What Is an RSU? Restricted Stock Units, Taxes, and the 22% Withholding Trap Explained
RSUs get taxed as ordinary income on the day they vest, and your employer's 22% flat withholding is usually not enough. Here's the full mechanics, the concentration risk most employees miss, and how to think about selling vs. holding.
An RSU, or Restricted Stock Unit, is one of the most common forms of employee equity compensation in the United States. If you work at Amazon, a big tech firm, a defense contractor like Huntington Ingalls Industries, or almost any public company large enough to have a long-term incentive plan, there is a good chance part of your pay package is quoted in RSUs.
The problem is that the offer letter almost never explains how they actually work. So employees walk into their first vest date thinking they got a bonus, and walk out of their first tax season realizing they owe the IRS several thousand dollars they did not budget for.
This post fixes that. It is a plain-English guide to what an RSU is, how grant and vesting are different things, why the tax bill shows up at vest even if you do not sell a single share, why your employer’s 22% flat withholding is usually not enough, and how to think clearly about the sell-at-vest vs. hold decision.
What an RSU Actually Is
An RSU is a promise from your employer to give you a specific number of company shares at a future date, provided you are still employed on that date. The “restriction” is the service requirement. You do not own the shares on the day they are granted. You own a contractual right to receive them later, if and when they vest.
Two dates matter: the grant date and the vest date.
Grant date. The day your employer tells you, in writing, that you will receive X shares over Y years on Z schedule. Nothing taxable happens on the grant date for a standard RSU. You do not own shares. You cannot sell anything. You cannot vote the shares. You have a promise, and the promise has no current tax basis.
Vest date. The day the promise converts into actual shares. This is the taxable event. The fair market value of the shares on that day is added to your W-2 as ordinary income, exactly as if your employer had paid you that dollar amount in cash and that cash was immediately converted into shares at the morning’s market price.
This distinction is the single most important thing to understand about RSUs. It is also where Section 83 of the Internal Revenue Code enters the picture.
Why RSUs Get Taxed as Ordinary Income (Section 83)
IRC Section 83 governs the taxation of property transferred in connection with the performance of services. In plain English: when your employer gives you something of value in exchange for your labor, the value is compensation, and compensation is ordinary income.
RSUs have a twist. Because no property actually transfers on the grant date (you get a promise, not shares), the IRS does not treat the grant as a Section 83 event. That is why, per IRS guidance, you cannot make an 83(b) election on an RSU the way you can with a Restricted Stock Award. There is nothing to elect on, because nothing has been transferred.
At vest, though, the shares actually move to you. Section 83 kicks in. The fair market value on the vest date is ordinary income, reportable on your W-2, subject to federal income tax, Social Security and Medicare, and state income tax where applicable.
A simple example:
| Item | Value |
|---|---|
| RSUs vesting on Nov 17, 2026 | 200 shares |
| Closing price Nov 17, 2026 | $150.00 |
| Ordinary income added to W-2 | $30,000 |
| Cost basis in those 200 shares | $150.00/share |
Your cost basis in the shares going forward is that $150.00 per share. If you hold and the stock later rises to $180 and you sell, the $30 per share gain is a capital gain. If you hold for more than a year after vest, long-term. Less than a year, short-term. If you sell the same day as vest, there is essentially no capital gain or loss because the basis equals the sale price.
The 22% Withholding Trap
Here is where most first-time RSU holders get blindsided.
When RSUs vest, the IRS classifies the income as “supplemental wages.” Under IRS Publication 15, employers have two options for withholding federal tax on supplemental wages. Almost all of them use the flat rate method: 22% on supplemental wage payments up to $1 million per calendar year, and 37% on any amount above that. The $1 million threshold and the 22% rate are confirmed in the 2026 Employer’s Tax Guide.
For a single filer earning $200,000 in base salary plus $100,000 of vesting RSUs, the problem is immediate. The 2026 federal marginal bracket for a single filer at $300,000 of total taxable income is 35%, per IRS Revenue Procedure 2025-32 as reported by the Tax Foundation. The IRS withheld 22%. The actual tax owed on that slice of income is closer to 32-35%. The gap shows up in April as a surprise balance due.
A rough illustration of the gap on $100,000 of RSU income for a taxpayer whose marginal bracket is 32%:
| Line | Amount |
|---|---|
| RSU fair market value at vest | $100,000 |
| Federal withholding at 22% flat | $22,000 |
| Approximate federal tax actually owed (32% marginal) | $32,000 |
| Withholding shortfall | ~$10,000 |
State tax makes it worse if you live somewhere with a real income tax. Most states use a state-specific supplemental rate that also underwithholds relative to top bracket earners.
This is not a tax increase. It is a timing mismatch between what the IRS tells your employer to withhold and what you actually owe. The fix is either adjusted withholding on your W-4 (additional federal withholding line), quarterly estimated payments to cover the gap, or a mental note to set aside the extra 10-13% in a savings account so April does not hurt.
Sell at Vest vs. Hold: How to Think About It
Once the shares vest, you own them. You can sell that day, hold indefinitely, or do something in between. There is no universally correct answer, but there is a disciplined way to frame the decision.
Framing the decision as a buy decision. This is the clearest mental model. At vest, you own, say, $30,000 of your employer’s stock at that day’s price. Ask: if I had $30,000 in cash right now, would I use it to buy $30,000 of my employer’s stock? Most employees, when honest, would not. They would build a diversified portfolio. But they already hold concentration in their employer through their job itself, their 401(k) match if it is in company stock, and often an ESPP. Adding RSU shares on top is doubling down.
Concentration risk is real. Research from Candor and most mainstream financial planning firms pegs the concentration threshold at roughly 10% of net worth in any single stock. For senior tech employees, private-company pre-IPO employees, and long-tenured defense and finance workers, the concentration is routinely 40% to 90% of liquid net worth in employer stock. That is an enormous bet on one company’s execution, in one sector, often in one geographic region where you also earn your paycheck.
The human capital stack. Your paycheck, your health insurance, your promotion track, and your RSU value are all tied to the same employer. If the company has a bad year, you risk compensation cuts, layoffs, and a falling stock price at the same moment. Diversification at vest is not about market-timing. It is about reducing correlation between your human capital and your financial capital.
Tax-efficient selling. If you sell at vest, the basis and the sale price are roughly identical, so capital gains are immaterial. If you hold, any appreciation becomes short-term capital gains for the first year (taxed as ordinary income) and long-term after. Some employees hold the vested shares specifically for the step-up in basis, but holding a concentrated position to save on taxes is usually the tax tail wagging the portfolio dog.
For a deeper dive on pairing concentrated-stock liquidation with loss harvesting in the rest of the portfolio, see the tax-loss harvesting guide.
Common Employer Patterns
Vesting schedules are not standardized. They are negotiated, or more often dictated, by the employer’s long-term incentive plan. Three patterns are common enough to know by name.
Standard tech: 25/25/25/25 over four years with a one-year cliff. You get nothing in year one, then 25% at the one-year anniversary, then monthly or quarterly vesting through year four. Common at Meta, Google, Apple, Microsoft, and most venture-backed tech. Cash flow is smooth after the cliff.
Amazon: 5/15/40/40 over four years. Per Consilio Wealth Advisors and KFA, Amazon backloads vesting heavily. 5% in year one, 15% in year two, 40% in year three, 40% in year four. The stated purpose is retention: 80% of the value vests in years three and four. The practical consequence is that an Amazon employee in year three or four has a very large supplemental wage event, often pushing total income well above the 22% withholding bracket. This is the 2026 context for Amazon’s RSU-to-cash pilot, which is changing how some employees receive equity compensation entirely. The mechanics of the existing RSU program are covered in detail in our Amazon RSU vesting and tax guide.
Defense and large industrials (HII, Northrop, Lockheed): three equal annual installments. Per HII’s own long-term incentive stock plan documentation, Restricted Stock Rights vest in three equal annual installments, roughly 33% per year. This produces steadier year-over-year RSU income than the Amazon model but concentrates three overlapping grant tranches into any given calendar year once an employee has been there more than three years. For HII-specific planning, the HII mega backdoor Roth guide pairs well with this.
Pre-IPO and recently public: double-trigger RSUs. As explained by Baker McKenzie, a double-trigger RSU requires two events to vest: service (time served) and a liquidity event (typically an IPO or acquisition). At private companies, time-based vesting accumulates, but nothing becomes taxable until the IPO liquidity trigger fires. When it does, multiple years of accumulated RSUs vest all at once, producing the single largest supplemental wage event most people ever experience, often far above the $1 million threshold where the 37% flat rate kicks in.
The Checklist Most First-Time RSU Holders Need
A few practical items to walk into a vest date with open eyes:
- Know the vest date. Mark it on a calendar. It is a taxable event.
- Know the share count and estimate the tax. If the stock is at $150 and you vest 200 shares, that is $30,000 of ordinary income. Your actual marginal rate, not 22%, is what you will owe.
- Budget for the withholding gap. Set aside an additional 10-13% of the vest value in a high-yield savings account, or file a new W-4 with additional federal withholding, or make a quarterly estimated payment.
- Decide the sell-or-hold policy in advance. Make the decision in cold blood, not in the moment. Sell-at-vest by default is a defensible policy. Hold for a specific reason is also defensible. “I don’t know” typically becomes “I held, and now I have a concentration problem.”
- Revisit concentration annually. If employer stock is more than 10% of liquid net worth, the next grant is a trim opportunity, not an accumulation opportunity.
- Understand the interaction with your 401(k) and ESPP. Employer match in company stock plus ESPP purchases plus RSUs can push concentration to levels most people would be uncomfortable with if they saw the number on one page. Getting an objective view of the full picture is part of what a fiduciary financial advisor helps with.
What Most Employees Get Wrong
Three patterns come up again and again with first-time RSU holders:
“I don’t have to pay tax until I sell.” Wrong. You pay tax at vest, on the fair market value, whether you sell or not. Selling later generates a separate capital gains event on any appreciation above the vest-date price.
“The 22% withholding covers my tax.” Usually wrong if your total income is above roughly $100,000. The 22% flat rate matches the 22% marginal bracket. Everything above that bracket creates a withholding shortfall.
“I’ll hold because I believe in the company.” This may or may not be a sound investment thesis, but it is a separate question from the concentration question. Belief in the company is a reason to own some shares. Belief is not a reason to hold 60% of your liquid net worth in one stock.
Bottom Line
An RSU is compensation. It becomes taxable on the day it vests, at your ordinary marginal rate, on the fair market value that day. Your employer’s 22% flat withholding is a starting point, not a final answer. Concentration risk is the second-order problem that most employees discover only after years of accumulated vests. The framing that works is simple: treat every vest as a cash bonus that was automatically used to buy your employer’s stock, and decide each time whether that is the portfolio you want.
Ferrante Capital LLC is a registered investment adviser. Information presented is for educational purposes only and does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. All investing involves risk, including the possible loss of principal.
FC and its principals may hold positions in HII. This analysis is for educational purposes only and does not constitute a recommendation to buy, sell, or hold any security.
Forward-looking statements reflect Ferrante Capital’s current analysis and involve assumptions and estimates. Actual results may differ materially. Past performance is not indicative of future results.
Please consult a qualified financial professional before making investment decisions.
