How RSUs are taxed when your company goes public
When restricted stock units vest they are generally taxed as ordinary income, and your employer often withholds less than you actually owe. Here is how that works, and why it surprises people.
When RSUs vest, the value of the shares is generally taxed as ordinary income based on the price at vesting. Employers usually withhold at a flat supplemental rate, which can be lower than your real tax bracket, leaving a gap you may owe when you file.
Vesting is the taxable moment
For most RSUs, tax is triggered at vesting, not when you eventually sell. The share price at vesting sets the ordinary-income amount, and your cost basis going forward.
The withholding gap
If your marginal rate is higher than the flat supplemental withholding rate, the amount withheld will not cover the full bill. That difference is the withholding gap, and it is why a good year can come with an unexpected tax balance.
What you can do about it
Plan for the gap in advance, decide whether to hold or sell at vesting, and coordinate with your CPA. Selling some shares at vesting to cover taxes is common, though the right answer depends on your whole picture.
Common questions
Are RSUs taxed twice?
Should I sell my RSUs as they vest?
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