What are RSUs (Restricted Stock Units) and How do You Maximize Tax Efficiency

Restricted stock units (RSUs) are a form of equity compensation linked to the value of your employer’s stock price. They’re called “restricted” because you’ll need to meet certain conditions – typically a set length of employment – before the shares vest and become yours. While RSUs can represent a significant portion of your compensation, it’s important to consider their tax implications: RSUs can trigger a hefty tax bill when the shares vest, and again when you sell them. Planning ahead can help you avoid surprise taxes and make the most of your compensation. To help you get started, here’s what you should know about RSUs taxation and RSU financial planning.  

Quick facts:

• Restricted stock units represent an unsecured promise by your employer to deliver shares of stock (or the cash equivalent) to you at a future date, subject to vesting criteria.¹‍
• RSUs are taxed as ordinary income when they vest, based on the fair market value of the shares at that time.
• When you sell your RSU shares, any increase in value is subject to short-term or long-term capital gains tax, depending on how long you hold them.
• If you leave the company before your RSUs have vested, you typically forfeit any unvested shares.
• Effective stock-based compensation tax strategies can help you improve your investment returns and keep more money in your pocket.

What are RSUs?

RSUs are company shares your employer may grant you as part of your compensation package. Unlike stock options, which give you the right to buy company stock at a fixed price, RSUs are shares that become yours once you meet conditions, typically a time milestone. (Performance stock units, or PSUs, are similar offerings tied to specific performance goals, such as the company’s initial public offering, or IPO.)

Vesting schedules are typically time-based, so you’ll need to work at the company for a set period before your shares vest. For example, you might be granted 1,000 RSUs that vest over four years, with 25% of the RSUs (250 in this example) vesting each year. If you leave the company before meeting the vesting criteria, you’ll generally forfeit any unvested shares.

RSUs have some key differences compared to other types of stock-based compensation, such as stock options and employee stock purchase plans (ESPPs). For example, RSUs always have value at vesting, while stock options can be worthless if the stock’s price falls. RSUs also are granted for free by your company, whereas you’ll pay to acquire shares via stock options or ESPPs.

Tax implications of RSUs

RSUs can trigger considerable taxes, so it’s important to plan ahead for your tax bill(s).

RSUs are not taxable on the grant date (the date the company “promises” the RSUs to you). Instead, when RSUs vest, the shares’ fair market value is included on your W-2 as taxable income and taxed as ordinary income at your state and federal tax rate. The added income can push you into a higher tax bracket, raising your overall tax burden. After the vesting date, income from RSUs is subject to payroll taxes (Social Security and Medicare) and, if applicable, the Additional Medicare Tax, further increasing your tax liability.²

Long-term capital gains tax considerations

RSUs might also be taxed when you sell them. If you sell your shares immediately upon vesting, you’ll (theoretically) owe zero capital gains tax because the share value won’t have an opportunity to increase. However, if you sell your shares later, any gains are subject to short-term or long-term capital gains tax, depending on how long you held them (your cost basis is the price at vesting):³

• Shares held for a year or less are subject to short-term capital gains tax, taxed at your ordinary income tax rate.
• Shares held for more than a year are subject to long-term capital gains tax, typically taxed at the more favorable capital gains rate.

Withholding and tax liability

The IRS considers RSUs supplemental income (i.e., payments made to an employee that aren’t regular wages).⁴ As such, it’s subject to mandatory federal withholding rates of 22% for income up to $1 million, and 37% at higher income levels.⁴ However, that amount may not cover your entire tax obligation, especially if the vested shares push you into a higher tax bracket. This means you could owe additional taxes and underpayment penalties when you file your return.

There are a few common ways to cover tax withholding obligations:

• Your company sells some of your vested shares to cover your tax obligation.
• Your company sells all your vested shares, withholds the necessary taxes and gives you the remaining cash.
• You pay the withholding out of pocket and keep 100% of your vested shares.

It’s important to check your tax bracket and estimate your total tax liability. If you expect tax withholding to be insufficient, consider setting aside additional funds to cover any shortfall or making quarterly tax estimates. You may want to consult a tax advisor for advice on your specific financial situation.

Common challenges in managing RSUs

RSUs can be valuable components of your compensation package, but they aren’t without challenges. Here are a few to consider.

Concentration risk

Holding too much of your wealth in your employer’s stock increases concentration risk – the likelihood that you’ll experience amplified losses from having a large portion of your holdings in a particular investment, asset class or market segment.⁵ It can be helpful to think of your RSUs as a cash bonus: Would you buy your company’s stock with that money or invest it elsewhere? If the answer is no, consider selling the shares and diversifying your holdings or freeing up cash for other spending goals.

Market Volatility and timing sales

You can’t change the vesting schedule of your RSUs, so you can’t control when you owe taxes on your vested shares. Similarly, stock prices fluctuate continuously, so you can’t control the stock’s value when your shares vest, which determines your basis for any future capital gains tax. What you can control is whether you hold onto or sell your vested shares. Here are a few strategies to consider:

• If you think your company’s share price will increase, consider holding your shares for at least a year after vesting to take advantage of any growth and the more favorable long-term capital gains tax.
• If you think share prices will drop, consider selling immediately at vesting to lock in the value and ensure your tax bill is covered.
• To spread out your tax liabilities, consider selling your shares in stages (a strategy called dollar-cost averaging) over time.

Overlooked tax implications

RSUs are taxed as ordinary income when they vest, which can increase your total taxable income and push you into a higher tax bracket. This means you could owe more taxes and even lose eligibility for certain deductions or credits. If that describes your situation, consider maxing out your 401(k) and HSA contributions, making charitable contributions, setting up a college fund for the kids and selling other investments at a loss (tax-loss harvesting) to reduce your overall tax liability.

Real-world examples of RSU management

High tax burden due to RSU vesting

Remember, the fair market value of your RSU shares is included on your W-2 as taxable income upon vesting. This can significantly impact your tax bill, especially if it bumps you into a higher tax bracket. Because you know when vesting occurs, some planning can help lower your taxable income and tax liability. For example, you could:

• Max out your 401(k) and IRAs.
• Contribute to a health savings account (HSA).
• Fund a 529 college savings plan for your kids or grandchildren.
• Contribute to a dependent care flexible spending account (DCFSA) if you have child or adult daycare expenses.6
• Make charitable contributions to support your favorite causes.
• Take full advantage of tax credits and deductions, such as the mortgage interest and medical expense deductions.

By lowering your taxable income for the year, you can offset some of the tax burden created by your vested shares.

Diversification to reduce risk

Diversification is the equivalent of not putting all your eggs in one basket. It reduces the risk of major losses resulting from too much exposure to a single security or asset class, especially if those assets are uncorrelated, meaning they aren’t affected by market forces in the same way.⁷ With an outsized number of shares of your company’s stock, you’re exposed to risks like leadership changes, economic instability and sudden setbacks, such as scandals and regulatory changes, which could spell financial trouble for you.⁸

Rather than holding onto your shares, consider selling at least a portion of them immediately upon vesting to limit your exposure. Doing so will also provide funds to reinvest in assets that align with your financial goals or put toward building an emergency fund, making a down payment for a house, or another spending goal.  

Working with a financial advisor

Professional help with RSU management can make a big difference in your finances. A financial advisor can guide you on when to sell, how to reinvest and how to use your RSUs to meet your goals. A tax professional can help you plan for taxes, avoid surprises and make sure you're not paying more than necessary. With expert advice, you can reduce risk, keep more earnings and create a solid plan for your future.

Bottom line

RSUs can be a substantial part of your compensation, but they can have unexpected financial burdens if you aren’t proactive. Strategic planning – such as selling shares to cover your taxes, making estimated tax payments and diversifying your investments – can help you manage these challenges effectively. By understanding how RSUs work and consulting financial and tax professionals, you can maximize the benefits while avoiding costly surprises at tax time.

Investment advisory and financial planning services offered through Summit Financial, LLC, an SEC Registered Investment Adviser, doing business as Conway Wealth Group (4 Campus Drive, Parsippany NJ 07054. Tel. 973-285-3600). Neither Summit Financial nor Conway Wealth Group provide tax or legal advice. 7785018.1

1. Internal Revenue Service, “Equity (Stock) - Based Compensation Audit Technique Guide.”  (June 2024)
2. Internal Revenue Service, “Social Security and Medicare Taxation of Equity Compensation.” (June 2024)
3. Internal Revenue Service, “Topic no. 409, Capital Gains and Losses.”
4. Internal Revenue Service, “Publication 15 (2025), (Circular E), Employer’s Tax Guide.” (2025)
5. Financial Industry Regulatory Authority (FINRA), “Concentrate on Concentration Risk.” (June 2022)
6. Federal Flexible Spending Account Program (FSAFEDS), “Dependent Care FSA.”
7. Financial Industry Regulatory Authority (FINRA), “Asset Allocation and Diversification.”
8. Plancorp, “The Most Common RSU Mistakes – And How to Avoid Them.” (January 2025)

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