RSU Taxation: How Units Are Taxed

RSU taxation occurs at vesting when the restricted stock units convert to shares, creating ordinary income equal to the shares' fair market value. Employees face income tax withholding at vesting, with any subsequent gains or losses treated as capital gains when shares are sold. Understanding the two-stage tax treatment helps employees plan for tax obligations and optimize their financial outcomes.

RSU Tax Basics

Restricted stock units create tax obligations at two distinct events: when the RSUs vest and when the resulting shares are sold. Unlike stock options, RSUs have no purchase decision or exercise cost. The tax treatment differs fundamentally from incentive stock options and creates immediate tax liability at vesting.

Taxation at Vesting Event

RSU taxation begins at vesting, not at grant. The IRS treats vesting as a taxable compensation event because employees receive actual shares with immediate value. The taxable amount equals the fair market value (FMV) of the shares on the vesting date.

The vesting event creates three immediate consequences:

Tax Consequences at RSU Vesting:

1. Ordinary income recognition - Full FMV added to W-2 income
2. Withholding obligation - Employer withholds taxes (typically 22-37%)
3. Cost basis establishment - FMV becomes basis for future capital gains

Vesting Example with Numbers:

Event	Shares	Price	Value	Tax Treatment
Grant date	1,000 RSUs	$50	$0 taxable	No tax event
Vesting date	1,000 shares	$80	$80,000	Ordinary income
Tax withheld	~300 shares	$80	$24,000	Federal withholding
Net shares	~700 shares	$80	$56,000	Delivered to employee

The timing matters significantly. Quarterly or annual vesting schedules create predictable tax events, while accelerated vesting from acquisitions or IPOs can push employees into higher tax brackets.

Ordinary Income vs Capital Gains

RSU taxation involves two distinct tax treatments that apply at different times. Understanding this split helps employees plan for total tax liability and optimize holding periods.

Two-Stage RSU Tax Structure:

Tax Stage	Event	Tax Type	Rate	Basis
Stage 1	Vesting	Ordinary income	22-37% federal	FMV at vesting
Stage 2	Sale	Capital gains	0-20% federal	Gain/loss from vesting FMV

Why the distinction matters:

• Ordinary income rates (10-37%) apply to the full vesting value
• Capital gains rates (0-20%) apply only to post-vesting appreciation
• Holding period determines short-term vs long-term capital gains rates
• Tax planning focuses on managing vesting timing and sale timing separately

Comparative Example:

An employee receives 1,000 RSUs that vest when shares trade at $80:

1. At vesting: $80,000 ordinary income taxed at 32% marginal rate = $25,600 tax
2. At sale (6 months later at $90): $10,000 short-term capital gain at 32% = $3,200 tax
3. At sale (18 months later at $90): $10,000 long-term capital gain at 15% = $1,500 tax

Strategic Implications:

• No tax deferral - Vesting creates immediate tax obligation
• No qualified small business stock (QSBS) eligibility for RSUs
• No alternative minimum tax (AMT) complications like ISOs
• Predictable tax treatment - Easier to plan than stock options

The separation between ordinary income and capital gains creates opportunities for tax optimization through strategic sale timing after vesting occurs.

Income Tax at Vesting

The vesting date triggers the primary tax event for RSUs. Employers must calculate the taxable compensation amount, withhold appropriate taxes, and report the income on employee W-2 forms. This process happens automatically but understanding the mechanics helps employees verify accuracy and plan for cash flow needs.

Fair Market Value Calculation

Fair market value (FMV) determines the exact ordinary income amount employees recognize at vesting. The calculation method depends on whether the company is publicly traded or private.

H4: Public Company FMV

For publicly traded companies, FMV equals the stock's closing price on the vesting date. Some companies use alternative pricing methods specified in the RSU agreement:

Common FMV Determination Methods:

Method	Calculation	Example (1,000 RSUs)
Closing price	Last trade on vesting date	$82.50 × 1,000 = $82,500
Average price	(High + Low) ÷ 2	($83 + $82) ÷ 2 = $82,500
Opening price	First trade on vesting date	$81.75 × 1,000 = $81,750
Prior day close	Previous trading day close	$82.25 × 1,000 = $82,250

H4: Private Company FMV

Private companies require 409A valuations to establish FMV for RSU vesting events. These independent appraisals must be conducted at least annually or after material events.

409A Valuation Triggers:

• New funding rounds that change company valuation
• Significant revenue or customer growth milestones
• Major product launches or market expansions
• 12-month intervals since last valuation (minimum requirement)

The 409A valuation date must be reasonably close to the vesting date. Companies typically schedule RSU vesting to align with recent 409A valuations to ensure defensible FMV calculations.

Withholding Requirements

Employers must withhold federal, state, and payroll taxes from RSU vesting events. The IRS treats vested RSUs as supplemental wages, subject to specific withholding rules that differ from regular salary withholding.

H4: Federal Tax Withholding

Supplemental wage withholding rates apply to RSU vesting:

Federal Withholding Structure:

Income Threshold	Standard Rate	High Earner Rate	2025 Rules
Under $1M annually	22%	-	Flat rate
Over $1M annually	22% + 37%	37% on excess	Progressive
Total supplemental	Varies	Up to 37%	Includes RSUs

Example Calculation:

Employee with $200,000 salary receives 1,000 RSUs vesting at $80 per share:

1. Vesting value: $80,000
2. Federal withholding: $80,000 × 22% = $17,600
3. FICA taxes: $80,000 × 7.65% = $6,120 (up to Social Security cap)
4. Total withholding: $23,720
5. Net delivery: ~703 shares after withholding

H4: Payroll Tax Requirements

RSU vesting income faces FICA taxes (Social Security and Medicare) in addition to income tax withholding:

Payroll Tax Components:

• Social Security: 6.2% on wages up to $176,100 (2025 limit)
• Medicare: 1.45% on all wages (no cap)
• Additional Medicare: 0.9% on wages above $200,000 (single filers)

Combined Maximum Withholding:

Tax Component	Rate	Applied To	Example ($80K vest)
Federal income	22%	Full amount	$17,600
Social Security	6.2%	Up to cap	$4,960
Medicare	1.45%	Full amount	$1,160
Add'l Medicare	0.9%	Above threshold	Varies
Total	~30.55%	Typical	~$24,000

H4: State and Local Taxes

State income tax withholding adds another layer based on employment location and residency. Rates vary significantly by jurisdiction:

State Tax Impact Examples:

State	Rate	$80K Vesting	Total Withholding
California	9.3-13.3%	~$10,640	~$34,640 (43%)
New York	4-10.9%	~$8,720	~$32,720 (41%)
Texas	0%	$0	~$24,000 (30%)
Washington	0%	$0	~$24,000 (30%)

Multi-state complications arise when employees work remotely or relocate between grant and vesting. Tax liability typically follows where services were performed during the vesting period.

Capital Gains Tax on Sale

After RSUs vest and convert to shares, employees face a second tax event when they sell the stock. The capital gains tax applies to any increase or decrease in share price between the vesting date and sale date. This creates opportunities for tax optimization through strategic timing.

Capital Gains Calculation Formula:

Capital Gain/Loss = (Sale Price × Shares) - (Vesting FMV × Shares)

Holding Period Determines Tax Rate:

Holding Period	Classification	Tax Rate	Requirements
Less than 1 year	Short-term	10-37%	Same as ordinary income
1 year or more	Long-term	0-20%	Preferential rates
Plus	Net Investment Income Tax	3.8%	Income above $200K/$250K

Complete Tax Example:

An employee receives 1,000 RSUs with different holding periods:

Scenario A: Immediate Sale (0 days)

• Vest at $80, sell at $80
• Ordinary income: $80,000 at 32% = $25,600
• Capital gain: $0
• Total tax: $25,600

Scenario B: Short-Term Hold (6 months)

• Vest at $80, sell at $90
• Ordinary income: $80,000 at 32% = $25,600
• Short-term gain: $10,000 at 32% = $3,200
• Total tax: $28,800

Scenario C: Long-Term Hold (18 months)

• Vest at $80, sell at $90
• Ordinary income: $80,000 at 32% = $25,600
• Long-term gain: $10,000 at 15% = $1,500
• Total tax: $27,100 (saves $1,700 vs Scenario B)

Scenario D: Long-Term Hold with Depreciation

• Vest at $80, sell at $70
• Ordinary income: $80,000 at 32% = $25,600
• Capital loss: -$10,000 (offsets other gains)
• Total tax: $25,600 (plus loss deduction benefit)

Strategic Considerations:

1. Same-day sales eliminate capital gains exposure but provide no tax optimization
2. One-year holding qualifies for long-term capital gains treatment
3. Concentration risk increases when holding large positions for tax benefits
4. Market volatility can erase tax savings if share price declines significantly

Long-Term Capital Gains Rate Brackets (2025):

Filing Status	0% Rate	15% Rate	20% Rate
Single	Up to $47,025	$47,026-$518,900	Above $518,900
Married Joint	Up to $94,050	$94,051-$583,750	Above $583,750
Head of Household	Up to $63,000	$63,001-$551,350	Above $551,350

The net investment income tax (NIIT) adds 3.8% to capital gains for high earners, bringing maximum federal rates to 23.8% for long-term gains and 40.8% for short-term gains.

Tax Withholding Methods

Employers offer multiple methods for satisfying tax withholding obligations at RSU vesting. The method chosen significantly impacts the number of shares employees receive and their immediate cash flow. Most companies set a default method but allow employees to select alternatives.

Available Withholding Methods:

Method	Mechanism	Shares Retained	Cash Required	Best For
Sell-to-cover	Sell shares for taxes	Partial	$0	Most employees
Net settlement	Company withholds shares	Fewer	$0	Default method
Cash payment	Pay from other funds	All shares	High	Tax optimization
Same-day sale	Sell all immediately	None	$0 (profit)	Liquidity needs

H4: Sell-to-Cover Method

The sell-to-cover approach automatically sells just enough vested shares to cover the tax withholding obligation. Employers typically execute this transaction immediately at vesting through a brokerage partner.

Sell-to-Cover Mechanics:

1. 1,000 RSUs vest at $80 per share = $80,000 income
2. Tax obligation: ~$24,000 (30% combined withholding)
3. Shares sold: 300 shares at $80 = $24,000
4. Net delivery: 700 shares deposited to brokerage account
5. Employee retains: 70% of vested shares with no cash outlay

Advantages and Limitations:

Pros:

• No cash required from employee
• Maintains substantial equity ownership
• Simple transaction with automatic execution
• Retains upside potential on remaining shares

Cons:

• Creates immediate taxable sale event (usually break-even)
• May trigger pattern day trader rules if multiple vesting events
• Reduces total shares retained compared to cash payment method
• Subject to market price at vesting moment

H4: Net Settlement Method

Net settlement (also called "net issuance" or "share withholding") involves the company keeping a portion of shares before delivery to satisfy tax obligations. This is the most common default method.

Net Settlement Process:

Vesting Event Breakdown:

• Gross vesting: 1,000 RSUs
• Withholding requirement: 30% = 300 shares
• Net delivery: 700 shares to employee
• No sale transaction: Company retires 300 shares

The key difference from sell-to-cover: no market sale occurs. The company simply delivers fewer shares, satisfying tax obligations by valuing the withheld shares at the vesting date FMV.

Tax Reporting Differences:

Aspect	Net Settlement	Sell-to-Cover
Shares issued	700	1,000
Shares sold	0	300
Form 1099-B	Not generated	Generated for sale
Cost basis	Vesting FMV × 700	Vesting FMV × 1,000
Complexity	Lower	Slightly higher

H4: Cash Payment Method

The cash payment method allows employees to pay withholding taxes from personal funds rather than surrendering shares. This preserves maximum equity ownership but requires significant available cash.

Cash Payment Scenario:

• 1,000 RSUs vest at $80 = $80,000 income
• Tax withholding: $24,000 required
• Employee pays: $24,000 from bank account or other source
• Shares received: All 1,000 shares (100% retention)

When Cash Payment Makes Sense:

1. Strong conviction in company's future performance
2. Available liquidity from other sources (savings, bonuses)
3. Tax optimization - Maximizes long-term capital gains potential
4. Executive positions with high equity upside expectations

Mathematical Advantage:

Assuming 25% annual stock appreciation over 3 years:

Method	Initial Shares	Value After 3 Years	Gain
Net settlement	700	$136,719	$56,719
Cash payment	1,000	$195,312	$115,312
Difference	+300	+$58,593	+$58,593

The advantage equals the appreciation on the 300 additional shares retained, minus the opportunity cost of the $24,000 cash deployed.

H4: Same-Day Sale Method

Same-day sale (or "sell-all") immediately liquidates all vested shares, converting the entire RSU value to cash. This eliminates equity exposure and provides maximum liquidity.

Same-Day Sale Outcomes:

• Tax withholding: Satisfied from sale proceeds
• Remaining proceeds: Distributed as cash to employee
• Equity ownership: Zero ongoing exposure
• Capital gains: None (cost basis equals sale price)

Same-Day Sale Example:

1. 1,000 RSUs vest at $80 = $80,000
2. Immediate sale at $80 = $80,000 proceeds
3. Withholding: $24,000 for taxes
4. Net cash to employee: $56,000
5. Shares retained: 0

Strategic Rationale:

• Diversification priority - Avoid concentration in single stock
• Immediate needs - Home purchase, debt repayment, other investments
• Risk aversion - Prefer cash certainty over equity upside
• Portfolio rebalancing - Convert compensation to diversified holdings

Most financial advisors recommend same-day sales for employees whose equity compensation exceeds 10-15% of total net worth, prioritizing diversification over tax optimization.

State Tax Considerations

State income tax significantly impacts total RSU tax liability, with rates ranging from 0% to 13.3% depending on jurisdiction. Multi-state complications arise for remote workers, relocated employees, and those working across state lines during the vesting period.

State Income Tax Landscape:

Tax Profile	States	Rate Range	RSU Impact (per $80K vest)
No income tax	9 states	0%	$0 state tax
Low tax	~15 states	1-5%	$800-$4,000
Moderate tax	~20 states	5-7%	$4,000-$5,600
High tax	~6 states	7-13.3%	$5,600-$10,640

H4: High-Tax States

California, New York, New Jersey, Hawaii, Oregon, and Minnesota impose the highest state income tax rates on RSU vesting income:

High-Tax State Comparison:

State	Top Rate	Threshold	Combined Max (Fed + State)
California	13.3%	$1M+	50.3%
New York	10.9%	$25M+	47.9%
New Jersey	10.75%	$1M+	47.75%
Hawaii	11%	$200K+	48%
Oregon	9.9%	$125K+	46.9%

California-Specific Considerations:

California taxes RSU income based on the time-weighting method for employees who move in or out of the state during the vesting period:

CA Taxable Percentage = (Days in CA during vesting period) ÷ (Total days in vesting period)

Example: Employee granted RSUs with 4-year vesting while living in California, then moves to Texas after 3 years:

• Year 1-3: 75% of vesting fully taxable by California
• Year 4: 0% taxable by California (services performed in Texas)

H4: No-Tax States

Nine states impose no income tax on wages, including RSU vesting income: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Relocation Tax Savings:

Moving from a high-tax to no-tax state before major RSU vesting events creates significant savings:

Relocation Savings Example ($500K RSU vesting):

Scenario	Federal Tax	State Tax	Total Tax	Savings
California resident	$185,000	$66,500	$251,500	-
Texas resident	$185,000	$0	$185,000	$66,500
Difference	-	-$66,500	-$66,500	13.3%

Relocation Timing Strategies:

1. Before grant date: Cleanest approach - All future vesting taxed in new state
2. During vesting period: Time-weighted allocation between states
3. Before large vesting: Target timing before annual or acquisition-related vesting
4. Physical move required: Must establish bona fide residency, not just paper change

H4: Multi-State Allocation

Employees working in multiple states during the RSU vesting period face source-based taxation by each state where services were performed. This commonly affects remote workers and frequently traveling employees.

Multi-State Sourcing Formula:

Most states use the service-based apportionment method:

State's Share = (Days worked in State A) ÷ (Total days worked during vesting period)

Complex Scenario Example:

Employee granted 4,000 RSUs (1,000 vesting annually) works in three locations:

Work Location History:

• Year 1: California (365 days)
• Year 2: 250 days California, 115 days New York
• Year 3: New York (365 days)
• Year 4: Texas (365 days)

Tax Allocation by Vesting:

Vesting	Amount	CA Tax	NY Tax	TX Tax	Total State Tax
Year 1	$80,000	$10,640	$0	$0	$10,640
Year 2	$85,000	$6,141	$2,681	$0	$8,822
Year 3	$90,000	$0	$9,810	$0	$9,810
Year 4	$95,000	$0	$0	$0	$0

Documentation Requirements:

• Calendar records of work location by day
• Travel logs for business trips during vesting period
• Residency documentation (leases, driver's licenses, voter registration)
• Employer location letters confirming remote work arrangements

H4: Remote Worker Complications

Remote work arrangements create unique state tax challenges for RSU taxation, especially when employer location and employee residence differ.

Common Remote Scenarios:

Situation	Tax State(s)	Complexity
CA company, TX remote worker	Texas (no tax)	Simple
NY company, FL remote worker	Florida (no tax)	Simple
NY company, NJ resident	NJ + NY (credit)	Moderate
Remote worker relocates mid-vest	Multiple states	Complex

Convenience Rule States:

Some states impose "convenience of the employer rule" that taxes remote workers even when services are performed outside the state:

• New York: Taxes remote work if employee works from home for their convenience (not employer requirement)
• Pennsylvania: Similar rule for work performed at employee's request
• Delaware, Nebraska, New Jersey: Varying convenience rules

Protection Strategy:

Document that remote work is employer-required, not employee convenience:

1. Written policy stating remote work is standard practice
2. No office space assigned in high-tax state
3. Business justification for remote arrangement
4. Employer communication confirming requirement

State tax treatment of RSU income continues evolving as remote work becomes permanent for many employees. Consult state-specific tax advisors when significant RSU vesting is expected.

Tax Planning Strategies

Strategic planning reduces overall RSU tax liability and optimizes after-tax value. While the ordinary income tax at vesting is unavoidable, several techniques help manage total tax burden, improve cash flow, and maximize wealth accumulation.

H4: Timing Vesting Events

For employees with control over vesting timing (founders, executives with negotiable agreements), strategic scheduling minimizes tax impact:

Vesting Timing Strategies:

Strategy	Mechanism	Tax Benefit	Best For
Year-end delay	Push vesting to January	Defers tax 12 months	High earners
Low-income years	Accelerate into gap years	Lower marginal rate	Career transitions
Split across years	Spread large vests	Avoid bracket jump	IPO/acquisition events
Pre-IPO acceleration	Vest at low FMV	Lower income recognition	Early-stage employees

Bracket Management Example:

Employee expects $400,000 salary plus $200,000 RSU vesting:

• Standard timing: Combined $600,000 taxed at 35-37% marginal = ~$218,000 tax
• Deferred timing: $400,000 in Year 1 (35% bracket), $200,000 in Year 2 (32% bracket) = ~$208,000 total tax
• Savings: $10,000 from avoiding top bracket

H4: Charitable Giving Strategies

Donating appreciated RSU shares to charity eliminates capital gains tax while providing income tax deductions:

Charitable Donation Method:

1. Allow RSUs to vest (ordinary income tax applies - unavoidable)
2. Hold shares 12+ months for long-term appreciation
3. Donate appreciated shares directly to charity
4. Deduction: Fair market value at donation (not vesting value)
5. Tax savings: Avoid capital gains + income deduction

Charitable Giving Example:

Shares vest at $80 (1,000 shares = $80,000 income), held 18 months, now worth $100:

Option A: Sell and Donate Cash

• Capital gain: $20,000 at 15% = $3,000 tax
• Donate: $97,000 cash
• Deduction: $97,000 (saves $31,040 at 32% rate)
• Net tax benefit: $28,040

Option B: Donate Shares Directly

• Capital gain: $0 (no sale)
• Donate: $100,000 in shares
• Deduction: $100,000 (saves $32,000 at 32% rate)
• Net tax benefit: $32,000

Donor-Advised Fund (DAF) Strategy:

• Contribute multiple years of charitable giving in high-income year
• Immediate deduction for full contribution amount
• Distribute over time to favorite charities at your pace
• Investment growth tax-free within DAF

H4: Tax-Loss Harvesting

Tax-loss harvesting involves selling RSU shares that declined in value after vesting to realize capital losses that offset other gains:

Loss Harvesting Mechanics:

1. RSUs vest at $80 (ordinary income on $80,000)
2. Stock declines to $60 over 8 months
3. Sell shares at $60 to realize $20,000 capital loss
4. Loss offsets other capital gains or up to $3,000 ordinary income annually
5. Excess losses carry forward indefinitely

Tax-Loss Harvesting Example:

Asset	Cost Basis	Sale Price	Gain/Loss	Tax Impact
RSU shares	$80,000	$60,000	-$20,000	Offsets gains
Other stocks	$50,000	$75,000	+$25,000	$5,000 net gain
Net position	-	-	+$5,000	Tax on $5,000 only

Without harvesting the RSU loss, the employee would pay 15% × $25,000 = $3,750 in capital gains tax. With harvesting, tax equals 15% × $5,000 = $750, saving $3,000.

Advanced Strategy: Harvest losses in December to offset current-year gains, then repurchase in January (respecting 30-day rule) to maintain long-term position while banking tax benefits.

H4: Estimated Tax Payments

RSU withholding frequently underpays actual tax liability, requiring quarterly estimated tax payments to avoid IRS penalties:

When Estimated Payments Required:

• Withholding shortfall: Tax liability exceeds withholding by $1,000+
• High earners: Combined income pushes into 35-37% brackets
• State taxes: High-tax states with insufficient state withholding
• Multiple vesting events: Several RSU vests throughout the year

Estimated Payment Schedule:

Quarter	Due Date	Income Period Covered
Q1	April 15	January 1 - March 31
Q2	June 15	April 1 - May 31
Q3	September 15	June 1 - August 31
Q4	January 15	September 1 - December 31

Safe Harbor Rules (Avoid Penalties):

Pay the lesser of:

1. 90% of current year tax liability, OR
2. 100% of prior year tax liability (110% if AGI > $150,000)

Estimated Payment Example:

Employee with 4 quarterly RSU vests of $80,000 each:

• Prior year tax: $88,000
• Safe harbor: $88,000 × 110% = $96,800
• Quarterly payment: $96,800 ÷ 4 = $24,200
• Result: No underpayment penalty even if actual tax is $120,000

The $23,200 shortfall ($120,000 - $96,800) is simply paid with the tax return without penalty.

H4: Concentration Risk Management

RSU vesting can create excessive concentration in employer stock, violating diversification principles. Strategic sales balance tax optimization with prudent risk management:

Diversification Guidelines:

Concentration Level	Risk Assessment	Recommended Action
Under 10%	Acceptable	Hold for LTCG treatment
10-20%	Moderate concern	Begin systematic sales
20-30%	High risk	Accelerate diversification
Over 30%	Excessive risk	Immediate sales priority

Systematic Selling Strategy:

Rather than all-or-nothing decisions, implement a rules-based selling program:

Example Rules-Based System:

1. Automatic sale: 50% of shares immediately at vesting
2. Hold for LTCG: 50% held 12+ months for preferential rates
3. Rebalance quarterly: Sell additional shares if concentration exceeds 15%
4. Minimum holding: Never reduce below 5% for employee alignment

Tax vs. Risk Trade-off:

Holding RSU shares for long-term capital gains treatment saves 12-17% in federal taxes but exposes the employee to company-specific risk. A 20% stock decline eliminates the tax savings and more:

• Tax savings from 12-month hold: 17% on gains = ~$1,700 per $10,000 gain
• Stock decline of 20%: $16,000 loss on $80,000 position
• Net outcome: -$14,300 compared to immediate diversification

Financial advisors typically recommend prioritizing diversification over tax savings when equity concentration exceeds 10-15% of net worth.

Reporting Requirements and Forms

RSU taxation involves multiple IRS forms and reporting requirements. Employers handle most reporting automatically, but employees must verify accuracy and include appropriate forms when filing tax returns. Understanding each form prevents errors and ensures compliance.

H4: Form W-2 Reporting

Form W-2 reports RSU vesting income as ordinary compensation. The vesting date FMV appears in multiple boxes affecting federal, state, and payroll taxes.

W-2 Box Breakdown for RSUs:

Box	Description	RSU Treatment	Example (1,000 RSUs at $80)
Box 1	Wages, tips, compensation	Includes vesting income	Salary + $80,000
Box 2	Federal income tax withheld	Includes RSU withholding	Total withholding
Box 3	Social Security wages	Includes RSU (up to cap)	Up to $176,100 limit
Box 5	Medicare wages	Includes full RSU amount	All wages + $80,000
Box 16	State wages	Includes RSU income	Varies by state
Box 17	State income tax withheld	Includes state withholding	State-specific

Verification Steps:

1. Count vesting events - Note each vesting date during the year
2. Calculate expected income - Shares vested × FMV on each date
3. Compare to W-2 - Box 1 should include all vesting amounts
4. Check withholding - Box 2 should reflect ~22-37% federal withholding

H4: Form 1099-B for Stock Sales

Form 1099-B reports proceeds from stock sales, including RSU shares sold for tax withholding or employee-initiated sales. This form appears when using sell-to-cover withholding or when selling retained shares.

1099-B Information for RSU Sales:

Box	Field	RSU Application	Critical Details
1a	Date sold	Actual sale date	Must be same as or after vesting
1b	Proceeds	Sale price × shares	Gross proceeds before fees
1e	Cost basis	Usually reported	Vesting FMV × shares
2	Short/long term	Holding period indicator	Based on time since vesting
5	Wash sale loss	Possible flag	If rebought within 30 days

Cost Basis Reporting:

Since 2011, brokers must report cost basis for RSU shares on Form 1099-B. The cost basis equals the FMV at vesting (the amount already taxed as ordinary income).

Example 1099-B for RSU Sale:

• Date acquired: March 15, 2024 (vesting date)
• Date sold: March 15, 2024 (same-day sale for withholding)
• Proceeds: 300 shares × $80 = $24,000
• Cost basis: 300 shares × $80 = $24,000
• Gain/loss: $0 (typical for same-day withholding sales)

Multiple Sales Tracking:

Employees with several vesting events and sales must track each transaction separately:

Annual Sales Summary:

Sale Date	Shares	Proceeds	Cost Basis	Gain/Loss	Term
03/15/24	300	$24,000	$24,000	$0	Short
06/15/24	250	$21,250	$21,250	$0	Short
09/15/24	275	$23,925	$23,925	$0	Short
11/20/24	500	$44,000	$40,000	$4,000	Long

Only the November sale creates taxable gain because these shares were held beyond vesting and appreciated before sale.

H4: Schedule D and Form 8949

Schedule D (Capital Gains and Losses) and Form 8949 (Sales and Dispositions of Capital Assets) report all stock sales from Form 1099-B.

Form 8949 Categories:

Category	Description	Basis Reported	Common for RSUs
Box A	Short-term, basis reported	Yes	Same-year sales
Box B	Short-term, basis not reported	No	Older shares
Box C	Long-term, basis reported	Yes	Held 12+ months
Box D	Long-term, basis not reported	No	Pre-2011 grants

Completing Form 8949:

Each RSU sale requires one line entry with:

1. Description: "1,000 shares Company XYZ"
2. Date acquired: Vesting date (establishes holding period)
3. Date sold: Actual sale date from 1099-B
4. Proceeds: Sale amount from 1099-B Box 1d
5. Cost basis: Vesting FMV (from 1099-B Box 1e or your records)
6. Adjustment codes: If basis corrections needed
7. Gain or loss: Proceeds minus cost basis

H4: Supplemental Tax Forms

Additional forms may apply depending on specific RSU circumstances:

Form 3921 and 3922: Not applicable to RSUs (these cover incentive stock options and ESPP shares only)

Form 6251 (Alternative Minimum Tax): RSUs don't trigger AMT adjustments, unlike incentive stock options. This simplifies tax reporting significantly.

State Tax Forms: Each state requires separate reporting of RSU income on state-specific forms. High-tax states like California demand detailed sourcing schedules for multi-state employees.

FBAR (FinCEN Form 114): Required if RSU shares held in foreign brokerage accounts exceed $10,000 at any time during the year. Common for employees of international companies.

Form 8938 (FATCA): Reports foreign financial assets including foreign-held RSU shares if total foreign assets exceed thresholds ($50,000-$600,000 depending on filing status and residency).

H4: Record Keeping Best Practices

Maintain comprehensive records for all RSU activity to support tax reporting and respond to IRS inquiries:

Essential Documents to Retain:

Vesting Records:

• Grant agreements showing total RSU quantity and vesting schedule
• Vesting confirmations from employer/brokerage with FMV
• Transaction histories showing shares delivered and withheld
• Withholding summaries showing tax amounts per vesting event

Sale Records:

• Trade confirmations for all sales
• Form 1099-B from brokers (keep 7 years)
• Cost basis calculations with supporting documentation
• Gain/loss schedules reconciling to tax forms

Multi-State Documentation:

• Work location calendars during vesting period
• Employer letters confirming remote work arrangements
• Residency documentation (leases, licenses, voter registration)
• State tax allocation worksheets

Recommended Retention Periods:

Document Type	Retention Period	Reason
Grant agreements	Permanent	Basis for all future calculations
Vesting records	7 years after final sale	Audit period + verification
Forms W-2	7 years	IRS audit statute of limitations
Forms 1099-B	7 years	Capital gains verification
State tax work papers	7+ years	State audits extend longer

Tax software like TurboTax or H&R Block automatically imports Forms W-2 and 1099-B data, but maintaining independent records ensures accuracy and provides backup if electronic data is lost or incorrect.

Frequently Asked Questions

How are RSUs taxed at vesting?

RSUs are taxed as ordinary income when they vest, based on the fair market value of shares on the vesting date. The IRS treats vesting as a compensation event, adding the full share value to your W-2 wages. Employers withhold federal taxes (typically 22-37%), FICA taxes (7.65%), and applicable state taxes, usually by selling or withholding shares to cover the tax obligation.

Do you pay taxes when you sell RSU shares?

Yes, you pay capital gains tax when you sell RSU shares, based on the difference between sale price and vesting-date fair market value (your cost basis). Short-term capital gains rates (10-37%) apply if you sell within one year of vesting, while long-term rates (0-20%) apply after holding 12+ months. The capital gains tax is separate from and in addition to the ordinary income tax already paid at vesting.

Can you avoid taxes on RSU vesting?

No, you cannot avoid ordinary income tax on RSU vesting. The IRS requires tax payment when RSUs convert to actual shares, regardless of whether you sell them. Unlike stock options where you can delay exercise, RSU vesting is automatic and creates immediate taxable income. The only tax optimization available is planning sale timing to qualify for preferential long-term capital gains rates on post-vesting appreciation.

What is the difference between RSU and ISO taxation?

RSUs are taxed as ordinary income at vesting with no preferential treatment, while Incentive Stock Options (ISOs) may qualify for capital gains treatment if holding requirements are met. ISOs trigger Alternative Minimum Tax (AMT) considerations and require a two-year waiting period from grant and one year from exercise, whereas RSUs have no AMT implications and simpler tax treatment. RSUs are taxed automatically at vesting, while ISO taxation depends on employee exercise decisions.

How much tax will I pay on $100,000 RSU vesting?

For $100,000 RSU vesting, expect total tax withholding of approximately $30,000-45,000 depending on income level and location. Federal withholding ranges from 22% (supplemental rate) to 37% (high earners), plus 7.65% FICA taxes (up to Social Security wage cap), plus state income tax of 0-13.3%. High earners in California face combined rates exceeding 50%, while those in no-tax states like Texas or Florida pay only federal taxes of approximately 30-40%.

Are RSUs better than stock options for taxes?

RSUs provide tax simplicity and certainty compared to stock options, but lack preferential tax treatment opportunities. RSUs guarantee value at vesting regardless of stock price movements, while options can expire worthless if share price falls below strike price. However, Incentive Stock Options (ISOs) may qualify for favorable long-term capital gains treatment on the entire gain, while RSUs always face ordinary income tax at vesting. The better choice depends on individual tax situations, company stage, and risk tolerance.