RSUs

The plain answer

A restricted stock unit (RSU) is a promise from your employer to deliver shares or cash after you meet vesting conditions. Vested RSUs are generally ordinary compensation income when they settle, even if you keep the shares. Plan for possible underwithholding, then decide how much employer stock you are willing to hold.

How it actually works

An RSU grant tells you how many units you may receive and what has to happen before you earn them. Vesting is the process of satisfying those conditions, often by remaining employed through scheduled dates or meeting a performance goal. Unvested units usually disappear when you leave, although the grant agreement controls.

When an RSU vests and settles, the company delivers shares or their cash value. The market value delivered is generally reported as wage income for that year. It appears in your pay and tax records even when no cash reaches your bank account.

Employers commonly cover required withholding by keeping some shares or selling some shares at settlement. A sell-to-cover transaction means part of the award is sold to send withholding to tax authorities. The withholding amount is a prepayment, not a calculation of your final tax bill.

That difference creates the undersold withholding problem. The company may sell enough shares to meet its standard withholding rules, but the amount may be less than your final federal and state tax on the income. A large vest can also affect the tax rate applied to other household income.

After settlement, any later change in share value is generally a capital gain or loss when you sell. Your cost basis is the amount used to measure that change, and it usually begins with the value already treated as compensation. Brokerage records can be incomplete or confusing, so keep every vest confirmation and sale record.

Some private company RSUs use two conditions before settlement, such as a service requirement and a company liquidity event. This is often called double-trigger vesting. Read the plan language because the tax and cash timing can differ from a public company award.

What this means for you

RSUs can add to your wealth, but their value depends on one company that also pays your salary. This is concentration risk. A company setback can reduce both your job security and your investments at the same time.

Before each vest, record the expected settlement date, estimated share value, withholding method, and any trading restriction. Then compare expected withholding with your broader tax situation. If the vest is large, ask a certified public accountant (CPA) who understands equity compensation whether you should adjust paycheck withholding or make an estimated payment.

Once the shares can be sold, ask whether you would buy the same amount of employer stock with cash today. Selling promptly reduces concentration risk but gives up possible future gains and can create a small gain or loss after vest. Holding preserves the upside but leaves more of your financial life tied to one company.

Choose a written policy before the stock price moves. You might sell all vested shares, sell enough to reach a target allocation, or sell on a schedule allowed by company rules. The recommendation is to keep employer stock small enough that a severe decline would not derail an essential goal.

This page provides general education, not tax advice. Tax treatment can depend on the award, settlement, sale, filing status, and state. Bring your grant, vest records, pay statement, and sale confirmations to a CPA when the amounts are material.

Common mistakes

Do not assume the shares withheld at vest fully cover your taxes. Check the actual withholding and your expected total tax before the payment deadline.

Another mistake is paying tax twice because the reported cost basis is wrong or missing. Compare brokerage forms with your vest records and the wage income reported by your employer.

Do not treat unvested units as cash available for a home, tuition, or another fixed goal. Employment conditions and the share price can change before settlement.

Finally, do not let taxes become the only reason to keep a concentrated position. Selling can create a tax cost, but a larger price decline can cost more.

Related pages

• Equity compensation
• Stock options
• Should you own individual stocks
• How investments are taxed