Restricted stock units and the tax at vesting

How it works

Nothing is taxed at the grant. On each vesting date, the number of shares vesting times the market price is added to the worker's wages on the W2, and the employer withholds income tax, Social Security tax up to this year's official social security wage base (not yet verified here; see the official source below), and Medicare tax, usually by selling or holding back some of the shares. Federal withholding on this kind of pay is often taken at a flat rate of this year's official supplemental wage withholding percent (not yet verified here; see the official source below), which can be below the worker's actual marginal rate, so a balance can be due in April. The worker's cost basis in the shares is the vesting date value already taxed. A later sale produces a gain or loss measured from that basis, long term if held more than a year after vesting. Selling on the vesting day produces almost no gain, since the basis and the price are the same.

What it gives

The shares are real pay with no purchase price, and they can be sold at once.

The basis equals the amount already taxed, so a sale at vesting creates no extra tax.

Vesting value is reported on the W2, so there is no separate form to file for the vesting itself.

What it costs, or where the catch is

Tax is owed at vesting even if the worker keeps the shares and the price later falls.

Flat rate withholding often undershoots the real tax for a high earner.

Holding vested shares concentrates the worker's pay and savings in one company.

A worked example

Ada has 400 units vest when the stock is $50, so $20,000, which is 400 times $50, is added to her wages. Her basis in those shares is $50 each. She sells 200 of them a year and a half later at $62 for a long term gain of $2,400, since 200 times $12 is $2,400. Because her marginal rate is 32 percent and withholding was taken at a lower flat rate, she owes about $2,000 more in April on the vesting itself.

Where it goes wrong

The common miss is treating vested shares as if they had never been taxed and reporting a gain on the full sale price, which taxes the same $20,000 twice.

Who confirms it for you

For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS Publication 525, Taxable and Nontaxable Income. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.