RSU Tax Planning Guide for Tech Employees

Restricted stock units (RSUs) are now the dominant form of equity compensation at large public tech companies and late-stage startups. Unlike stock options, RSUs guarantee a payoff: when they vest, you receive shares worth real money regardless of whether the stock price moved since the grant. But the tax mechanics create predictable problems — and the interaction with stock options on the same grant letter creates planning opportunities most employees miss.

When RSUs Are Taxed: Vesting Is the Event

RSUs become taxable income the moment they vest — not when you sell the shares. On the vesting date, your employer reports the shares' fair market value as ordinary W-2 income. You owe:

• Federal income tax at your marginal rate (up to 37% in 2026)
• Social Security tax at 6.2% on wages up to the 2026 wage base of $184,500¹
• Medicare at 1.45% (no wage base limit)
• Additional Medicare Tax at 0.9% on wages above $200,000 single / $250,000 MFJ²
• State income tax (varies; up to 13.3% in California)

There is no choice about when to be taxed on RSU income — vesting is the mandatory trigger. This is the fundamental structural difference from stock options, where you control the exercise date and can time ordinary income recognition strategically. With RSUs, your employer's vesting schedule sets your tax calendar.

The Withholding Shortfall Problem

Your employer withholds tax when RSUs vest. The default federal supplemental withholding rate is 22% on aggregate supplemental wages up to $1 million in a calendar year, and 37% on any amounts exceeding $1 million.³

That 22% flat rate creates a shortfall for most senior tech employees:

Most tech employees with both a high base salary and regular RSU vesting are systematically under-withheld every single year. The IRS charges underpayment penalties when you owe more than $1,000 at filing and haven't paid enough through withholding or estimated taxes.

The fix: File a new W-4 with your employer to increase additional withholding, or make quarterly estimated tax payments (IRS Form 1040-ES) by each quarter's deadline. A good rule of thumb: calculate your expected RSU vesting for the year, estimate the gap between 22% and your actual marginal rate, and pay that amount in estimated taxes across Q1–Q3.

Sell-to-Cover, Net Settlement, and Your Options at Vest

When RSUs vest, your employer uses one of these methods to satisfy the withholding obligation:

• Sell-to-cover: Your broker automatically sells a portion of vesting shares at the vest-date price to fund the tax withholding. You receive the remaining shares. Most common at public tech companies.
• Same-day sale (net settlement): All shares are sold at vest; you receive cash net of taxes. Used for simplicity, but leaves no equity position.
• Pay from other funds: Some employers allow you to fund withholding by check or debit and keep all vested shares. Requires having cash available but maximizes your equity position.

The shares sold in a sell-to-cover typically trigger no capital gain — the sale price equals the vest-date FMV, which is also your cost basis in those shares. No gain, no separate tax event beyond the ordinary income already recognized at vest.

After Vesting: Cost Basis and Capital Gains on Shares You Keep

Once RSUs vest, the shares you hold have a cost basis equal to the FMV on the vesting date. When you eventually sell those shares:

• Sold within 1 year of vest: Short-term capital gain (or loss) — taxed as ordinary income at your marginal rate.
• Sold more than 1 year after vest: Long-term capital gain — taxed at preferential LTCG rates. For 2026, the 0% rate applies up to $49,450 of taxable income (single) / $98,900 (MFJ); the 15% rate applies up to $545,500 (single) / $613,700 (MFJ); the 20% rate applies above those thresholds. The 3.8% Net Investment Income Tax also applies to capital gains for incomes above $200,000 single / $250,000 MFJ.⁴

The decision to hold or sell immediately at vest is a pure investment decision — you've already paid ordinary income tax on the full vest-date FMV either way. Holding creates a bet on further appreciation in exchange for concentrated single-stock risk. Most advisors treat "sell at vest and diversify" as the default and require a deliberate case to hold.

RSUs vs Stock Options: Key Differences

When You Have Both RSUs and Stock Options

Many tech employees at public companies — and nearly all startup employees who stayed through an IPO — hold both RSUs from current grants and exercisable options from earlier grants. The planning interaction is significant:

• RSU vesting raises your W-2 income floor. If you're vesting $150,000 in RSUs this year and also considering exercising ISOs with a $200,000 AMT spread, your regular taxable income is already elevated. AMT headroom calculations must account for RSU income — the available spread before AMT kicks in is smaller than it would be in a year without RSU vesting.
• RSU withholding gaps compete with ISO exercise cash needs. If your employer is under-withholding on RSUs by $25,000 and you're also trying to fund an ISO exercise (cash for exercise price + estimated AMT), cash flow becomes a constraint. Build your tax payment calendar around both obligations before committing to an exercise tranche.
• Concentrate ISO exercises in lighter RSU-vesting years. If your grants include heavier vesting in some years than others (common with 4-year cliffs), timing large ISO exercises to coincide with lower-RSU years preserves more AMT headroom and reduces the risk of the double-AMT trap where both RSU income and AMT preference items push you into significant net AMT territory.

Private Company RSUs: The Double-Trigger Structure

RSUs at private companies almost always use a double-trigger vesting structure: shares do not actually vest until both (1) your time-based schedule is satisfied AND (2) a liquidity event occurs — typically an IPO, acquisition, or company-sponsored tender offer. Without the liquidity trigger, you'd owe ordinary income tax on illiquid shares with no way to sell to pay the bill.

The practical implication: you can be fully "vested" on the time schedule but still owe no income tax. Tax is deferred until the liquidity event, at which point the entire accumulated grant vests and is recognized as ordinary income simultaneously — potentially a large concentrated income event in a single year.

If you're approaching an IPO year with a large double-trigger RSU tranche, estimated taxes for that year deserve advance planning. The default supplemental withholding may not cover the combined federal + state liability on a large single-year recognition event.

California: No LTCG Preference on RSU Shares

If you work or live in California, RSU income is fully taxable as ordinary state income — no capital gains preference. California's top rate of 13.3% applies to RSU vesting income and to any appreciation when you sell, regardless of how long you hold the shares after vest. There is also a sourcing rule for former California residents: if RSUs vested while you worked in California, a prorated portion of that income may remain California-source income even after you relocate. See the California stock options tax guide for the full picture.

Where a Specialist Adds Value

RSU taxation sounds simple — vest, pay tax, done. In practice, most tech employees with significant equity compensation are making expensive, avoidable mistakes:

• Failing to update W-4 withholding, creating April tax bills and potential underpayment penalties
• Missing the cost basis transfer problem and reporting capital gains on income already taxed at vest
• Holding concentrated RSU positions without a tax-efficient diversification plan
• Missing the AMT headroom interaction when exercising ISOs in high-RSU-vesting years
• Not coordinating RSU vesting with charitable giving (donor-advised funds can absorb RSU shares and offset ordinary income), 529 contributions, or other income-reduction strategies
• Ignoring the estimated-tax calendar until Q4, when options to reduce the shortfall have closed

A fee-only advisor who specializes in tech equity compensation runs these scenarios across your full picture — RSUs, options, base salary, deferred comp — and builds a multi-year tax plan rather than optimizing one year at a time.

1. SSA — 2026 Social Security wage base: $184,500. ssa.gov/oact/cola/cbb.html. Cross-checked with IRS Topic 751.
2. IRC §3101(b)(2) — Additional Medicare Tax: 0.9% on wages above $200,000 (single filers) / $250,000 (MFJ). Thresholds are not adjusted for inflation. IRS Topic 560
3. IRS Publication 15 (Circular E), 2026 — supplemental wage withholding: 22% flat on aggregate supplemental wages up to $1 million in a calendar year; 37% on amounts exceeding $1 million. IRS Pub 15
4. IRS Rev. Proc. 2025-32 — 2026 long-term capital gains thresholds: 0% through $49,450 (single) / $98,900 (MFJ); 15% through $545,500 (single) / $613,700 (MFJ); 20% above. IRC §1411 — Net Investment Income Tax (3.8%) on investment income above $200,000 (single) / $250,000 (MFJ); not inflation-adjusted. Cross-checked with Tax Foundation 2026 brackets. IRS 2026 adjustments

Values verified May 2026 against IRS and SSA sources. Tax law changes frequently; verify current-year values with a qualified advisor before making irreversible decisions.