RSU tax comes in two stages. When your restricted stock units (RSUs) vest, the US taxes the market value of the shares as ordinary income, the same way it taxes your salary. When you later sell the shares, the US taxes only the change in price since the vest date, as a capital gain or loss.
That is how RSUs are taxed in outline. Two problems cause most of the surprises. Your employer usually withholds less tax at vest than you owe. Your brokerage tax form can also make the same income look taxable a second time.
How RSUs are taxed at vest
An RSU is a promise from your employer to give you a share of company stock on a future date, as long as you still work there. You owe nothing when the RSUs are granted. Tax starts on the vest date, which is the day the shares become yours.
On that day, your employer multiplies the number of shares by the market price and adds the result to your wages. The amount appears in Box 1 of your Form W-2 along with your salary.
It is subject to federal income tax, Social Security tax (6.2% up to the annual wage limit) and Medicare tax (1.45%, plus an extra 0.9% on wages above $200,000). It is also subject to state income tax if your state has one.
Your visa status rarely changes this. The substantial presence test is a day-count test that makes most work visa holders US tax residents. If you are on an H-1B or L-1 and meet that test, or you hold a green card, you are taxed on RSU income the same way a US citizen is.
You owe this tax whether or not you sell. If the share price falls after the vest date, the income on your W-2 stays the same. The fall becomes a capital loss when you sell.
Why withholding on RSUs often falls short
The IRS treats RSU income as supplemental wages, a category that also includes bonuses. Most employers withhold federal income tax on supplemental wages at a flat 22%. Once your supplemental wages for the calendar year pass $1 million, the rate on the excess is 37%.
The 22% rate is a withholding rule. It has no link to your actual tax rate. If your salary and RSUs together put you in the 24%, 32% or 35% federal bracket, each vest leaves a gap between what your employer withheld and what you owe. You pay that gap when you file your return.
Most employers collect the withholding by keeping back some of your shares, often called sell-to-cover or net settlement. You see fewer shares arrive in your brokerage account than the number that vested. Your taxable income is still based on the full number that vested.
A large gap can also lead to an underpayment penalty. In general you avoid the penalty if your withholding and estimated payments for the year cover at least 90% of this year's tax, or 100% of last year's tax. The second figure is 110% if last year's adjusted gross income was above $150,000.
You can close the gap by asking payroll for extra withholding on your salary through Form W-4, or by making quarterly estimated tax payments.
A worked example
Suppose 400 RSUs vest when the share price is $150, and your total income puts you in the 32% federal bracket. Your employer keeps back 150 shares to cover all withholding (federal, Social Security, Medicare and state) and delivers 250 shares to you. A year and a half later you sell the 250 shares at $180.
| Step | Calculation | Amount |
|---|---|---|
| Income at vest (on your W-2) | 400 x $150 | $60,000 |
| Federal income tax withheld | 22% of $60,000 | $13,200 |
| Federal income tax owed at 32% | 32% of $60,000 | $19,200 |
| Federal shortfall due at filing | $19,200 - $13,200 | $6,000 |
| Cost basis of the 250 shares you kept | 250 x $150 | $37,500 |
| Sale proceeds | 250 x $180 | $45,000 |
| Long-term capital gain | $45,000 - $37,500 | $7,500 |
The $6,000 shortfall is federal income tax only. State tax varies and is left out.
Cost basis and the 1099-B double-counting mistake
Cost basis is the amount the tax system treats you as having paid for a share. For RSU shares, your basis is the market value on the vest date, because you already paid income tax on that value through your W-2. In the example, the basis is $150 a share.
After you sell, your broker sends Form 1099-B, which reports the sale to you and the IRS. For RSU shares, the cost basis on this form is often shown as zero or left blank. If you or your tax software copy that figure onto your return, the full $45,000 of proceeds is taxed as a gain.
The true gain is $7,500. The other $37,500 was already taxed as wages in the year of the vest, so you would pay tax on it twice.
Your broker normally issues a second document that shows the adjusted basis for each sale. It is usually called a supplemental statement or stock plan tax supplement. Use that figure, and report the correction on Form 8949, the form that lists each sale and feeds into Schedule D.
Keep your vest confirmations, which show the price and date for every lot. If you reported a zero basis in past years, an amended return may recover the overpaid tax.
Capital gains when you sell later
Your holding period starts the day after the vest date. If you sell one year or less after the vest, any gain is short-term and taxed at your ordinary income rates. If you hold for more than one year, the gain is long-term and taxed at 0%, 15% or 20%, depending on your taxable income. Higher earners may also owe the 3.8% net investment income tax on the gain.
Sell at vest or hold
Selling at vest does not reduce the tax on the vest itself. That tax is fixed once the shares vest. If you sell the same day, your gain or loss is close to zero, so the sale adds almost no further tax.
Holding is therefore a separate investment decision. Keeping vested shares has the same result as taking a cash bonus and using it to buy company stock at today's price. Your salary, your future RSUs and often your visa already depend on this one company.
The reason to hold is the lower long-term rate on any growth after the vest. That benefit applies only to the growth, and the price can drop while you wait. A common approach is to sell enough at each vest to cover the tax shortfall and keep company stock to a set share of your savings.
If you move back to India while RSUs are still vesting
RSUs that were granted while you worked in the US and vest after you move to India can be taxed by both countries. The US generally treats RSU income as earned over the period from grant to vest. It can claim the part linked to the days you worked in the US even if you have left. India may tax the same vest, depending on your residential status there in that year and where you worked during the vesting period.
The tax treaty between the two countries and foreign tax credits exist to reduce double taxation. How they apply depends on your dates, your employer's payroll setup in each country and your status under each country's rules. A green card adds another complication, because you remain a US tax resident until you formally give the card up.
Get advice before you move, because your move date and vesting schedule affect the result. Our returning NRI planning service covers this. Retirement accounts raise similar questions, covered in 401(k) tax after you return to India.
Use an RSU tax calculator before the vest date
You can estimate the shortfall in advance from your salary, the shares vesting, an assumed share price and your filing status. Our free RSU tax calculator and planner compares the tax owed on each vest with the amount likely to be withheld. That shows how much to set aside or add to your withholding.
Common questions
Do I pay tax on RSUs if I never sell the shares?
Yes. The vest triggers the income tax. Selling only decides when the later gain or loss is taxed.
Why is my RSU income on my W-2 and on my 1099-B?
The W-2 reports the value at vest as wages. The 1099-B reports the sale proceeds. They overlap only if the basis on the 1099-B is too low. That is why you correct the basis on Form 8949.
Are RSUs taxed differently for H-1B holders?
Generally no. Once you are a US tax resident under the substantial presence test, the rules above apply to you in full, including Social Security and Medicare tax on the vest.
Playbook Move: Before your next vest, add up this year's RSU income and compare 22% of it with the tax at your actual bracket. Set the difference aside or raise your withholding now. When you sell, take the cost basis from the broker's supplemental statement. If you have large vests, past sales reported with a zero basis, or a move to India planned, book a tax consult or have your US tax return prepared by someone who handles equity pay.
For informational purposes only; not financial, tax, or legal advice. For decisions about your specific situation, consult a qualified cross-border tax professional.