Restricted Stock Units (RSUs) are a popular part of compensation packages for executives and high earners. They can be a powerful way to build wealth when you’re employed by a growing company, but many people don’t realize RSUs often come with hidden implications, like a potential tax bill much larger than they expect.
Uncle Sam doesn’t wait to collect taxes once a year, instead employers withhold a certain amount (that you can adjust) from your standard W2 wages to cover your tax burden throughout the year. If you’ve ever wondered whether your employer is withholding enough taxes on your RSU income, the short answer is they’re probably not.
Under withholding is incredibly common, and the consequences can hit hard when you file your tax return.
Here’s why it happens, what it could cost you, and how to plan ahead so your vested shares remain a wealth-building opportunity rather than a tax-time headache.
When your RSUs vest, the fair market value of the vested shares on your vesting date is treated as ordinary income tax – just like your salary or bonus. That value gets added to your taxable income for the year, potentially bumping you into a higher tax bracket.
For example, if your company stock vests with a fair market value of $100,000, that full amount is taxed as income in the year it vests. That means it’s subject to federal income tax, state income tax, Social Security, and Medicare taxes in conjunction with the rest of your income.
Here’s where it gets tricky. Most employers withhold taxes on RSUs using a flat supplemental income tax rate, often around 22% for federal income tax.
However, if the value of your grant will push your total annual compensation over $1 million, they’ll withhold at the highest marginal rate of 37%, but those are of course rarer.
For reference, here’s a quick look at the current marginal federal tax rates for 2025:
|
Tax Rate |
Single |
Married Filing Jointly |
Head of Household |
|
10% |
Up to $11,275 |
Up to $22,550 |
Up to $16,550 |
|
12% |
$11,276 – $45,900 |
$22,551 – $91,800 |
$16,551 – $63,100 |
|
22% |
$45,901 – $98,750 |
$91,801 – $197,500 |
$63,101 – $100,500 |
|
24% |
$98,751 – $191,950 |
$197,501 – $383,900 |
$100,501 – $191,950 |
|
32% |
$191,951 – $243,725 |
$383,901 – $487,450 |
$191,951 – $243,700 |
|
35% |
$243,726 – $609,350 |
$487,451 – $731,200 |
$243,701 – $609,350 |
|
37% |
Over $609,350 |
Over $731,200 |
Over $609,350 |
If your actual income tax rate is higher than what was withheld, or if your filing status and other income sources push you into a higher bracket, you’ll owe additional taxes when you file.
Many professionals don’t realize their employer’s RSU tax withholding might not fully cover:
It’s important to note that this increased wage income from RSUs besting can push other income into higher tax brackets as well, namely causing higher rates for long-term capital gains and dividends/interest within your investment portfolio.
Notably, for people at or nearing age 65, it could also have an unexpected impact on Medicare premiums (IRMAA), as well as your ability to claim certain tax credits and/or deductions.
Sound complicated yet? These tax nuances are just one of the many reasons you shouldn’t tackle complex equity compensation alone. Consider hiring a wealth manager for peace of mind when it comes to your RSU tax strategy.
Underwithholding isn’t just an inconvenience. It can significantly disrupt your financial decisions and goals for the year.
Imagine this: your employer withholds 22% federal income tax on a grant worth $100,000. That’s $22,000 withheld. But if your effective tax rate is closer to 35%, you’ll owe an additional $13,000 when you file your tax return.
That unexpected bill can derail plans for reinvesting, paying down debt, or simply feeling confident in your cash flow. Worse, you could also face IRS underpayment penalties if you haven’t been paying enough in estimated taxes throughout the tax year.
Once your RSUs vest, they become like any other company stock you own. If you hold onto them and the stock price increases, any future gain is treated as a capital gains tax event when you sell the stock.
Deciding when to sell RSUs is a key financial decision. Holding vested shares means you’re taking on market risk tied to a single company stock, while selling can trigger tax consequences that need planning.
RSU taxation is rarely simple because it depends on:
That’s exactly why we created a simple tool to help you cut through the noise.
Our RSU Tax Estimator is an Excel-based tool designed to give you clarity on your tax obligations:
This estimator won’t replace personalized tax advice, but it will help you see your potential tax exposure before tax time hits.
Your RSUs are part of your compensation package, but without proactive tax planning, they can create more stress than opportunity.
While you can’t control the amount of RSU income that hits your tax return each year, you may have an opportunity to accelerate income or deductions elsewhere on your tax return to take advantage. A skilled and tax-aware wealth manager can help you with this.
When you integrate RSU income and potential capital gains into your broader financial plan, you can:
While tools like our estimator provide a helpful starting point, RSU planning is layered with complexity. A trusted financial advisor can:
RSUs can be a meaningful part of your wealth-building strategy – but proactively planning ahead for the taxes that come with them is key.
Download our RSU Tax Estimator today to get clarity on your tax exposure and ensure your financial plan stays on track.
And when you’re ready to go beyond the basics, our team is here to help you build a personalized strategy that turns your equity compensation into long-term confidence.