The bottom line

When your Restricted Stock Units (RSUs) vest, the full fair-market value (FMV) of the shares becomes ordinary income on that day — taxed at your federal marginal rate (10%–37%), plus state, plus FICA (7.65% up to the SS wage base, 1.45% above), exactly like a cash bonus. Your employer typically withholds federal tax at the 22% supplemental rate by selling some of the shares, which is almost always too little for anyone in the 32%, 35%, or 37% bracket. The under-withholding lands as a tax bill at filing time, and a separate, common cost-basis bug then double-taxes the same income on the eventual sale unless you correct it. RSUs do not qualify for an §83(b) election; that's an Incentive Stock Option (ISO) and Restricted Stock Award (RSA) thing, not RSUs.

What an RSU actually is

An RSU is a promise to deliver shares (or cash equivalent) at a future date if a vesting condition is met. The most common condition is continued employment over a 4-year schedule with a 1-year cliff: nothing vests in year 1, then 25% on the cliff, then monthly or quarterly thereafter. Until vest, you have no tax event and no shares — you have a contract.

The day the RSU vests (or, in some plans, settles), the company delivers shares (or pays cash) and the FMV that day enters your taxable wages. Three things happen:

  1. The full FMV is reported on your W-2 box 1 as wages.
  2. Federal + state + FICA withholding is collected by selling some of the vested shares ("net-share" or "sell-to-cover" mechanism). Some companies wire-transfer cash from your bank instead.
  3. Your cost basis in the remaining shares equals the same FMV — the price you "paid" via the wage inclusion.

The 22% withholding trap

Federal tax law lets employers withhold from "supplemental wages" (bonuses, commissions, RSU vests) at a flat 22% rate for amounts up to $1 million per year, or 37% above that. Many employers use the 22% flat rate by default.

Problem: 22% is well below the marginal rate of anyone earning above ~$100k single / ~$200k married. A senior software engineer in California vesting $200k of RSUs in a year with $250k of base salary is in the 32% federal bracket plus ~9.3% California — total marginal ~41%+. The 22% withholding leaves a ~19% under-withholding shortfall on the RSU portion alone.

There are three ways to plug the gap:

  • Increase W-4 withholding on your base salary — set extra federal withholding (line 4c) to make up the shortfall over the year.
  • Pay quarterly estimated tax to the IRS (Form 1040-ES) on the deficit.
  • Save the cash and pay at filing time — but the IRS adds an underpayment penalty if your shortfall is large.

The "safe harbor" rule for avoiding the underpayment penalty: pay at least the smaller of 90% of this year's tax, or 110% of last year's tax (if your AGI was over $150k). Hit either bar via withholding + estimated payments and the IRS doesn't care that the 22% was light.

The cost-basis double-tax bug

Brokerages sometimes report cost basis on the eventual sale of the vested shares as $0 rather than the FMV on vest day. If you don't notice this on your 1099-B, you'll be taxed on the entire sale proceeds as gain, even though the income portion was already reported on your W-2. That's double taxation on the same dollars.

The fix is a Form 8949 adjustment. You override the broker's basis with the correct FMV-on-vest figure and add code "B" (basis reported was incorrect) on Form 8949. Your tax software will usually walk you through this if you upload your 1099-B and W-2 together, but if you file by hand or use a fly-by-night service, you have to do it yourself.

How to confirm the correct basis: pull your year-end RSU statement from your equity portal (E*Trade, Fidelity, Schwab, Carta, etc.). It lists every vest event with the FMV and the number of shares delivered (after net-share withholding). Sum the FMVs of unsold lots and reconcile against the broker's 1099-B.

Why §83(b) doesn't apply

§83(b) lets you elect to be taxed now on the FMV of unvested property — paying tax up front in exchange for starting the long-term capital gains clock immediately. It applies to Restricted Stock Awards (RSAs) and to certain early-exercised stock options, where the property has been transferred to you subject to forfeiture.

RSUs are not transferred property until vest — they're a contractual right to future shares. The §83(b) election therefore can't be made on RSUs. Anyone telling you to "file an 83(b) on your RSUs" is wrong about the instrument or the law (or both).

The closest analog for early-stage stock option holders is to exercise early (before vest) using a plan that allows it; the early-exercised shares are restricted property that can take an §83(b) election. Most public-company RSU plans don't offer this.

Worked example

You're a senior engineer at a public company. On 2026-03-15 your first RSU tranche vests:

  • 1,000 shares delivered.
  • Closing price 2026-03-15: $200/share.
  • FMV income at vest: 1,000 × $200 = $200,000 added to W-2 box 1.

Withholding (employer net-share):

  • Federal supplemental: 22% × 200,000 = $44,000 → 220 shares sold.
  • California supplemental: 10.23% × 200,000 = $20,460 → 102.3 shares sold.
  • FICA SS: 6.2% × 200,000 (assuming under wage base) = $12,400 → 62 shares sold.
  • FICA Medicare: 1.45% × 200,000 = $2,900 → 14.5 shares sold.

(In practice the broker rounds up to whole shares.)

You receive ~601 shares, basis $200/share, total basis $120,200.

Your actual federal marginal rate is 32% (you also have $250k of base). On the $200k RSU income:

  • Owed federal: 32% × 200,000 = $64,000.
  • Withheld: $44,000.
  • Shortfall: $20,000.

Set aside the 100 shares you'd otherwise sell, or pay quarterly estimated tax of $5,000/quarter through the year, to land safe-harbor.

Six months later the stock has fallen to $180. You sell 200 shares to fund a down payment:

  • Proceeds: 200 × 180 = $36,000.
  • Basis: 200 × 200 = $40,000.
  • Short-term capital loss: $4,000.

If your 1099-B mistakenly shows basis $0, your tax software would compute a $36,000 short-term gain — taxed again at 32% — instead of the correct $4,000 loss. Always reconcile.

What this means for planning

  • Don't budget RSUs at face value. Half of a vest is gone to tax + FICA + state. Apply your effective tax rate, not the headline FMV.
  • Diversify on vest. Most planners recommend selling vested shares immediately and reinvesting per your target allocation. Concentrated employer-stock exposure has burned a lot of post-IPO employees who held everything in their one ticker.
  • Plan for under-withholding. Especially in a year you cross from W-4 default to a top bracket. The under-withholding accrues silently and shows up as a 5-figure surprise.
  • Reconcile every 1099-B against your W-2 and equity statement. The cost-basis bug is the single most common RSU tax error.
  • The vest day matters. If you can choose your vest schedule (some plans let you defer to a later date), and you expect a meaningfully higher or lower tax year, this can be worth thousands.

RSUs aren't free money. They're deferred-and-then-instant ordinary income, with a withholding gap and a double-tax trap on the back end. Treat them like a bonus — because that's exactly what the IRS treats them as.