If you work at a company that offers equity as part of your pay, you may have heard the term RSU. Restricted Stock Units are one of the most common types of equity compensation today. Tech companies, financial firms, and large corporations use them to attract and keep employees. But many people don’t fully understand how they work or what to do when they vest.
What Is an RSU?
An RSU, or Restricted Stock Unit, is a promise from your employer to give you company stock at a future date. You don’t receive the shares immediately. Instead, they are held in a restricted account and delivered to you over time according to a vesting schedule.
RSUs are not the same as stock options. With options, you have the right to buy shares at a set price. With RSUs, you receive actual shares automatically once they vest. You don’t pay anything to get them.
How Do RSUs Work?
The Grant
When your employer awards you RSUs, they announce a grant of a certain number of units. For example, they might grant you 1,000 RSUs. This is not 1,000 shares yet. It’s a promise of 1,000 shares, subject to conditions.
The Vesting Schedule
RSUs vest over time. A common schedule is four years with a one-year cliff. After one year, 25% of your RSUs vest (250 shares). After that, the remaining 75% vest monthly or quarterly over the next three years. If you leave before the cliff, you forfeit all your RSUs. If you leave after the cliff, you keep the vested shares but lose the unvested ones.
Delivery of Shares
Once RSUs vest, your company delivers the shares to your brokerage account. At that moment, the shares are yours and you can hold them, sell them, or do whatever you want with them.
How RSUs Are Taxed
This is where many people get surprised. RSUs are taxed as ordinary income when they vest, not when you eventually sell the shares.
At Vesting
On the day your RSUs vest, the value of the shares is added to your taxable income. Your employer will withhold taxes, usually by selling a portion of your shares to cover the tax bill. This is called “sell-to-cover” withholding. You’ll see it on your W-2 at the end of the year.
Example: If 500 RSUs vest and the stock price is $20 per share, you have $10,000 in ordinary income. You’ll owe federal income tax, Social Security, and Medicare on that amount.
When You Sell
When you later sell the shares, you owe capital gains tax on any increase from the price at vesting. If you sell within a year of vesting, short-term capital gains rates apply. If you hold for more than a year before selling, long-term capital gains rates apply, which are usually lower.
RSU vs. Stock Option vs. ESPP
| Feature | RSU | Stock Option | ESPP |
|---|---|---|---|
| Cost to receive | Free (no purchase) | Exercise price | Discount purchase |
| Value at zero stock price | Zero | Zero (worthless) | Zero |
| Tax at vesting | Ordinary income | Varies (ISO vs NSO) | Varies |
| Tax when sold | Capital gains on appreciation | Capital gains | Capital gains |
| Risk | Low (you always get the shares) | Higher (stock must exceed strike price) | Low (purchase at discount) |
| Typical at | Public tech companies | Startups | Large public companies |
What Should You Do When Your RSUs Vest?
Option 1: Sell Immediately
Many financial advisors recommend selling RSUs shortly after they vest. Your employer already represents a significant financial risk in your life through your job. Holding large amounts of company stock adds concentration risk. If the company struggles, you could lose your job and watch your stock decline at the same time.
Selling immediately also makes tax reporting simpler since there’s little price difference between the vesting price and the sale price.
Option 2: Hold for Long-Term Gains
If you believe strongly in your company’s future and want to convert some of the ordinary income into lower long-term capital gains, you might hold the shares for more than a year after vesting. This can save you money on taxes if the stock price rises. But it adds risk if the stock falls.
Option 3: Sell Enough to Cover Taxes, Hold the Rest
Some employees sell just enough shares to pay the taxes owed at vesting, then hold the remaining shares. This is a middle-ground approach.
Common RSU Mistakes to Avoid
- Ignoring the tax impact. RSU income can push you into a higher tax bracket. Plan ahead so you’re not surprised at tax time.
- Over-concentrating in company stock. No more than 10 to 15% of your net worth should be in a single stock, including your employer’s.
- Forgetting about vesting dates. Put your vesting dates in your calendar and plan what you’ll do before each date.
- Not updating your tax withholding. If your RSU income is large, your standard withholding may not be enough. Talk to a tax advisor about making estimated quarterly payments.
Should You Negotiate RSUs?
Yes, especially at larger tech companies. RSUs are often negotiable as part of a job offer. You can ask for a larger grant, a shorter vesting cliff, or accelerated vesting upon a change of control such as an acquisition. Research what is standard at the company level and be prepared to make a case based on your market value.
This article is for educational purposes only and does not constitute financial or tax advice. Consult a qualified tax professional or financial advisor before making decisions about your RSUs.