Overview
RSUs (Restricted Stock Units) get taxed as ordinary income at vesting, not at grant and not when you eventually sell the shares. This article walks through exactly how to calculate the tax due on an RSU vesting event, why the standard withholding rate often isn't enough, and how to estimate the net number of shares you actually receive after tax.
It's aimed at employees receiving RSU grants who want to understand their tax obligations before vesting events happen, rather than getting surprised at filing time.
What You Need
Before calculating RSU tax, gather:
- Total RSUs granted and the vesting schedule (say, 4 years with a 1-year cliff, then monthly)
- Stock price on each vesting date (or a reasonable current estimate for future planning)
- Your supplemental withholding rate, from your pay stub or equity plan documents. The federal default is 22% up to $1 million a year, 37% above that
- Your state's supplemental withholding rate, if applicable, since many states apply their own flat rate on top of federal
Steps
Step 1: Determine shares vesting in this period
Shares Vesting = Total RSUs Granted / Number of Vesting Periods, adjusted for any cliff structure. A 4,000-share grant with a 1-year cliff (25%) followed by monthly vesting over the remaining 3 years vests 1,000 shares at the cliff, then roughly 83 to 84 shares per month afterward.
Step 2: Calculate the pre-tax value at vesting
Pre-Tax Value = Shares Vesting × Stock Price on Vesting Date
At the 1-year cliff with the stock at $50/share: 1,000 shares × $50 = $50,000 pre-tax value.
Step 3: Apply the supplemental withholding rate
Tax Withheld = Pre-Tax Value × Supplemental Withholding Rate
At the 22% federal flat rate: $50,000 × 22% = $11,000 withheld. Add any applicable state supplemental rate on top; a state rate of 6% would withhold a further $3,000.
Step 4: Calculate net shares (or net value) after tax
Net Value After Tax = Pre-Tax Value − Tax Withheld = $50,000 − $11,000 = $39,000
Net Shares After Tax ≈ Shares Vesting × (1 − Withholding Rate) = 1,000 × 0.78 ≈ 780 shares
In practice, the company typically withholds and sells enough shares to cover the tax bill ("sell to cover"), delivering the remaining net shares to your brokerage account.
| Detail | Value |
|---|---|
| Total RSUs granted | 4,000 |
| Shares vesting at cliff | 1,000 |
| Stock price at vesting | $50 |
| Pre-tax value | $50,000 |
| Federal withholding (22%) | $11,000 |
| Net value after tax | $39,000 |
Step 5: Account for the gap between withholding and your actual tax bracket
Compare the 22% (or 37%) flat withholding rate against your actual marginal bracket, factoring in base salary plus this vesting income. If your marginal bracket runs 32% or higher, flat withholding will undershoot your real liability, so set aside the difference or adjust your Form W-4 to avoid an unexpected balance due at filing.
Step 6: Track cost basis for a future sale
The fair market value at vesting becomes your cost basis for that batch of shares. Sell later at a higher price and the gain since vesting is a separate capital gains tax event, short-term or long-term depending on the holding period measured from the vesting date, not the original grant date.
The RSU calculator can model your own grant size, vesting schedule, stock price, and withholding rate.
Common Mistakes to Avoid
- Assuming the withheld amount covers your full tax liability. The flat supplemental rate frequently falls short of your actual marginal bracket, especially with a base salary layered on top.
- Forgetting state supplemental withholding. Many states apply their own flat rate on top of federal, and some apply none at all, so check your specific state's rules.
- Measuring the capital gains holding period from the grant date instead of the vesting date. The clock for short-term versus long-term treatment starts at vesting, not when the RSUs were originally granted.
- Not planning for large single vesting events. IPOs and double-trigger vesting can release multiple years of RSUs at once, temporarily spiking that year's taxable income well above your normal salary.
Formula & Methodology
Shares Vesting per Period = Total RSUs Granted / Number of Vesting Periods
Pre-Tax Value at Vesting = Shares Vesting × Stock Price on Vesting Date
Tax Withheld = Pre-Tax Value × Supplemental Withholding Rate
Net Shares After Tax = Shares Vesting × (1 − Supplemental Withholding Rate)
These formulas assume the standard flat-rate supplemental withholding method most employers use. Some employers use the aggregate method instead, combining vesting income with your regular paycheck and withholding based on your W-4 elections, which can produce a different withholding amount for the same vesting event.
Key Terms
- RSU: Restricted Stock Unit, company shares granted to an employee that convert to actual shares on a vesting schedule
- 401(k): US employer-sponsored retirement plan, often offered alongside RSU compensation at the same company
- Self-Employment Tax: relevant if you have outside 1099 income in addition to W-2 RSU compensation
- W-4: the form used to adjust your federal withholding to compensate for RSU tax shortfalls