Tax
Restricted Stock Unit (RSU)
A grant of company shares that vests over time and is taxed as ordinary income at vest, at the market value of the shares delivered. The dominant equity comp instrument at public companies and later-stage private companies.
RSUs are taxed as ordinary W-2 income on the FMV at vesting. The employer typically withholds shares to cover the tax (often at 22% federal supplemental, which is usually too low for high earners).
After vest, the employee owns the shares. Subsequent appreciation/depreciation is capital gain/loss, measured from the FMV at vest — the vest-day FMV becomes the cost basis for the shares.
The 22% supplemental withholding is the number that trips high earners. A senior engineer or exec in a 35%+ marginal bracket has 13+ percentage points of underwithholding on every vest; by December of a large-vest year they can owe $50k-$200k at April 15 unless they made a manual estimated payment, a 4th-quarter W-4 adjustment, or a same-year sale of vested shares to fund the tax. Modeling this in Q1 for the full year is the difference between an on-time filing and an underpayment penalty.
Double-basis is the reconciliation trap that catches every wave of first-time RSU holders. The W-2 already includes the vest-day FMV as wages. The 1099-B from the brokerage reports the sale but historically showed cost basis as $0 (the option cost), so the tax return would tax the same income twice. IRS Form 8949 has a specific adjustment (code B) for this — but tax software only catches it if the user marks the sale as employer-share activity. Every professional-services CPA sees this misfile every March.
For pre-IPO RSUs (double-trigger vesting: time + liquidity), the wait for the liquidity event compounds the tax bill. When the IPO or acquisition finally trips the liquidity event, years of vested-but-not-taxed shares all hit W-2 income in one year — a $10M single-year W-2 is not unheard of for early employees of a large-outcome exit. Financial planning starts with 83(b) at grant if allowed (rare for RSUs), diversification via 10b5-1 plans post-liquidity, and QSBS planning where the company qualifies.
Common pitfalls
- Under-withholding at vest leads to large balances due at filing
- Mistakenly cost-basis-doubling on the W-2 income in the 1099-B reconciliation
- Ignoring the pre-IPO double-trigger bill — years of vested RSUs all become taxable in the liquidity year
- Not modeling the single-vest year impact on the marginal AMT / SALT / phaseout cliffs (Medicare surtax, NIIT, QBI, etc.)
- Selling vested shares to cover tax at the wrong time, missing a wash-sale window if the same equity was recently bought or sold
Related service
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Federal, state, and local returns prepared and reviewed by a licensed CPA, with the planning done before year-end rather than after it.