Free Stock? Almost. What to Expect, What It Costs, and How to Plan for Your RSUs

Your offer letter said something like "1,000 restricted stock units vesting over four years," and you nodded like you knew exactly what that meant. Then the first batch showed up, it was smaller than you expected, your paycheck stub looked like a ransom note, and in April your tax preparer asked if you were sitting down. Welcome to the RSU club. Let's walk through what to expect, how the taxes work, and how to plan so the IRS isn't the only one celebrating.

First, what is an RSU?

A restricted stock unit is a promise from your employer to give you shares of company stock later, as long as you meet certain conditions, usually sticking around. Until the units vest, you do not own anything. No shares, no dividends, no voting, and if you leave early, the unvested units generally stay behind with your badge.

Vesting schedules come in a few flavors. A common one is four years with a one year "cliff," meaning nothing vests in year one and then a chunk vests all at once, followed by quarterly or annual pieces. Private companies often use "double trigger" RSUs, which need both time served and a liquidity event like an IPO or sale before anything vests. Your grant agreement is the rulebook, and yes, it is worth reading.

What actually happens on vest day

On vest day, the units turn into real shares and land in your brokerage account, usually at the company's plan administrator. You will probably notice fewer shares than you expected. That is because most companies use "sell to cover," automatically selling some of your shares to pay the tax withholding.¹ The value of everything that vested also shows up as wages on your W2, right next to your salary.

Here is the key idea for everything that follows: the day your RSUs vest is a payday. The IRS sees it exactly as if your employer handed you a cash bonus and you immediately used it to buy company stock.

Taxes, part one: vesting is income

When RSUs vest, the fair market value of the shares is taxed as ordinary income, the same as salary.¹ Restricted property is not taxed until it is no longer subject to a substantial risk of forfeiture, which is fancy IRS language for "until you can't lose it."² That income is also subject to Social Security tax (up to the 2026 wage base of $184,500) and Medicare tax, including the extra 0.9% Medicare tax on wages over $200,000.^3,4

You may have heard of the 83(b) election, the move where you choose to be taxed early on restricted stock. Unfortunately, it is not available for RSUs.¹ Nice try, though.

The withholding gap (a.k.a. the April surprise)

Here is where most people get bitten. RSU income is treated as "supplemental wages," the same bucket as bonuses. For those, the IRS gives employers a choice: withhold at an optional flat rate of 22%, or add the amount to your regular paycheck and withhold on the total. Many equity plans default to the 22% flat rate, and some let you pick a higher rate. Once your supplemental wages for the year pass $1 million, the choice goes away and the rate is a mandatory 37%.³ The problem is that 22% is often a lot less than your actual tax bracket.

Let's run a quick example. Say you are single, earn a $200,000 salary, and $150,000 of RSUs vest in 2026. Using the 2026 tax brackets and standard deduction, those RSUs push your taxable income from about $184,000 to about $334,000, through the 24% and 32% brackets and into the 35% bracket.⁵ The federal income tax on the RSUs works out to roughly $48,900. Your employer withheld 22%, or $33,000. That leaves about $15,900 still owed, and that is before your state takes its share.

The withholding did exactly what it was designed to do. It just was not designed for you.

The IRS safe harbor works like this: you avoid an underpayment penalty if your withholding and estimated payments cover at least 90% of this year's tax or 100% of last year's tax, whichever is smaller.⁶ If your adjusted gross income last year was over $150,000, which describes a lot of RSU households, that prior year number becomes 110%.⁷ So for many people reading this, the target is 110% of last year's tax. Big vest years are where people fall off this cliff without noticing.

Taxes, part two: when you sell

Once the shares are yours, they behave like any other stock. Your cost basis is the value of the shares on the day they vested, since you already paid income tax on that amount.¹ From there:

• Sell right away and there is little or no additional gain, so little or no additional tax.
• Sell within a year and any growth above your basis is a short term gain, taxed at ordinary income rates.
• Hold more than a year and the growth is a long term gain.⁸ For 2026, long term gains are taxed at 0% for taxable income up to $49,450 single or $98,900 married filing jointly, 15% up to $545,500 single or $613,700 joint, and 20% above that.⁹ Higher earners may also owe the 3.8% net investment income tax.⁸

One more thing to know: your holding period generally starts when the shares are deposited in your account, not the day you received the grant.¹

The double tax trap hiding in your 1099B

This one costs people real money every year. The Form 1099B from your brokerage may show a cost basis of zero, or a basis that does not include the income already taxed on your W2.¹ If you or your tax software take that number at face value, you pay tax on the same dollars twice. The IRS instructions for Form 8949 tell you to report the basis as shown and then fix it with an adjustment in column (g), using code B.¹⁰ Translation: keep your vest statements, and make sure whoever prepares your return knows you have RSUs.

How to plan for your RSUs

Ask the "would I buy it?" question. If your employer handed you a $150,000 cash bonus, would you put all of it into company stock? If the answer is no, that is a strong hint to sell at least some shares at vest. Because your basis equals the vest price, selling right away usually adds little extra tax. Holding RSU shares is really a brand new decision to invest in your employer, and your job already has you pretty invested in your employer.

Fix the withholding before April does it for you. You can bump up withholding on your regular paycheck through a new Form W4, make quarterly estimated payments, or ask whether your plan lets you elect a higher withholding rate on vests. Withholding has a nice perk that estimated payments do not: unless you choose otherwise, the IRS treats it as paid in four equal installments across the year, even if most of it came out of your December paychecks.⁷ Estimated payments only count on the date you actually send them.

Watch the concentration. RSUs pile up quietly. Four years of grants plus an ESPP plus company stock in your 401(k) can turn one ticker into a big slice of your net worth. If that sounds familiar, our article on concentrated positions walks through the risks and some tax smart ways to unwind.

Mind the wash sale rule around vest dates. Selling company shares at a loss within 30 days before or after a new vest can trigger a wash sale, which delays your ability to use that loss.¹¹ Put your vest dates on the calendar before you go tax loss harvesting.

Know your trading windows. Many companies only let employees sell during open windows, usually after earnings are announced. If you are an insider, a Rule 10b5-1 trading plan lets you set up future sales in advance. Plans now come with a cooling off period of at least 90 days for directors and officers and 30 days for other employees before trades can begin.¹²

Use the income spike to your advantage. A big vest year is a great year to max out your 401(k), front load a donor advised fund, or give older appreciated shares to charity instead of cash. Deductions are worth more when your income is at its highest.

The bottom line

RSUs are a fantastic benefit, and we are big fans of this additional compensation. They are paychecks that happen to arrive as stock, with a tax bill that often runs bigger than the withholding. At Swan Wealth we look at your vesting schedule, withholding, and investment plan together so vest day feels like a win instead of a tax pop quiz. If you have RSUs vesting soon, or you just opened a 1099B that made no sense at all, give us a call.

This is general education, not personalized tax or investment advice. How your RSUs should be handled depends on your grant terms, tax bracket, state, and the rest of your portfolio, so let's look at your numbers before your next vest date.

Sources

1. Charles Schwab, "Restricted Stock and Performance Stock Taxes: A Guide": RSUs taxed as ordinary income at vest and delivery, sell to cover withholding, cost basis equal to fair market value at vest, holding period starting when shares are deposited, 1099B basis that may not reflect W2 income, and 83(b) elections not eligible for RSUs. schwab.com/learn/story/rsu-taxes-and-psu-taxes
2. IRS, Publication 525, "Taxable and Nontaxable Income," Restricted Property section. irs.gov/publications/p525
3. IRS, Publication 15 (Circular E), "Employer's Tax Guide" (2026), Section 7: optional flat rate or aggregate method for supplemental wages, 22% flat rate, or 37% on supplemental wages over $1 million, and the 2026 Social Security wage base of $184,500. irs.gov/pub/irs-pdf/p15.pdf
4. IRS, "Topic no. 560, Additional Medicare Tax": 0.9% on wages over $200,000 single or $250,000 married filing jointly, with employers withholding on wages over $200,000. irs.gov/taxtopics/tc560
5. IRS, "IRS releases tax inflation adjustments for tax year 2026, including amendments from the One, Big, Beautiful Bill": 2026 tax brackets and standard deduction of $16,100 single and $32,200 married filing jointly. Example calculated by Swan Wealth from these figures and is federal income tax only. irs.gov/newsroom
6. IRS, "Topic no. 306, Penalty for underpayment of estimated tax." irs.gov/taxtopics/tc306
7. IRS, Form 1040 ES, "Estimated Tax for Individuals" (2026): 110% prior year rule for AGI over $150,000, and IRS, "Instructions for Form 2210": withheld federal income tax is considered paid one fourth on each payment due date unless you show otherwise. irs.gov/pub/irs-pdf/f1040es.pdf and irs.gov/instructions/i2210
8. IRS, "Topic no. 409, Capital gains and losses": long term holding period of more than one year and reference to the net investment income tax. irs.gov/taxtopics/tc409
9. IRS, Revenue Procedure 2025 32, Section 4.03: 2026 maximum zero rate and 15% rate amounts for capital gains. irs.gov/pub/irs-drop/rp-25-32.pdf
10. IRS, "Instructions for Form 8949": reporting an incorrect basis from Form 1099B and correcting it with code B and an adjustment in column (g). irs.gov/instructions/i8949
11. Fidelity, "7 rules for selling company shares to raise needed cash": restricted stock or RSUs vesting within 30 days before or after a loss sale generally treated as a wash sale. fidelity.com
12. U.S. Securities and Exchange Commission, "Fact Sheet: Rule 10b5-1 Insider Trading Arrangements and Related Disclosure": cooling off periods for directors, officers, and other persons. sec.gov/files/33-11138-fact-sheet.pdf