To retain top talent and encourage optimal performance, many companies are offering very generous employee compensation packages. And these could include restricted stock units (RSUs).
These could provide a great deal of value. But they can also leave you open to major risk, especially when it comes to taxes. So it’s crucial that you understand how RSUs work.
What Are RSUs?
RSUs are shares of company stock that are granted to certain employees. But they aren’t 100 percent yours until they’re fully vested. Vesting can happen after you’ve stayed with the company for a certain period of time or after meeting certain performance goals. But they typically have to do with time.
And there are two main types of vesting schedules.
Cliff vesting: This is when all your RSUs vest at a specific point. For instance, you may be granted 1,000 RSUs that vest after two years of employment.
Graded vesting: This means that your RSUs vest at different time intervals. For example, you may be granted 1,000 RSUs. And 25 percent (250 shares) vest each year over a four-year period.
But once they vest, the RSUs become actual shares of stock. And you can do as you please with them. You can sell your shares and use the proceeds to help you buy a home, open a business, pay off high-interest debt, etc.
Upon vesting, however, RSUs can leave you open to serious tax consequences if you’re not careful.
So let’s take a closer look.
How Are RSUs Taxed?
At the moment RSU’s vest, they are treated as ordinary income at their fair market value on the vesting date. This means it’s taxable income that’s added to your W2 for the year in which the RSUs vested.
But your employer must also withhold portions for the following taxes: federal, state, local, and payroll (e.g., Social Security and Medicare).
And here is where it can get tricky, especially when it comes to federal taxes. The default federal withholding rate of 22 percent may not be enough to foot the bill if you’re in the higher tax brackets in a range of 24–37 percent for 2026. And if you’re getting RSUs, chances are you’re finding yourself in there.
This can raise some concerns if several shares vest at a high price. For example, say 2,000 RSUs vested at $200 each. That’s $400,000 in additional taxable income.
But you can also face taxation if your shares increase in value and you sell them down the road. In this case, you’d owe capital gains taxes on the appreciation of those shares.
For instance, say the share price increased to $250 in six months and you sold all your shares. That means you’d sell for $500,000. And you’d owe capital gains taxes on the appreciation or $100,000 ($500,000–$400,000).
But there are ways to minimize the tax impact of RSUs. So let’s explore.
Sell-to-Cover
Once your shares vest, you can immediately sell enough shares to cover the taxes beyond what your employer withheld. And some companies let you surrender enough stock back to the firm to cover taxes due.
Moreover, you can ask your human resources department if you can adjust your RSU withholding rate to better align with your actual tax bracket.
However, these moves would leave you with less shares that could benefit from potential growth in the future.
Hold for More Than a Year
If you hold onto your RSUs for longer than a year and then sell them for more than their vesting price, you’d face the more favorable long-term capital gains tax rates. These are zero percent, 15 percent, or 20 percent, depending on your income.
If you hold onto your RSUs for a year or less and then sell, your capital gains rates would be the same as your ordinary income tax rates. This can be as high as 37 percent.
And the effective rate can be larger for high earners if they trigger the net investment income tax (NIIT).
Still, if your income puts you in the 20 percent long-term bracket and you cross into NIIT territory, your effective rate would be 23.8 percent. That’s still lower than the highest short-term rate of 37 percent.
But remember that in both cases, we’re assuming your shares increase in value. Nothing is certain. Company turmoil or market volatility could force your shares to drop and you could be selling at a loss after holding on to them.
Max Out Tax-Deferred Accounts
By maximizing contributions to tax-deferred accounts like 401(k)s, IRAs, and health savings accounts (HSAs), you can sharply reduce your taxable income.
These moves could offset the extra income from your vested shares. And by reducing your taxable income, you can also lower your marginal tax rate and therefore your overall tax burden.
Here are some 2026 tax-deferred account contribution limits at a glance:
- 401(k)s if under 50: $24,500
- 401(k)s if 50 or over: $32,500
- 401(k)s if 60–63: $35,750 (if the plan allows)
- IRAs if under 50: $7,500
- IRAs if 50 or over: $8,600
- HSA for single coverage: $4,400
- HSA for family coverage: $8,750
Relocation
So far, we’ve focused on federal taxes and capital gains. But you could also face major state and local tax burdens. So it could help to consider moving to a state with no income tax before your shares vest. However, it’s also important to go over residency rules in the place you’re eying with a qualified tax adviser.
Diversification
RSUs can pose other concerns that stretch beyond taxation.
If your vested shares hold a lot of weight, they could push your portfolio off balance. In some cases, you’d be overconcentrated in your company’s stock. This could leave you open to significant risk should your company stock and/or the overall stock market take a plunge.
You can work around this by diversifying your portfolio across various asset classes such as stocks, bonds, and alternative investments (e.g., real estate) in order to limit exposure to one particular asset class. In fact, many advisers recommend you don’t devote more than 10 percent of your portfolio to a single stock.
You could sell portions of your vested shares and use the proceeds to buy securities in other asset classes to diversify your portfolio.
The Bottom Line
RSUs can certainly add value to your overall financial plan. But if you’re not careful, RSUs can also pose major tax risks and overconcentration in your portfolio. You may mitigate these risks by selling-to-cover, holding your shares for more than a year, and by diversifying your portfolio. But the right way to use RSUs would vary depending on your unique financial situation and goals. So it’s important to discuss RSUs with a qualified financial adviser.
The Epoch Times copyright © 2026. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
