An RSU vest feels like a bonus until the following April, when the IRS informs you that you underpaid by four figures. The shares are real and the income is real, but so is a tax bill almost nobody flags at offer-signing. None of this is complicated. It’s just counterintuitive in the exact spots where being wrong is expensive.
Start with what a restricted stock unit is once it vests. The fair market value of the shares on the vest date is ordinary income, taxed like salary. A hundred shares vesting at $200 is $20,000 of W-2 wages. There’s no special equity rate and no capital gains break at vesting. You were paid $20,000 of compensation that happened to arrive as stock instead of cash.
The withholding gap is what actually bites
Your employer has to withhold tax on that vest, and RSUs count as supplemental wages. The default federal withholding on supplemental wages is a flat 22% up to $1,000,000 of such income in a year, then 37% above that line. Twenty-two percent sounds fine until you line it up against what an engineer actually earns.
If your base salary is $160,000, you’re already above the top of the 22% federal bracket before any shares vest. Every RSU dollar stacks on top of that salary and falls into your 24%, 32%, or 35% marginal bracket. The company still withholds 22%. The shortfall is invisible until you file, and it compounds with state tax, which most employers also under-withhold on vests.
Say $40,000 vests in a year your marginal rate is 32%, which is common once total comp climbs.
| On a $40,000 vest | Amount |
|---|---|
| Federal withheld at the 22% supplemental rate | $8,800 |
| Actually owed at a 32% marginal rate | $12,800 |
| Federal shortfall, before any state tax | $4,000 |
At a $160,000 base the gap is only a couple of points, annoying but survivable. For a senior engineer whose vests push total comp past $250,000, the distance between 22% and a 32% or 35% marginal rate runs ten points or more on every vest. Multiply that across a year of vesting and a state like California or New York, and the April surprise reaches well into five figures. The fix is unglamorous: bump your W-4 withholding, or make quarterly estimated payments, so you’re covering the real marginal rate instead of the flat 22%. A mid-year projection, or a short conversation with a CPA, beats finding out when you file.
Sell-to-cover, and why you still owe more
Most companies handle vest-day tax through sell-to-cover or net share withholding: they sell or hold back enough shares to pay that 22%, and you keep the rest. People watch shares disappear and assume the taxes are handled. They saw 22% handled. If your real rate is 32%, the other ten points are yours to settle later, and the brokerage confirmation won’t spell that out.
FICA stacks on top of all of this. RSU income is subject to Social Security tax up to the annual wage base, Medicare at 1.45%, and the additional 0.9% Medicare tax once your wages cross $200,000. None of it is optional, and none of it shows up as a line you’ll think about until you reconcile the year.
The 1099-B mistake that makes you pay twice
This is the one that quietly overcharges people who do their own taxes, and even some who hand it to a preparer who isn’t paying attention. When you sell vested shares, your broker issues a 1099-B reporting the sale. The problem is the cost basis on that form.
Brokers like Fidelity, Schwab, and E*TRADE are not permitted to report the ordinary-income portion of your shares as cost basis on the 1099-B. So the form frequently shows a basis of $0, or a basis that only includes what you paid out of pocket, which for RSUs is nothing. Copy that number onto your return and you get taxed a second time on income you already paid ordinary tax on at vesting.
Make it concrete. Your shares vested at $200 and you sold them a week later at $205. You already paid ordinary income tax on the full $200 when they vested, and it’s sitting in your W-2. The only thing that should be taxed on the sale is the $5 of gain per share. But if the 1099-B says your basis is $0, your return treats the entire $205 as a capital gain. On a few thousand shares that error is real money.
The correct basis is the fair market value on the vest date, the same figure that hit your W-2. You report the sale on Form 8949, enter the proceeds and the broker-reported basis, then use the adjustment column with code B to correct the basis up to the vest-date value. Most brokers include a supplemental statement, usually buried in the last pages of the 1099-B package, that lists the adjusted basis per lot. Find that statement before you file. If your software imported the raw 1099-B, check that the gain on each RSU lot looks like a small number rather than the whole sale price.
Holding shares out of fear of a tax you already paid
A surprising number of engineers hold vested RSUs because they think selling triggers a big tax event. At vest you already paid ordinary income tax on the full value. Selling the same day adds essentially nothing, because there’s been no gain since the vest. The default move, selling at vest and putting the cash into something diversified, is the right one for most people, and it’s the choice the tax code is closest to neutral about.
Holding is a bet, not a tax strategy. If you keep the shares and they rise, the gain since vesting is a capital gain: short-term and taxed as ordinary income if you held under a year, long-term at lower rates past a year. The long-term rate is genuinely better. But waiting a year to save on taxes while one company makes up a large slice of your net worth is the kind of trade that looks clever right up until the stock drops 30% in a quarter. The tax tail shouldn’t wag the concentration-risk dog.
There’s a timing wrinkle worth knowing too. If a grant vests in a year you also exercise options or take a large bonus, all of it stacks, and a vest you assumed was covered at 22% can be sitting in a 35% reality. The people who get burned usually got burned in their highest-income year, when the distance between 22% and their actual marginal rate was widest.
The engineers who lose the most to RSU taxes rarely made a bold, wrong bet. They assumed the vest-day withholding had them covered, took a 1099-B at face value, and held shares out of a tax fear that didn’t apply. None of those require bad luck, only trusting that the defaults were set up in your favor, which they weren’t. Run a mid-year projection, treat the cost basis on every RSU sale as guilty until checked, and confirm the current brackets and your own withholding with a CPA, because these numbers shift and your situation is yours alone.
Line up the rest of your job search: