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RSU

Investment

Restricted Stock Unit

A grant of company shares promised to an employee on a vesting schedule, taxed as ordinary income at the value of the shares on each vesting date — a common form of equity compensation at public and late-stage private companies.

Definition

An RSU (Restricted Stock Unit) is a grant of company stock promised to an employee, which converts into actual shares only after a vesting schedule is satisfied — typically tied to continued employment over several years. RSUs are one of the most common forms of equity compensation at public companies and well-funded private companies, alongside or instead of stock options.

Unlike stock options, RSUs have value even if the stock price falls, since the employee receives actual shares rather than the right to buy shares at a fixed strike price. This makes RSUs simpler to understand but means the tax treatment kicks in automatically at vesting, regardless of whether the employee wants to sell.

Formula

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)

Worked Example

An employee is granted 4,000 RSUs vesting over 4 years with a 1-year cliff:

Detail Value
Total RSUs granted 4,000
Vesting schedule 25% after 1-year cliff, then monthly over remaining 3 years
Stock price at first vest $50
Supplemental tax withholding rate 22% (federal flat rate)

Shares vesting at cliff = 4,000 × 25% = 1,000 shares

Pre-tax value = 1,000 × $50 = $50,000

Tax withheld = $50,000 × 22% = $11,000

Net shares delivered ≈ $50,000 − $11,000 = $39,000 worth (≈780 net shares, with the rest withheld to cover tax)

Use the RSU calculator to model your own grant, vesting schedule, and withholding rate.

Key Things to Know

  • RSU income shows up on your W-2: Vested RSU value is reported as wages, just like salary — it's not a separate "investment" category for tax purposes until you sell the shares afterward.
  • Flat-rate withholding often undershoots your real tax bill: The standard 22% federal supplemental rate frequently doesn't cover an employee's actual marginal bracket, especially when combined with a base salary — many RSU recipients owe additional tax at filing time and should budget for it or adjust withholding via Form W-4.
  • Concentration risk is the biggest financial risk with RSUs: Holding a large, growing position in your employer's stock ties your investment portfolio and your paycheck to the same company — many financial advisors recommend selling vested RSU shares promptly and diversifying, rather than holding them long-term out of habit or loyalty.
  • Vesting events can push you into a higher tax bracket for that year: A large single-tranche vest (common at IPOs, where four years of RSUs can vest in one event) can temporarily spike taxable income well above your normal salary, affecting eligibility for certain deductions and credits that year.
  • RSUs differ from stock options in downside risk: Options can expire worthless if the stock price falls below the strike price; RSUs retain some value as long as the stock price is above zero, making them generally lower-risk (and lower potential upside) equity compensation.

Related Calculators

RSU Calculator →Calculate your RSU vesting schedule, pre-tax value, estimated withholding tax, and net shares after tax. Model a 4-year vest with 1-year cliff or a custom schedule.
Capital Gains Tax Calculator →Calculate your US federal capital gains tax using 2025 IRS rates. Covers short and long-term gains for single, married, and head-of-household filers.
401(k) Calculator →Project your 401(k) retirement savings including employer match and investment growth. See your balance at retirement based on your salary, contribution rate, and return.
Payroll Tax Calculator →Calculate how much federal income tax, Social Security, and Medicare is withheld from each paycheck. See your net take-home pay by filing status in seconds.

Related Terms

401(k)US Employer-Sponsored Retirement Savings PlanSelf-Employment TaxUS Self-Employment Tax (Social Security + Medicare)W-4US Federal Tax Withholding Certificate

Frequently Asked Questions

RSUs are taxed at vesting, not at grant. At grant, RSUs have no tax consequence because the employee doesn't yet own the shares — they're just a promise. Once each tranche vests, the fair market value of the shares on that date is taxed as ordinary income (added to W-2 wages), and the company typically withholds shares or cash to cover the tax bill, similar to how a paycheck is taxed.
A vesting cliff is a waiting period — commonly one year — before any RSUs vest at all, even if the overall vesting schedule is four years. After the cliff passes, the cliff-period RSUs vest all at once, and the remainder typically vests monthly or quarterly for the rest of the schedule. If an employee leaves before the cliff, they forfeit all unvested RSUs from that grant.
Selling vested RSU shares triggers a separate capital gains tax event. The cost basis is the fair market value at vesting (which was already taxed as ordinary income). If the stock price rose between vesting and sale, that additional gain is taxed as a short-term or long-term capital gain depending on how long the shares were held after vesting — not from the original grant date.
Employers commonly withhold RSU income at the IRS supplemental wage flat rate (22% federally for amounts up to $1 million in a year, 37% above that), which often falls short of an employee's actual marginal tax rate — especially for employees in higher tax brackets or in high-tax states. This can create a surprise tax bill at filing time; many RSU holders set aside additional funds or adjust W-4 withholding to cover the shortfall.
Unvested RSUs are almost always forfeited immediately upon voluntary resignation or termination — there is no ownership until vesting occurs. Only vested shares already in the employee's brokerage account are retained. This is a key reason RSU vesting schedules are used as a retention tool, and why total compensation offers should be evaluated net of the risk of leaving before full vesting.