(e) excludes an unfunded and unsecured promise to pay property in the future from the definition of property, and section 83 has nothing to attach to until the shares themselves are transferred. Some plans deliver shares later than the vesting date under a deferral feature, in which case income follows the delivery, though Social Security and Medicare tax can still apply earlier.
Can I make an 83(b) election on RSUs?
No. A section 83(b) election accelerates tax on restricted stock — shares you hold subject to a risk of forfeiture. An RSU is a promise rather than stock, so there is no transfer of property to elect on. If your grant is genuinely restricted stock rather than units, the election is available and must be filed within 30 days of the transfer. Read the grant agreement rather than the offer letter; the two instruments are often described interchangeably in casual language and never in the plan documents.
My 1099-B shows a huge gain on shares I sold the day they vested. Is that right?
Almost certainly not. Brokers commonly report cost basis for equity compensation shares without the compensation element, which produces a basis of zero and turns the entire proceeds into gain. The correct basis is the market value on the vesting date, which is the same amount already taxed as wages on your W-2. The fix is a basis adjustment on Form 8949 using code B. Left uncorrected, you pay tax twice on the same money.
I moved out of California before my RSUs vested. Do I still owe California tax?
Usually on part of it. California allocates the income by the ratio of California workdays to total workdays between grant and vesting, so units earned partly while you worked in the state remain partly taxable there even if you vest as a nonresident. FTB Publication 1004 sets out the method. Your new state will generally tax the same income and give a credit for tax paid to California, but the credit rules are not symmetrical and the record of where you worked is yours to keep.
Related reading
- Getting the most out of an employee stock purchase plan
- Equity compensation: RSUs, options and ESPPs
- 2026 contribution limits, and the new Roth catch-up rule
- The SALT deduction cap: what it is now and who loses it
- QSBS after the 2025 rewrite: a guide for founders
- Five filing errors high earners make
- Individual tax preparation and planning
Have a vest coming this year
We size the shortfall, decide between estimated payments and extra withholding, and check the basis on every equity sale before it reaches your return. We can work with you in any state, and most of our clients have never been to the office.
This article is general information, not advice for a particular taxpayer. Figures apply to the 2026 tax year. Primary sources: IRS Publication 525 (taxable and nontaxable income), IRS Publication 15 (supplemental wage withholding), Treas. Reg. § 1.83-3 and 26 U.S.C. § 83, IRS Notice 2018-97 (section 83(i) qualified equity grants), Rev. Proc. 2025-32 (2026 rate tables and capital gain thresholds), the Social Security wage base, and FTB Publication 1004 for California sourcing.
