What Happens to Your RSUs at Vest

Your first restricted stock unit (RSU) tranche is about to vest, and the paycheck math around it can be confusing: shares show up in your account, some of them seem to disappear immediately, and the withholding never quite matches what you expected. This article walks through what actually happens on the vest date, why the withholding on your pay stub is usually too low, and how to decide whether to sell the shares you keep or hold them — the decisions that matter before your next tax return is due.

What happens when my RSUs vest?

On the day a tranche of restricted stock units vests, your employer delivers the shares to a brokerage account in your name — there is no purchase and no decision to make at that moment; the vesting itself is the taxable event. The number of shares times their fair market value on the vest date becomes ordinary compensation income, reported in Box 1 of your W-2 exactly like your salary, even though you never received cash for it. Because this income is compensation, not investment income, your employer is required to withhold federal income tax, Social Security and Medicare tax, and any state tax that applies, at the moment the shares vest — before you have sold anything. Most equity plans handle this through "sell to cover": the plan automatically sells enough of the newly vested shares to cover the withholding, and deposits the remaining shares into your account. Some plans instead reduce the number of shares delivered to you in the first place (net share settlement), which produces the same economic result. Either way, the shares that land in your account after vest are already net of the withholding your employer calculated — but, as the next section explains, that withholding is often not the full amount you will actually owe.

Why was so little tax withheld on my vest?

Your paycheck withholding on ordinary wages is calculated using the graduated brackets and the allowances on your W-4, but RSU income is treated as a "supplemental wage" for withholding purposes, and supplemental wages are withheld differently. Instead of running the vest income through your normal W-4 calculation, most employers apply a flat percentage rate set by the IRS to the value of the vested shares — a rate designed for administrative simplicity, not for matching your actual tax bracket. If your combined federal and state marginal tax rate on that income is higher than the flat supplemental rate your employer applied, the withholding on your pay stub understates what you will eventually owe, and the difference becomes due when you file. This gap tends to be largest for people whose base salary alone would already put them in a higher bracket, since the flat rate does not adjust for your other income at all. The size of the shortfall scales directly with the value of the vest: a small vest early in your career may create only a small gap, but a large vest — especially one on top of a full salary — can create a bill large enough to trigger an underpayment penalty if you do nothing about it before your return is due.

Should I sell my shares at vest or hold them?

The moment your RSUs vest, your cost basis in the shares resets to their fair market value on that date — the same value your employer already taxed as compensation income. If you sell immediately at that same price, you generally have little or no additional capital gain or loss to report, because you are selling at (or very close to) your basis; the tax on the compensation portion was already handled through withholding. That makes selling at vest close to a tax-neutral decision, not a tax-saving one and not a tax-costly one. What selling immediately does accomplish is converting employer stock into diversified cash before it has a chance to become a concentrated position. Holding the shares instead is a bet on your employer's stock specifically, on top of the bet you already have through your salary and career depending on the same company — a concentration decision, not a tax decision. There is no tax penalty for holding vested shares; whatever they do from here is simply a new investment, with its own new holding-period clock starting at vest. Whether to hold should be evaluated the same way you would evaluate buying that much of any single stock with cash today, separate from the vesting event itself.

How do I cover the shortfall before April?

If your employer's flat-rate withholding on a vest fell short of what you actually owe, you have two mechanical ways to close the gap before your return is due: increase the withholding taken from your regular paychecks for the rest of the year, or send the IRS an estimated quarterly payment covering the shortfall. Increasing your paycheck withholding works because the IRS treats withholding as paid evenly across the year regardless of when it was actually withheld, so a lump-sum increase in your final paychecks can retroactively cover an earlier vest's shortfall. Sending an estimated payment instead is more precise if the vest happened well before a quarterly deadline, since it lets you pay closer to when the income was actually earned. Which approach makes sense — and how large a payment or withholding change you need — depends on your full tax picture for the year: your marginal bracket, any other income, and how many additional vests you expect before year-end. Waiting until you file your return to deal with the gap risks both a larger cash surprise and a potential underpayment penalty, so the calculation is worth doing as soon as you know a vest is coming, not after it happens.

What is my cost basis after a vest?

Your cost basis in newly vested RSU shares is the fair market value used to calculate your compensation income on the vest date — not zero, and not what the company originally granted the units at. That basis, and the vest date itself, both matter later: the basis determines your capital gain or loss whenever you eventually sell, and the vest date starts the holding-period clock that determines whether a later sale qualifies for long-term treatment. The most common and costly mistake happens on the 1099-B your broker sends after a sale: brokers are not always required to include the compensation portion in the basis they report, so the 1099-B box can show a basis of zero or far lower than your real basis. If you use that number as-is on your tax return, you will pay tax a second time on income your employer already reported on your W-2. Before filing, compare the 1099-B basis to your own vest-date records — your equity plan's transaction history typically shows the fair market value used at vest — and correct the basis on your return whenever the two numbers disagree.

Key numbers (2026)

• Flat withholding rate on supplemental wages — the IRS sets a flat 22% federal withholding rate for supplemental wages, including RSU vests, up to $1,000,000 of supplemental wages in the calendar year (IRS Pub 15).
• Mandatory rate above $1,000,000 — once your cumulative supplemental wages for the year cross $1,000,000, the excess must be withheld at a mandatory flat rate of 37%, the top individual income-tax bracket, instead of the standard 22% (IRS Pub 15).
• Social Security wage base — Social Security withholding stops once your year-to-date wages cross the 2026 Social Security wage base of $184,500 (IRS Pub 15).
• Additional Medicare Tax — an extra 0.9% Medicare tax applies to wages above $200,000 in a calendar year, regardless of filing status, and your employer must begin withholding it once your wages from that employer cross the threshold (IRS Pub 15).
• Long-term holding period — a later sale of shares you already own qualifies for long-term capital gains treatment once you have held them for more than one year (IRS Topic No. 409).

Current as of 2026-09

Sources

• IRS Publication 15 (Circular E), Employer's Tax Guide — https://www.irs.gov/publications/p15
• IRS Publication 525, Taxable and Nontaxable Income — https://www.irs.gov/publications/p525
• IRS Topic No. 409, Capital Gains and Losses — https://www.irs.gov/taxtopics/tc409

Sample content for demonstration purposes — not financial advice.