Key Takeaways
- You pay tax on RSUs when they vest, not when your employer grants them. The fair market value of your shares becomes ordinary income when they vest, even if you don’t sell them.
- The default 22% withholding often isn’t enough. Many high-income tech employees owe more because their marginal tax rate exceeds the standard supplemental withholding rate.
- Selling your shares is a separate tax event. You generally calculate your capital gain or loss using the share value at vesting as your cost basis.
- Stock options are taxed differently from RSUs. Exercising incentive stock options can trigger the Alternative Minimum Tax even when no cash changes hands. Qualified Small Business Stock (QSBS) can exclude a significant portion of capital gain from federal tax. It rarely applies to RSUs, though it can apply to certain early-exercised option shares.
- Planning before your next vest can reduce surprises. Tech employees have more options when they review withholding, estimated tax payments, stock sales, and multi-state tax exposure before year-end. Waiting until tax season leaves fewer choices.
Why RSUs Catch So Many Tech Employees Off Guard
If a significant part of your compensation comes in restricted stock units (RSUs), there’s a good chance you’ve experienced this before. Your shares vest. Your employer withholds taxes. Everything seems taken care of. Then tax season hits you with an unexpected tax bill.
Equity compensation has become a common part of pay packages across the tech industry, but it often catches employees off guard at tax time. One of the biggest surprises we see among tech professionals who receive RSUs is that the taxes withheld when their shares vest often aren’t enough. Many employers satisfy the federal withholding requirement using the supplemental wage withholding rules. High-income employees frequently owe considerably more than that default withholding. The result is an unexpected tax bill that many people don’t see coming.
The good news is that once you understand when RSUs are taxed, the planning opportunities become much clearer. However, understanding the rules is only the first step. The bigger question is whether your employer’s default approach matches your overall tax situation. For many high-income tech employees, it doesn’t. Several factors can influence your final tax bill. Your withholding election, the timing of future vesting events, bonus payments, stock sales, and even where you live all play a role. Looking at each vest in isolation often means missing planning opportunities that only become obvious when you model the full tax year.
How Tech Companies Tax RSUs: Grant, Vest, and Sale
Nearly every misunderstanding about RSUs comes from confusing three different events.
Grant
When your employer grants RSUs, nothing taxable happens. A grant simply represents a promise that you’ll receive company shares in the future if you meet certain conditions, usually continued employment over a vesting schedule. Since you don’t yet own the shares, there’s no income to report and no tax to pay.
This is the standard structure at large public tech employers. Google, Amazon, Apple, Meta, and Microsoft all grant RSUs on this same basic timeline.
Vest
For most public-company RSUs, tax is due when the shares vest. Under IRS rules, you generally recognize the fair market value of the vested shares as ordinary compensation income.
For example:
- 200 RSUs vest.
- Your company’s share price is $150 per share.
- The fair market value of the vested shares is $30,000 (200 × $150), generally treated as ordinary compensation income.
- Your employer generally includes the value in your Form W-2 along with your other compensation for the year.
Whether you immediately sell the shares or decide to hold them for years doesn’t change this initial tax treatment. The income is generally taxable when the shares vest and are delivered to you. For most employees, this is where their tax liability begins.
Sale
Selling your shares creates an entirely separate tax event. Once you’ve paid ordinary income tax when your RSUs vest, those shares become an investment just like any stock you purchase on the market.
When you eventually sell them, you’ll either realize a capital gain or a capital loss. Your basis is the value that was already taxed at vesting, so you don’t start counting gain from zero. Keeping these two taxable events separate eliminates most of the confusion surrounding RSUs.
Why Tech Employees Often Owe More Tax on RSUs
This is where many high-income employees get caught. When RSUs vest, employers generally treat the income as supplemental wages. For 2026, federal withholding is generally:
- 22% on supplemental wages up to $1 million from that employer during the calendar year.
- 37% on supplemental wages above $1 million.
Most employers use what’s known as sell-to-cover, where your employer automatically sells enough shares to satisfy the required withholding. However, the amount withheld doesn’t always match the tax you’ll ultimately owe.
For example:
- Your RSUs vest with a fair market value of $200,000.
- Your employer withholds 22%, or $44,000, for federal tax.
- If your combined taxable income places you in the 35% marginal tax bracket, your federal tax on that income could be approximately $70,000.
- This leaves a potential $26,000 shortfall before considering state income taxes or other factors.
Many employees assume they only have two choices: accept the default withholding, or pay the balance when filing their return. In reality, there are several ways to manage the shortfall. Some employees increase payroll withholding or make quarterly estimated tax payments. Others intentionally keep the lower withholding because they qualify for an IRS safe harbor, or because they’d rather keep more cash invested throughout the year. The right approach depends on your projected income, cash flow, and overall tax position, not the withholding percentage alone.
This is especially common among employees who receive substantial RSU compensation or large annual bonuses. It’s also common for those in the 32%, 35%, or 37% federal income tax brackets. Your final tax bill depends on your total income, filing status, deductions, credits, and state tax rules, not just the amount your employer withholds.
The Surtaxes Many Employees Forget: Medicare and Net Investment Income Tax
An RSU vest doesn’t just increase your ordinary income tax bill. It can also trigger two additional taxes that many employees don’t expect until they prepare their return.
- The Additional Medicare Tax is a flat 0.9%. It applies to earned income, meaning wages and self-employment income, above $200,000 for single filers or $250,000 for married couples filing jointly. RSU income counts as wages, so it’s subject to this tax. Your employer generally starts withholding it once your wages from that employer alone cross $200,000, but the real threshold is based on your household total. Married couples with two incomes can end up over-withheld or under-withheld, depending on how their individual paychecks compare to their combined return.
- The Net Investment Income Tax, often called NIIT, is a separate 3.8% tax on investment income: interest, dividends, capital gains, and rental income. It applies once your modified adjusted gross income crosses those same $200,000 or $250,000 thresholds.
Your RSU compensation itself isn’t investment income, so the 3.8% doesn’t apply directly to an RSU settlement. But it shows up in two indirect ways. First, a large equity year can push your total income well above the threshold. This pulls the rest of your portfolio, dividends, interest, and any capital gains from other investments, into the 3.8% net for that year. Second, when you eventually sell your vested shares, the appreciation since vesting is a capital gain. If you’re above the threshold, that gain is generally subject to the 3.8%, on top of the regular capital gains rate.
Stack all of this together, and the numbers add up fast. A high earner in a tax state can see a combined marginal rate in the high 40s to low 50s percent on equity income. In a no-tax state, that number drops meaningfully, one more reason residency and sourcing matter so much.
The Capital Gains on RSUs
When your RSUs vest, the value of the shares on that date becomes your starting point for future tax calculations. Many people assume they’ll pay capital gains tax on the entire sale price when they eventually sell their shares. It doesn’t really work that way.
For example:
- Your RSUs vest when the share price is $150.
- You later sell the shares for $180.
- The first $150 per share was already taxed as ordinary compensation income when the shares vested.
- Only the additional $30 per share may be subject to capital gains tax.
Your holding period also begins on the vesting date, not the grant date. If you sell within one year of vesting, any gain is generally taxed as a short-term capital gain. Hold for more than one year, and you may qualify for the more favorable long-term capital gains rates. That’s the standard timeline for public-company RSUs. Pre-IPO employees are usually working on a different clock entirely.
Double-Trigger RSUs: What You Need to Know
Many mature startups and pre-IPO tech companies use a different type of equity award known as a double-trigger RSU. Unlike traditional RSUs, a double-trigger RSU delays taxation until two events occur. First, you complete the required vesting period by remaining employed for the period specified in your RSU agreement. Second, the company experiences a liquidity event, such as an IPO or acquisition, that lets employees receive or sell their shares.
This structure is designed to help employees avoid paying tax before they can generally sell their shares. But it can also create a different planning challenge. Several years’ worth of RSUs can become taxable at the same time following an IPO or acquisition. Employees may then suddenly recognize a substantial amount of ordinary income and land in a higher marginal tax bracket. State income tax complications often follow, and lock-up periods after the IPO can compound the liquidity problem.
There’s a less obvious version of this same risk worth watching for. Some companies stay private far longer than a typical vesting schedule assumes. When that happens, they sometimes simply remove the liquidity condition from their RSU agreements, converting double-trigger RSUs into single-trigger ones. The moment that change takes effect, every year of already time-vested RSUs settles and becomes taxable at once. That can generate a large amount of ordinary income with very little advance notice. If your equity team communicates any change to how your RSUs settle, treat it as a tax event with a deadline, not a routine plan update.
Planning ahead matters here. Understanding when you should expect to pay tax on your RSUs gives you more time to prepare for the potential impact. Contact us to build a Capital Gains tax strategy.
RSU Tax Planning for Tech Employees
Every equity compensation package is different. Once you understand how RSUs are taxed, the next step is reviewing your income, vesting schedule, and long-term financial goals. Start with these fundamentals.
Make Sure You’re Paying Enough Tax
One of the most common mistakes is assuming your employer has withheld enough tax. As we’ve covered, the default withholding rate often falls short for higher-income earners. Depending on your situation, you may need to increase payroll withholding, make quarterly estimated tax payments, or set aside cash from each vest to cover the difference. Reviewing your projected tax liability before year-end can help you avoid an unexpected bill or underpayment penalties.
Decide Whether to Hold or Sell Your Shares
After your RSUs vest, you’ll need to decide whether to keep or sell your shares. Holding your employer’s stock for more than one year may qualify future gains for long-term capital gains treatment. However, it also increases your exposure to a single company, especially if your salary, bonus, and equity compensation all come from the same employer.
Tax is only one part of the decision. Many employees already rely on the same company for their salary, annual bonus, and retirement contributions. Holding a large amount of employer stock can further concentrate that risk. Others have strong conviction in their company’s long-term prospects and are comfortable with that concentration. The right decision depends on your financial goals, investment strategy, and risk tolerance, not just the tax implications. Reviewing the investment and tax sides together usually leads to better decisions than considering either one alone.
Consider Other Planning Opportunities
Depending on your circumstances, additional strategies may help reduce your tax exposure. These can include donating appreciated shares to charity or reviewing state tax rules if you’ve lived or worked in more than one state during your vesting period.
If you relocate before a significant vesting event, don’t assume moving automatically changes where your RSU income is taxed. Residency and sourcing are two separate tests, and clearing one doesn’t clear the other. Residency determines which state taxes your overall income, and is generally based on where you live and how many days you spend there. Sourcing determines which state can tax income you earned by working within its borders, even if you’re not a resident there.
For equity compensation, sourcing is often based on the number of workdays you spent in a particular state between grant and vest. This means someone who relocates to a no-income-tax state can still owe tax elsewhere. Say they occasionally travel to their employer’s headquarters in a state that does have income tax. The equity income tied to those workdays can still be taxed there. Even employees who have permanently relocated may still need to file returns in more than one state. Reviewing workday records before a major vest can often prevent surprises later.
The earlier you review your situation, the more proactive you can be about tax savings opportunities.
How Incentive Stock Options Are Taxed Differently From RSUs
If your equity package includes stock options rather than, or in addition to, RSUs, the next concern isn’t about the taxes you’ll owe. It’s when to exercise. That decision can significantly affect both your current tax bill and your long-term tax outcome.
The first distinction that matters is between two types of options.
- Non-qualified stock options, or NSOs, work a lot like RSUs. When you exercise, the difference between your strike price and the current fair market value is often called the spread. That spread is taxed as ordinary income right away. Your employer generally reports it on your W-2, the same as RSU income at vest.
- Incentive stock options, or ISOs, work differently, and that difference is where most of the planning opportunity and most of the risk live. When you exercise ISOs and hold the shares, there’s generally no regular income tax due at exercise. But the spread between your strike price and the current value doesn’t disappear. It becomes what the IRS calls a preference item for the Alternative Minimum Tax, a separate tax calculation running quietly alongside your regular return.
For example:
- Your strike price is $5 per share.
- The stock is currently valued at $70 per share.
- You exercise 5,000 shares.
- The spread is $65 per share, or $325,000 total.
- You may owe no regular income tax on this amount at exercise, but it generally counts toward your Alternative Minimum Tax calculation for the year.
That’s a substantial number to generate on paper, from shares you likely can’t sell yet if your company is still private.
Why the Alternative Minimum Tax Catches ISO Holders Off Guard
The Alternative Minimum Tax runs a second version of your return alongside the regular one. It adds back certain preference items, including the ISO spread, and applies its own rate structure. You then pay whichever amount is higher, your regular tax or your Alternative Minimum Tax.
Here’s the part that surprises people. A large ISO exercise in a year when your regular income is otherwise unremarkable can push your Alternative Minimum Tax well above what you’d expect. Typically because there’s little regular tax to offset it. Counterintuitively, the opposite can happen in a year when your ordinary income is already high, say from a large RSU settlement. That income can absorb more of the ISO preference before the Alternative Minimum Tax kicks in, since your regular tax is already elevated. This is exactly why an ISO exercise shouldn’t be a one-time decision made in isolation. It generally works best modeled year by year, often in tranches, against your full income picture.
There’s also a holding-period rule attached to ISOs. To get full capital gains treatment on the entire gain, rather than ordinary income, you generally need to meet two holding requirements. You must hold the shares more than two years from the grant date, and more than one year from the exercise date. Sell sooner, and the sale may become what’s known as a disqualifying disposition, which can convert some or all of the gain back to ordinary income.
For employees at private companies, this holding-period math has to line up with when you’ll actually be able to sell. Timing here depends on whenever an IPO, acquisition, or company-arranged sale eventually arrives. Planning the exercise and the expected liquidity timeline together is generally the difference between a well-executed strategy and an expensive surprise.
QSBS: A Valuable Exclusion, But One RSUs Rarely Qualify For
Qualified Small Business Stock, often shortened to QSBS, is one of the more generous provisions in the tax code. Under Section 1202, it can exclude a significant portion, sometimes all, of your capital gain from federal tax when you sell qualifying stock.
The rules recently became more favorable. Stock acquired after July 4, 2025, generally qualifies for a tiered exclusion rather than an all-or-nothing standard. A portion of the gain is excluded at three years of holding, and more at four years. The full exclusion applies at five years or more. The company size limit and the per-person exclusion cap were also both raised.
Here’s where it gets complicated for tech employees specifically. QSBS has to be stock issued directly by a qualifying company while that company was still under the size ceiling. By the time RSUs at a large, mature company settle, the company is almost always well past that ceiling, so newly settled RSU shares generally don’t qualify. Shares from stock options you exercised early, back when the company was still small, are a different story and may qualify.
If you were an early employee somewhere and still hold exercised shares, or you’re considering an early exercise now, it’s worth having someone check whether QSBS applies. Don’t assume it doesn’t, and don’t assume it does, without checking first.
What Happens When You Owe Tax on Stock You Can’t Sell
This is one of the most difficult situations tech employees face: owing a real tax bill on shares they still can’t sell because the company remains private.
You generally have two paths. The first is to let the company withhold or sell enough shares to cover the tax. You end up with fewer shares, but no cash to find and no liability hanging over you. For most employees, this is the more conservative and sensible default, especially if you’re already heavily concentrated in your employer’s stock through salary, bonus, and equity.
The second path is to elect lower withholding, keep more shares, and cover the tax another way. You do this because you believe the stock will be worth significantly more later. That’s a legitimate strategy for some people. But be honest about what it is: a leveraged bet on your employer’s stock, not a tax-planning technique.
If you need cash to cover a bill on illiquid stock, the realistic options generally run in this order by cost:
- IRS safe harbor rules. Effectively free if you can structure your withholding to meet the prior-year safe harbor and pay the balance by the filing deadline.
- A securities-based line of credit. Often the next cheapest option if you have a separate liquid investment portfolio, since private company stock usually can’t be used as collateral.
- A home equity line of credit or loan. Often the most accessible secured option if your home is your other major asset.
- An IRS installment agreement. A workable solution, but generally the most expensive and one that requires full financial disclosure above certain balances.
Interest on these options generally isn’t tax-deductible when the proceeds are used to pay a personal tax bill. The decision comes down to cost, collateral, and how much flexibility you’re willing to give up.
Common RSU and Equity Planning Mistakes
We see the same issues repeatedly among tech employees receiving equity compensation.
- Employer withholding often gets treated as the final word, when it’s really just a default that may not match your actual tax bracket.
- Tax season is frequently the first time anyone estimates the real liability, rather than the last chance to adjust it.
- A concentrated employer stock position sometimes goes unreviewed for years, even as it grows into a meaningful share of someone’s net worth.
- Moving states doesn’t necessarily change where RSU income is taxed, but plenty of employees assume it does.
- Stock options are sometimes assumed to work exactly like RSUs, an assumption that can produce an unwelcome Alternative Minimum Tax surprise or an overlooked QSBS opportunity.
Many of these situations are easier to address before the next vesting event than after the tax year has ended.
How Fusion CPA Can Help
Equity compensation planning is rarely about a single vesting event. Fusion CPA works with employees receiving RSUs, stock options, and other equity awards. That work includes projecting tax liabilities before shares vest or are exercised, and reviewing withholding strategies. It also covers estimating quarterly tax payments, evaluating multi-state tax exposure, and coordinating equity compensation with broader financial planning. This applies to employees at public companies with ongoing vesting, and those at pre-IPO companies preparing for a liquidity event.
Contact us to build a tax strategy around your equity compensation before your next vesting or liquidity event
Frequently Asked Questions (FAQs)
Why did I still owe taxes after my company sold shares to cover withholding?
Most employers use the default federal supplemental withholding rules, which generally withhold 22% on supplemental wages up to $1 million per employer during 2026. If your marginal tax rate is higher, that withholding may not fully cover your tax liability. You could end up with an unexpected balance due when you file your tax return.
Are ISOs taxed the same way as RSUs?
No. RSUs are generally taxed as ordinary income when they vest, regardless of whether you sell. ISOs work differently. Exercising and holding them generally triggers no regular income tax. But the spread between your strike price and the current value can trigger the Alternative Minimum Tax instead. Selling before meeting the ISO holding-period requirements can also convert part of the gain back to ordinary income.
Does QSBS apply to my RSUs or stock options?
Usually not for RSUs. QSBS applies to stock issued directly by a qualifying company while it was still under the size ceiling set by the tax code. By the time RSUs at a large company settle, the company is almost always past that ceiling. Early-exercised stock option shares are more likely to qualify, and it’s worth checking rather than assuming either way.
Can moving to another state reduce tax on my RSUs?
Possibly, but it’s rarely that straightforward. Many states tax RSU income based on where you earned the award during the vesting period rather than where you live when your shares vest. If you move during that time, more than one state may have taxing rights, making advance planning important.
This article is provided for general informational and educational purposes only and does not constitute tax, legal, accounting, or financial advice. Tax laws change and apply differently depending on your specific circumstances. Nothing here creates a client relationship with Fusion CPA, and it should not be relied upon or acted on without consulting a qualified professional about your own situation. To discuss how these rules apply to you, contact Fusion CPA at info@fusiontaxes.com.