How RSUs are taxed

When are RSUs actually taxed? The day they vest, not the day you sell. That one fact is responsible for almost every RSU tax surprise I see, so it is worth burning in: vesting is income, full stop. This guide is the whole arc of RSU tax, from that first vest to the line on your return. The two separate taxes and why the sale is the easy part. The flat withholding rate and exactly why it underpays you. The surtaxes a big year drags in. The cost-basis error that taxes you twice. And the quarterly payments the IRS expects so a penalty does not stack on top. Read it top to bottom once, then come back to any section when a vest or a sale is in front of you.

The vesting bill

On the day your units vest, the full market value of those shares counts as ordinary income, the same as salary. If 100 shares vest at $80, you just earned $8,000 of compensation. It lands on your W-2, runs through payroll, and is taxed at your ordinary rate.

You did not sell anything. You may not want to sell anything. The tax is due anyway, because the income event is the vesting, not a sale. Think of a vest as a bonus the company chose to pay in shares instead of cash. Holding the shares does not undo it: the ordinary income is locked in by the value on the vest date, and holding only affects what the price does afterward, which becomes a separate capital gain or loss.

It is not just income tax

Because a vest is wages, it carries the same payroll taxes your salary does, not only income tax. Social Security and Medicare ride along on the vested value.

High earners pick up extra layers on a big year, and those get their own section below. First, the part that quietly costs the most: withholding.

22%

Supplemental withholding

37%

On wages over $1M

0.9%

Additional Medicare

3.8%

Net investment income tax

The gap that catches people

Here is the engine behind almost every April RSU surprise. Your employer does withhold tax at vesting, but the default withholding on this kind of supplemental income is a flat rate, and that flat rate is often lower than a high earner’s real top tax rate.

RSU income is a supplemental wage, the same bucket as a cash bonus. The IRS lets employers withhold on supplemental wages at one flat rate instead of running them through your normal payroll math. For 2026 that flat rate is 22% on the first $1,000,000 of supplemental wages in the year, and 37% on anything above $1,000,000 2026.

So if $100,000 of RSUs vest and you are under the million-dollar mark, your company sends the IRS $22,000 in federal withholding. Clean and simple. The problem is that 22% is a guess, and for a lot of equity earners it is a low one. Your actual federal rate is set by your total taxable income and the 2026 brackets, which run up to 37% 2026. Once your income pushes that vest into the 32% or 35% bracket, the 22% withheld is short by 10 to 13 cents on every dollar.

$100,000 vest

Lands in your account $78,000

Withheld at 22% $22,000

Illustrative, federal withholding only. The 22% flat rate is confirmed for 2026, but it is a deposit, not your final tax. If the vest lands in a 32 to 37 percent bracket, more is still owed at filing. State tax and the payroll surtaxes are not shown here.

Nobody hands you a bill that says “you are short.” The vest looks fully taxed because tax was clearly withheld. The shortfall only shows up months later when you file, by which point you may have spent or held the money. On a big vesting year that gap runs into real money, and the IRS may want it sooner through estimated payments, not just next April. To size the shortfall before it becomes a penalty, work through the withholding gap.

The crossover at $1M cuts the other way

The 37% rate above $1,000,000 in supplemental wages can over-withhold instead. If a large vest or an IPO pushes your supplemental wages past the million-dollar line, the slice above it gets 37% withheld 2026, which may be more than your true rate on those dollars. So the rule is lumpy. Below a million, 22% usually under-withholds a high earner. Above a million, the 37% piece can swing to over-withholding. Neither one is tuned to your situation, because a flat statutory rate cannot be. This shows up most at a liquidity event, covered in how RSUs are taxed at an IPO.

Can I just ask payroll to withhold more?

Sometimes. Some companies let you elect a higher supplemental rate or add extra withholding through your W-4, and some do not budge from the flat rate. If payroll will not move, you close the gap yourself with a quarterly estimated payment or by bumping withholding on your regular paychecks. The fix matters more than the method. The IRS charges a penalty for paying late, not just for paying short.

The surtaxes a big vesting year drags in

A single large vest can pull you past two thresholds meant for high earners, and most people never see them coming because their salary alone stayed below the line. RSU income stacks on top of your salary, and that stack is what trips them.

The 0.9% Additional Medicare Tax rides on the vesting wages. For 2026 it is an extra 0.9% on wages above $200,000 for single filers and $250,000 for married filing jointly 2026, on top of the regular 1.45% Medicare tax that never caps out. Your employer is required to start withholding the extra 0.9% once your wages with them pass $200,000, regardless of your filing status 2026, so the withholding and your actual liability may not line up if you are married or have two incomes. The true-up happens on your return.

The 3.8% net investment income tax (NIIT) hits the investment side. For 2026 it is 3.8% on the lesser of your net investment income or the amount your modified adjusted gross income exceeds $250,000 for married filing jointly or $200,000 for single filers 2026. The vesting income itself is wages, so it is not directly subject to NIIT. The trap is indirect: the capital gain when you sell shares after vesting is investment income and can be taxed at the extra 3.8%, and separately, the wages from the vest inflate your total income, which can drag your other investment income over the NIIT line even in a year you sell nothing. The vest raises the water level, and things that used to sit above water are submerged.

The sale is the easy part

After vesting, your shares behave like any stock you bought at the vesting price. That price is your cost basis. Sell later for more, and the gain is a capital gain. Hold more than a year past vesting and it is a long-term gain, taxed at the lower long-term rate. Sell within a year and it is short-term, taxed at your ordinary rate.

So there are really two separate taxes: ordinary income at vesting on the whole value, then capital gains tax on only the change in price after that. The vesting value was already taxed and is invisible to tax from here on. If 100 shares vested at $80, you have $8,000 of basis. Sell at $95 and only the $15 per share is a gain. Sell at $70 and you have a $10 per share loss you can actually use.

For 2026 the long-term rates are 0%, 15%, or 20% depending on your taxable income 2026, and a high earner can also owe the 3.8% NIIT on top. The clock for the lower rate starts the day after vesting, not the grant date and not your hire date.

Single

0%

15%

20%

$49,450 $545,500

Married filing jointly

0%

15%

20%

$98,900 $613,700

The rate steps up at each dollar threshold. Long-term gains stack on top of your ordinary income to decide which band they fall in. Band widths are illustrative, not to scale.

Here is the second-order cost the “hold for long-term gains” advice skips. To save the rate difference on the gain, you have to keep holding a single concentrated stock, your employer’s, for a full year. The tax tail starts wagging the dog. If the gain since vesting is small, the tax you would save by waiting is small, and you are taking real single-stock risk to chase it. I have watched people hold a volatile position for months to save a few hundred dollars in tax, then lose far more than that when the stock dropped. The rate is a rounding error next to the price swing. Decide whether you want the stock first. The tax rate is the last question, not the first. The full decision is in sell at vesting or hold.

The cost-basis trap that taxes you twice

Here is the part that quietly costs the most on the sale side, and it is hiding in plain sight on your broker statement. Get your cost basis wrong on your 1099-B and you pay tax twice on the same shares.

Your RSU basis per share is the fair market value on the vesting date, the same value you already paid ordinary income tax on. But your broker often reports your basis as zero, or as only what you paid out of pocket, which for RSUs is usually nothing. The reason is a reporting rule, not your mistake: brokers generally are not allowed to include the compensation income, the vesting value, in the basis they report for this kind of equity. So the 1099-B can show a basis of zero even though your real basis is the full vesting-day value. Take the form at face value and you report your entire sale price as gain and pay tax on money you were already taxed on.

Show the math: where the double tax hides

Say 100 shares vested at $80, so you had $8,000 of ordinary income at vesting, already taxed. Your basis is $8,000. Months later you sell at $95 a share.

Correct: gain is $95 minus the $80 basis, which is $15 a share, or $1,500 on 100 shares. Only that $1,500 is taxed, and the holding period decides whether it is long-term or short-term.

What a $0-basis 1099-B does: it reports the whole $95 a share as gain, $9,500 instead of $1,500. That extra $8,000 of phantom gain is the $80 a share you already paid ordinary tax on at vesting, taxed a second time.

The fix is a basis adjustment on Form 8949 using the vest-day value. The line-by-line steps are in how to read your W-2 and 1099-B for RSUs.

The quick gut check before you file: if your sale price was roughly the same as your vesting value, your real gain is small or near zero. So if your return shows a giant gain on a sale you made right after vesting, the basis correction did not take, and that gap is the double tax sitting right there on the form. Check the basis on every RSU sale.

What if the stock dropped since it vested?

Then you may have a capital loss, and that is useful. A loss offsets other capital gains dollar for dollar, and you can deduct a limited amount against ordinary income each year with the rest carried forward. The same basis trap bites in reverse: a $0 basis hides the loss and can even invent a phantom gain. Check the basis on every sale before you trust the 1099-B, or you will pay tax on money you never made.

When RSUs force you to make estimated tax payments

The shortfall from flat withholding is not a problem you can quietly settle next April. Income tax is pay-as-you-go: the IRS expects tax to be paid as income is earned. For most wage earners, payroll withholding handles that automatically. RSUs break the automation, because the flat withholding can leave a gap your salary withholding never covers. If you owe enough above what was withheld, the IRS charges an underpayment penalty, calculated as if you had taken an interest-free loan from the government across the year.

The escape hatch is the safe harbor. You do not have to predict your exact tax to avoid the penalty. Pay in at least a set amount through withholding and estimated payments, and you are shielded from the underpayment penalty even if you still owe a balance at filing. The safe harbor is a set share of last year’s tax, higher for high earners, or a share of this year’s tax. Hitting it is usually the simplest target: you do not need a perfect forecast, you need to clear the line.

A single steady vest at a public company may be fully handled by your normal withholding. A large or lumpy event is where people get caught: an IPO settlement, a big refresh grant vesting at once, or several vests stacking in one quarter. If that is your year, do not skip the first step.

How PSUs are taxed

Performance stock units are taxed on the same rule as RSUs, with one wrinkle in the timing and the size. When PSUs vest, the full market value of the shares is ordinary income, exactly like an RSU vest: it hits your W-2, it is taxed at your ordinary rate, and it carries Social Security and Medicare with it. After vesting, the shares are just stock with a basis equal to that vesting value, and the sale taxes only the change in price, short or long term. The structure of PSUs, the multipliers and metrics, is in how performance stock units work.

The wrinkle is when the clock starts. A normal RSU vests on a date you can see on a calendar. A PSU vests when the board or committee certifies that the goal was met, and that certification date is your taxable event. Your income is the share count times the price on that date, and both pieces float until then.

Can I file an 83(b) election on PSUs to be taxed earlier?

Almost never in a useful way. An 83(b) election applies to restricted property you receive now, and a standard PSU is a contractual promise of shares contingent on a future performance result, so there is usually nothing to make the election on at grant. The income is fixed at certification. If your award is structured as actual restricted shares rather than a promise, the answer can differ, so check your grant agreement.

What this means for you

Plan for the vesting bill before it arrives, not after. The cleanest move for most people is to treat a vest like a bonus that happens to arrive as stock: size the shortfall between the flat withholding and your real rate, set it aside the same week, and decide separately whether you even want to keep the position. On a big year, assume the surtaxes are in play and that you may owe a quarterly payment. At sale, check your cost basis on every lot so the same dollars are not taxed twice. None of these is hard on its own. The mistake is treating a vest as handled because tax was withheld, when the flat rate was only ever a rough deposit against the real number.

This is exactly the kind of thing worth getting right before a large or lumpy vesting year, because the dollars are real and a penalty is avoidable. If your vesting is sizable or an IPO is in view, a fit check can make sure none of these steps catches you off guard.