RSUs are wages at vesting
RSU income is the market value of restricted stock units on the day they vest. It is ordinary W-2 wage income in that year, whether or not you sell a share.
Key points
The 22% withholding gap
Employers typically withhold a flat 22% federal on it, while many tech workers fall in the 32% to 37% brackets. The gap becomes a balance due in April unless it is closed during the year.
Basis is the value at vest
After vesting, the shares are just stock: your basis is the value at vest, and only movement above or below that is capital gain or loss.
Ask in the vest year, while withholding and estimates can still be adjusted.
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The setup
Compensation paid in shares, taxed as wages
RSU income is compensation paid in shares instead of cash. On each vesting date, the market value of the shares that vest is added to your wages, appears in Box 1 of your W-2, and is taxed as ordinary income that year. Selling is optional. The tax is not.
For a lot of New York tech and finance employees, vesting becomes the largest line of the year's income, often larger than salary. The mechanics deserve the same attention the salary negotiation got.
01At vesting
How RSU income is taxed at vesting
Share count × market price on the vest date. That amount is wages.
At vesting, RSU income draws:
- Federal income tax
- State income tax, plus city income tax for NYC residents
- Social Security tax, up to the annual wage base
- Medicare tax with no wage cap, plus the 0.9% additional Medicare tax on wages above $200,000
Most employers run sell-to-cover, selling a slice of the vested shares automatically to fund the withholding, so you receive fewer shares than vested and a W-2 that grew more than your paycheck did.
You get no choices at vesting: there is no election to defer it and no way to be taxed at grant instead, which separates RSUs from restricted stock and options. Because RSUs are taxed under Section 83 only when they vest, no 83(b) election is available for them, unlike restricted stock. All the planning has to happen around the vest.
02Why withholding falls short
Why RSU withholding falls short
Employers withhold on RSU income at the flat supplemental wage rate: 22%, or 37% once supplemental wages pass $1 million in a year. The flat rate ignores your actual bracket. A household in the 35% bracket vesting $300,000 is under-withheld by tens of thousands of dollars, and the shortfall shows up as a balance due, often with an underpayment penalty attached.
The fix is arithmetic done early: project the vest year, then close the gap with extra payroll withholding or quarterly estimates sized to a safe harbor. Clients with quarterly vests treat this as a standing calculation, not a one-time scramble. For high earners, that safe harbor is 110% of last year’s tax once prior-year AGI tops $150,000.
| Your bracket | Withheld (flat 22%) | Actually owed | Gap due in April |
|---|---|---|---|
| 32% | $66,000 | $96,000 | $30,000 |
| 35% | $66,000 | $105,000 | $39,000 |
| 37% | $66,000 | $111,000 | $45,000 |
03Selling shares
Selling the shares: basis and the double-tax trap
Once vested, the shares are ordinary stock. Your cost basis is the market value on the vest date, the same number that was already taxed as wages. Hold more than a year past vesting and further gains price at long-term capital gains rates of 0%, 15%, or 20%; sell sooner and gains are short-term.
Brokers often report a basis of zero, or omit it, on the 1099-B for RSU shares. Filed as-is, the entire sale price is taxed again as gain, on top of the wage tax already paid at vest. Say 100 shares vest at $50: that is $5,000 of wage income and a $5,000 basis. Sell later at $60 and the real gain is $1,000, but a zero-basis 1099-B filed as-is taxes the full $6,000 again. The correction is a basis adjustment on Form 8949, and checking for it is a standard step in our individual tax preparation for anyone with equity compensation.
04New York
How New York taxes RSU income
New York taxes RSU income based on where you worked between grant and vest, even after you leave the state. For nonresidents and people who moved, the state allocates that income by workdays between grant and vest.
allocated by workdays. Move from Manhattan to Miami two years into a four-year vesting schedule and New York still claims its share of every later vest earned during the New York years. City residency adds its own layer on top.
Remote years, relocations, and multi-state stints each change the allocation, and the employer’s state withholding rarely tracks any of it correctly. This is the single most common reason equity comp clients bring us amended returns from prior preparers.
05Make it boring
Make the vest year boring
A well-run RSU year has no surprises: withholding matched to reality, basis recorded, state allocation defended on paper.
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06The useful window
Before December, not after
If shares vested this year, the useful window is now. Withholding elections, estimated payments, and even the decision to sell or hold all work better before December than after, and the first projection takes one meeting.
Bring a recent vest confirmation and your last pay stub. That is enough to size the gap.
[ Book an equity comp consultation ]
Call (212) 641-0673 or send the contact form. Our team gets back to you within 24 hours, and we are available evenings and weekends.
Confidential, and handled by a CPA or EA, not a call center.
Close the gap before April
Size the RSU gap with a CPA
Bring a recent vest confirmation and your last pay stub. We’ll project the year, size the balance due, and set the withholding or estimates so April is boring.
Reviewed by George Dimov, CPA, New York, NY. Licensed in all 50 states, 15+ years advising on equity compensation taxation. President of George Dimov, CPA, a New York City firm serving clients across the five boroughs and nationwide.