IRC §83(a) · IRS Pub 525 · Pub 15 §7 · Equity Compensation · TY 2026
When restricted stock units vest, the FMV becomes ordinary wage income under IRC §83(a). The 22 percent supplemental withholding routinely under-collects for senior employees, and an 83(b) election does not apply to RSUs. Here is the full mechanics for tax year 2026.
Estimate the federal tax on a vest event, the sell-to-cover share count, and your shortfall versus marginal bracket in one place.
Run the RSU Tax Calculator →RSUs are taxed at vest under IRC §83(a). The fair market value of the shares on the vest date becomes ordinary wage income, reported in W-2 Box 1. The employer withholds federal income tax at the supplemental wage rate of 22 percent (37 percent above $1 million per employer per calendar year), Social Security tax (6.2 percent up to the 2026 wage base of $184,500), Medicare (1.45 percent), and Additional Medicare Tax (0.9 percent over $200K single or $250K MFJ). Most companies use sell-to-cover, selling enough shares at vest to remit the withholding. The 22 percent supplemental rate routinely under-withholds for employees in the 24 percent bracket and above; the shortfall surfaces at filing. An 83(b) election is not available for RSUs because no property has been transferred at grant.
A restricted stock unit (RSU) is an unfunded promise from your employer to deliver a specified number of shares of company stock at a future date, conditional on continued service or other vesting requirements. RSUs are the dominant form of equity compensation at U.S. public companies and an increasingly common alternative to stock options at private companies preparing for IPO.
The critical legal feature of an RSU is that no shares are transferred at grant. The employee receives a contractual right (typically documented in a grant agreement and a stock incentive plan) that says "if you continue to work here through the vest dates, we will issue you shares on those dates." No book-entry shares, no certificates, no transfer of beneficial ownership occurs at grant. The employee owns nothing until vest.
This is what distinguishes an RSU from a restricted stock award (RSA). With an RSA, actual shares are transferred to the employee at grant, subject to forfeiture if vesting conditions are not met. The employee owns the shares at grant (with restrictions), and an 83(b) election can be made to accelerate the income inclusion to grant date. With an RSU, no property has been transferred, the 83(b) election is unavailable, and the first taxable event is always vest.
IRC §83(a) is the controlling statute for property transferred in connection with the performance of services. The general rule: when property is transferred in connection with services and the substantial risk of forfeiture lapses, the FMV of the property minus any amount paid is included in the recipient's gross income for the taxable year in which the rights become transferable or no longer subject to substantial risk of forfeiture, whichever is earlier.
For a normal time-vested RSU, the substantial risk of forfeiture lapses on the vest date because the service condition has been satisfied. At that moment, the FMV of the underlying shares is included in the employee's W-2 wages for the year. The employer issues the shares to the employee's brokerage account that day or shortly after, then reports:
The vest event is irreversible from the tax perspective. Even if the employee never sells the shares and the stock subsequently drops to zero, the vest-date inclusion stays on the W-2 and the tax is owed. This is the structural risk of RSU compensation: the tax is fixed at vest-day FMV regardless of subsequent share price. Selling immediately at vest converts the equity to cash and eliminates the price risk; holding retains both upside and downside.
This is one of the most common mistakes among employees new to equity compensation. The 83(b) election under IRC §83(b) allows an employee to elect to include the FMV of restricted property in income at the time of transfer rather than at vest. The benefit: any post-grant appreciation is taxed as long-term capital gain rather than ordinary income.
The 83(b) election is only available for property transferred under §83(a). RSUs do not satisfy this requirement because no property is transferred at grant. The employee receives a contractual promise of future share delivery, not actual shares. Without a transfer of property, there is nothing to make an 83(b) election on.
The IRS Equity-Based Compensation Audit Technique Guide (Publication 5992) confirms this directly. Restricted stock units, in the IRS's terms, are not property for purposes of §83. An employer or advisor who suggests filing an 83(b) on RSUs is operating on a misunderstanding of the statute.
If you receive a grant of restricted stock at a startup before the company has significant value, the 83(b) election can be powerful: you elect to include a small FMV at grant in income today, the substantial risk of forfeiture later lapses with no further ordinary income, and any future appreciation is long-term capital gain. The downside: if the shares are forfeited (you leave before vest), you lose the tax already paid with no deduction.
For RSUs at the same startup, the 83(b) election is not on the table. The first taxable event is vest at FMV. If the company has appreciated substantially between grant and vest, the entire appreciation is taxed as ordinary income at vest, not capital gain. This is a structural disadvantage of RSUs for high-growth startups; the upside has been the simpler administrative profile for the employer.
The 83(b) election deadline is 30 days from the date of property transfer. Missing the deadline is fatal; there is no extension. For RSAs, file the election on time. For RSUs, do not file an election; it would be ineffective even if accepted.
IRS Publication 15, section 7, classifies RSU vest income as supplemental wages for federal withholding purposes. The same rule that applies to bonuses applies to RSU vests:
The 22 percent rate is a withholding rate, not a tax rate. It is the IRS's administrative shortcut to estimate federal withholding on irregular wage payments. It does not reflect the employee's actual marginal bracket. For employees whose marginal bracket is below 22 percent, the supplemental rate over-withholds and the excess returns at filing. For employees whose marginal bracket is above 22 percent (which is most RSU recipients), the supplemental rate under-withholds and the shortfall becomes a balance due at filing.
A single senior engineer with $250,000 of regular base salary in a year vests 800 shares at $250 FMV in the same year, producing $200,000 of vest income. Federal supplemental withholding is $200,000 × 22 percent = $44,000.
The engineer's marginal federal bracket on the next $200,000 of income (after the $250,000 base) is 32 percent. Actual federal tax on the vest is approximately $200,000 × 32 percent = $64,000. The shortfall is $64,000 - $44,000 = $20,000. This $20,000 surfaces as a balance due when the engineer files in April. Add California state tax (10.23 percent supplemental rate × $200,000 = $20,460, which itself may under-withhold relative to California's 13.3 percent top bracket) and the actual cash impact at filing can exceed $40,000.
The $1 million supplemental wage threshold is per employer per calendar year, not cumulative across employers. For senior executives receiving multi-million-dollar vest events, this often produces a structural under-withholding even at the 37 percent rate, because not all of the cumulative income is captured by one employer. Rare, but a known issue for executive equity compensation.
Once the vest event happens and federal withholding plus FICA is computed, the employer needs to remit the cash to the IRS via the regular employment-tax deposit schedule. The employer's plan determines how this cash is sourced. Three mechanics dominate.
Under sell-to-cover, the employer's equity broker sells just enough vested shares at vest-day FMV to cover the federal supplemental withholding, Social Security tax, Medicare tax, and (for high earners) Additional Medicare Tax. The cash proceeds flow to the employer's payroll system, which forwards the federal portion to the IRS through normal tax deposits. The employee receives the residual shares net of the share count sold for taxes.
Mechanics: Shares to sell = CEILING(Total tax / FMV per share). Brokers round up to the nearest whole share to avoid a short remittance; any cash difference is added to the employee's next paycheck as a small over-withholding return.
Sell-to-cover is the dominant model at public companies because it eliminates the cash-flow burden on the employee and produces no immediate cash outlay. The downside: it locks in a portion of the vest at the vest-day price (no opportunity to wait for a higher sale price), and it does not address the 22 percent under-withholding gap for high earners.
Under sell-all, the broker sells every vested share at vest-day FMV. The cash proceeds (net of withholding) flow to the employee. Capital gain on the sale is zero because the sale price equals the cost basis (vest-day FMV equals sale-day FMV when sold same day).
Sell-all is appropriate when: the employee needs cash, wants to diversify out of single-stock concentration, anticipates a price decline, or simply prefers cash compensation. It produces the largest possible W-2 income inclusion in the vest year (because no shares are retained and the employee captures the full FMV at vest as cash).
Under hold-all, no shares are sold at vest. The employer withholds federal income tax and FICA from the employee's regular paycheck or requires the employee to remit cash to the employer to cover the withholding. This is rare in practice because most plans require sell-to-cover or cash settlement to ensure the employer's tax remittance obligations are met.
Hold-all maximizes the share count retained but creates a cash-flow problem: the employee may face a $50,000 negative paycheck if a $100,000 vest is withheld at the supplemental rate plus FICA. Most employees who want to retain all shares should use the sell-to-cover default and immediately repurchase the share count sold using outside cash, to maintain the share position with cleaner cash mechanics.
Most public-company RSUs are single-trigger: time-based vesting alone causes the substantial risk of forfeiture to lapse, and the vest produces ordinary income on that date. Most private-company RSUs are double-trigger: two events must occur for the substantial risk of forfeiture to lapse:
Until both triggers occur, the substantial risk of forfeiture has not lapsed for §83(a) purposes, and there is no taxable event. The employee owes no federal income tax, no FICA, and no W-2 inclusion despite the time-based vest having technically occurred.
When the liquidity event happens, all previously time-vested but unliquidated shares become taxable in the same year at the IPO-day FMV (or the change-of-control transaction value). For an employee who has accrued 4 years of time-based vesting at a high-growth private company, the IPO-year tax inclusion can be enormous, often exceeding the employee's annual base salary by a factor of 5x or more.
Once shares vest, the employee owns them outright. Subsequent sale produces a capital gain or loss equal to (Sale Price - Cost Basis), where cost basis equals the FMV at the vest date (already included in W-2 Box 1 ordinary income).
The holding period for capital gains starts on the vest date, not the grant date. If shares are sold:
This is the most common RSU filing error. When the broker sells RSU shares (whether sell-to-cover or post-vest sale), the broker issues Form 1099-B reporting the sale proceeds. Many brokers report cost basis as $0 because the broker has no record of the employee paying for the shares. The shares were issued by the employer at vest with no purchase price.
If the employee files using the broker-reported $0 basis, the entire sale proceeds are reported as capital gain. But the vest-day FMV was already included as ordinary income on the W-2. Reporting $0 basis double-counts the income: ordinary on the W-2 plus capital gain on Schedule D.
The correct fix: adjust cost basis on Form 8949 to the vest-day FMV (the same amount included in W-2 Box 1 for that vest event). Most modern tax software handles this automatically if the user enters the vest-date FMV when prompted. Verify the basis adjustment before filing.
RSU vest income is W-2 wage income for state tax purposes and is sourced to the state(s) where the employee performed work during the vesting period. For a 4-year vesting cycle, this can produce complex multi-state allocation if the employee has worked in multiple states during that period.
For an employee who lived and worked in one state for the entire vest period, state tax is straightforward. The employer applies the state's supplemental withholding rate (or aggregate method) to the vest income at the state's normal rate.
| State | Approximate Treatment | Note |
|---|---|---|
| California | 10.23% on bonuses, 6.6% on stock options | EDD Pub DE 44 - work-period sourcing applies even after employee leaves CA |
| New York | Bracket-based, ~11.7% top supplemental | NY DTF Pub NYS-50-T; NYC adds local tax |
| Massachusetts | 5% flat plus 4% surcharge above $1M | Aggregate method or flat depending on employer |
| Washington | 0% (no income tax) | WA Cares LTC tax may apply |
| Texas, Florida, Nevada | 0% (no income tax) | Federal only |
| Illinois, Pennsylvania | 4.95%, 3.07% flat | Standard flat rate applied to supplemental |
RSU vests reflect compensation for services performed across the entire vest period (typically 4 years). If the employee worked in multiple states during that period, each state where work was performed has a claim on a pro-rata portion of the vest income.
California is particularly aggressive on this point. If an employee worked in California for any portion of the vest period, California taxes the work-period portion of the vest even after the employee has relocated to a non-California state. This is sometimes called the "California trailing tax" on RSUs. The Franchise Tax Board's allocation method is typically based on the ratio of California work days to total work days during the vest period.
Multi-state RSU allocation requires detailed work-location records by quarter or month. Employees with significant equity compensation who relocate should maintain a written work-location log and consult a multi-state tax practitioner before vest events in transitional years.
The largest tax-planning leverage on RSU compensation comes from anticipating the under-withholding gap and managing post-vest concentration. The window for action is the calendar year of the vest plus the first few weeks of the following year.
Compute the gap as (Vest Income × (Marginal Rate - 22 percent)). Cover via one of:
For employees with significant single-stock concentration in their employer, immediate sell of a vested batch eliminates the post-vest price risk. This produces zero capital gain (sale price equals cost basis) and converts the equity to diversifiable cash. Most CFP-style guidance recommends limiting employer-stock concentration to 10 percent of household net worth.
For employees who hold post-vest shares more than one year and who itemize, donating the appreciated shares directly to a public charity (or donor-advised fund) provides a fair-market-value charitable deduction without recognizing capital gain. This is more efficient than selling and donating cash. The OBBBA standard deduction for 2026 ($16,100 single / $32,200 MFJ / $24,150 HoH) means most taxpayers do not itemize, but high earners with significant charitable intent can stack contributions in alternating years to clear the standard deduction threshold.
Maximize pre-tax 401(k) deferrals from regular salary to bring AGI down before RSU income is added. The 2026 elective deferral limit applies. HSA contributions through payroll reduce both federal income tax and FICA on the contributed amount.
If you also hold incentive stock options (ISOs) at the same employer, exercising ISOs in a year with a large RSU vest can trigger Alternative Minimum Tax exposure. The ISO bargain element is an AMT preference item even when no ordinary income is recognized. Coordinate ISO exercises across multiple years to manage AMT.
These are the patterns we see most often at LMN Tax Inc during March and April return preparation:
The deposit looks like a strong year-end. The engineer takes home roughly $46,260 of vest cash plus 785 shares retained at the $250 vest FMV (about $196,250 nominal value). What is invisible until April: $42,210 of additional federal and California tax is owed by April 15 because the 22 percent federal supplemental rate and the 10.23 percent California supplemental rate both fall short of the engineer's actual marginal brackets. Add an underpayment penalty (roughly 8 percent of the shortfall, prorated) if no quarterly estimate was made.
The fix lands in November, not April. A Q4 estimated payment of about $39,000 to IRS Direct Pay and $3,200 to the California Franchise Tax Board closes both gaps and ends the filing season with a near-zero balance due instead of a $42,000 surprise.
LMN Tax Inc: What We See in March RSU Returns
At LMN Tax Inc, the March RSU conversation runs the same way every year. A senior engineer or product manager arrives with a W-2 showing $300K to $700K of total wages, a Schedule D with broker-reported $0 cost basis on RSU sales, and a question that starts with "why do I owe so much when my employer withholds." The answer has two layers. First, the 22 percent supplemental rate is below the 32 to 37 percent marginal bracket for most senior tech and finance employees. Second, the broker-reported $0 basis on RSU sales is wrong. The vest-day FMV is already in W-2 Box 1, so cost basis must be adjusted upward on Form 8949 to avoid double-counting. Once we correct the basis and add a Q4 estimated payment for the prior year (or apply the safe-harbor estimate to the current year), the return looks normal. The work is mechanical. The trap is that nobody told the employee in advance, and the September equity-compensation training session at the employer almost never covers the under-withholding math. Our standing recommendation for clients with a recurring vest schedule: build the Q4 estimated payment into the November planning calendar and update the W-4 Step 4(c) for the following year to spread the additional tax over the regular paychecks.
Use our RSU Tax Calculator to estimate vest-day federal withholding, the sell-to-cover share count, and the under-withholding gap for your specific marginal bracket. The calculator applies the 2026 Social Security wage base, Medicare, and Additional Medicare thresholds automatically.
If your marginal federal bracket is 24 percent or above, plan a Q4 estimated payment via IRS Direct Pay sized to (Vest Income × (Marginal Rate - 22 percent)) by January 15 of the following year, or update your Form W-4 Step 4(c) to add extra withholding on regular paychecks. Our How to Fill Out W-4 Guide walks through the line items.
If you also receive cash bonuses, the same supplemental rules apply at 22 percent / 37 percent. See our Bonus Tax Calculator and Bonus Tax Withholding Guide for the cash-side mechanics.
For RSU vests that affect anticipated refunds or balance due, project IRS deposit timing using the Refund Date Estimator after you file. For OBBBA provisions that interact with W-2 wages, see the OBBBA Tax Changes Guide.