Most companies today offer a variety of benefits to their employees.
401ks, life insurance and health insurance are the norm. A lot of companies even offer matching contributions to your 401ks, in addition to deferred compensation plans.
But a lot of companies nowadays are adding an additional benefit, known as Restricted Stock Units (RSUs), that is becoming more and more common. RSUs are a form of equity compensation. And while there are many different forms of equity compensation, such as ISOs and NQSOs, RSUs are becoming a fairly common form of equity compensation. Companies like to offer equity compensation typically because it is a way to align an employee's compensation with the company's interests.
So how do RSUs work?
RSUs are essentially a promise by the company to grant you a certain number of company shares at a certain date. The date when this happens is called the grant date. Conditions have to be met for you to receive the shares, such as performance metrics set by the company or just remaining employed at the company for a certain period of time. This period of time for whatever conditions need to be met for you to receive the shares is called the vesting period. If you meet the conditions needed to receive the shares then you vest in the RSUs. The date you vest in the RSUs is an important date to know for tax purposes.
The date you vest in the RSUs is the date at which you receive the shares and vesting in the RSUs means the shares have now been given to you and are your property. The shares will typically vest at the Fair Market Value (FMV) of the stock shares on the date they are given to you.
For example, if you are hired at your company and granted 100 RSUs that vest at the share's FMV if you are still employed 1 year from now, then 1 year from now you will receive 100 shares at the FMV of your company's shares. If the FMV of a share of your company's stock is $100/share then you own 100 shares worth $10,000.
The FMV of the shares on the date you vest is also very important for tax purposes.
Once you own the shares you can choose to keep the shares or sell the shares. This is also an important consideration, not only for tax purposes, but for your overall financial goals.
But first... ↴
How are RSUs taxed?
The taxation of RSUs is an important concept to understand if you have RSUs as part of your compensation, especially if RSUs are a significant part of your compensation, because if you don't understand how they are taxed than you may end up with an unpleasant surprise tax bill come tax time.
Your RSUs are taxed as ordinary income when they vest.
In our previous example, when you vested in the 100 RSUs with a FMV of $100/share you then owned 100 shares worth $10,000 on the date they vested. This means that $10,000 is taxed as ordinary income to you. The IRS literally looks at this like you received $10,000 of additional income. Even if you don't sell the shares you still owe ordinary income tax on $10,000 of additional income. Ignoring deductions, credits and the progressive nature of income tax rates, if you are in the 37% tax bracket this means that you'll owe $3,700 in taxes on the $10,000 RSUs you vested in. Again, even if you don't sell the shares.
You'll want to make sure you plan for this throughout the year, especially if you have multiple vesting dates for different sets of granted RSUs throughout the year where you are continually vesting in RSUs creating more income that is taxed at ordinary income rates for you.
→ What can you do after the shares vest?
You can do 1 of 2 things.
You can either do nothing and simply keep the RSU shares or you can sell your shares.
→ What happens if you keep the RSU shares?
If you do nothing and keep your shares once they vest not much happens. In our example, you would continue to own the 100 shares of your company stock and the value of those shares would fluctuate over time with the FMV of your company stock.
No more taxes are due except potentially on any dividend income that your company stock pays you once you own the shares.
→ What happens if you sell your shares?
This is where things can get interesting.
If you decide to sell the stock there are potential tax impacts and it depends on how long you've held the stock since the RSUs vested and when you sell the stock. The time from when you vested and when you sold the stock is called your holding period. Think of it as literally how long you "held" onto the stock. When you sell the stock you can either have a capital loss or a capital gain. If you sell the stock for less than the FMV on the date they vested, in our example less than $10,000, then you realize a capital loss. If you sell the stock for more than the FMV on the date they vested, in our example more than $10,000, then you have a capital gain.
When it comes to a capital loss it doesn't really matter (most of the time) how long you held the stock since the vesting date.
If you sell the stock for more than the FMV on the vesting date then you realize a capital gain. When it comes to capital gains, how long you held the stock since the vesting date matters. Remember, how long you held the stock is called your holding period and the holding period will determine how much tax you pay for selling the stock at a gain.
If your holding period is a year or less then it is considered "short term" and you have a short term capital gain. Short term capital gains on stock sales are taxed as ordinary income, and ordinary income tax rates tend to be some of the highest tax rates around (up to 37% in 2025). The difference between the FMV on the date you vested in the RSUs and the amount you sell the shares for is the taxable gain.
Let's look at an example. ↴
If, however, your holding period is longer than a year and you sell the stock shares for more than the FMV when they vested then you have a long term capital gain. This is typically a more ideal situation because long term capital gains have their own tax treatment that tends to be more favorable than short term capital gains rates because, remember, short term capital gains are taxed as ordinary income and subject to ordinary income tax rates (up to 37%).
Long term capital gains are taxed anywhere between 0-20%, depending on your income, so they can be much lower than ordinary income tax rates.
Here's an example of a realized long term capital gain ↴
The need for tax planning
Given the taxation of your RSUs, having RSUs as part of your compensation add the necessity for proactive tax planning throughout the year. Because since you're going to be hit with additional income and, therefore, additional income tax when they vest and potential capital gain taxes when you sell, you need to be aware of the additional tax owed and plan accordingly.
Now, some companies may withhold an additional % of tax (say 20%) when your RSUs vest to help avoid any tax surprises come tax time (and some companies might not), but sometimes this additional withholding still isn't enough to avoid a larger than anticipated tax bill.
Without proactive tax planning throughout the year, having RSUs can potentially make you run the risk of having a larger than expected tax bill come tax season when you file your taxes. And I've never met anyone that enjoys a surprise tax bill. Therefore, it's extremely beneficial to work with a financial advisor that will help you with your tax planning.
Proactive tax planning when it comes to RSUs can look like:
→ Helping you estimate your tax liability for the year, accounting for your vested RSUs and other sources of income
→ Helping you determine if additional withholding needs to be done, or if an estimated tax payment needs to be made
→ Helping you determine when to sell your RSUs after they vest
→ Potential tax loss harvesting to offset any gains from your RSU sales
→ Once you sell your RSUs, developing a tax efficient way to invest those proceeds going forward.
So, if you have RSUs and aren't doing any tax planning, I would welcome the opportunity to have a quick 15 minute call with you to see if we're a good fit for each other and to see how I might be able to help you.
Feel free to reach out using the link below.