Question 1

How are RSUs taxed?

Accepted Answer

RSUs are taxed as ordinary income the day they vest. Your employer takes the number of shares that vested, multiplies by the share price that day, and adds that amount to your W-2 wages. It's taxed exactly like a cash bonus — federal income tax, Social Security, Medicare, and state income tax all apply. There is no special capital-gains treatment at vest; that only comes into play on gains after the vest date if you hold the shares.

Question 2

Why did I owe money at tax time even though my employer withheld taxes on my RSUs?

Accepted Answer

Because employers typically withhold federal tax on RSUs at the flat 22% supplemental rate, but your actual marginal rate is probably higher. If your salary plus RSU income puts you in the 32%, 35%, or 37% bracket, every RSU dollar was under-withheld by 10 to 15 cents. On a $100,000 vest, that's a $10,000 to $15,000 gap that shows up as a surprise bill in April. This is the single most common tax problem we see with tech and biotech employees.

Question 3

Should I sell RSUs at vest?

Accepted Answer

For most people, selling at or near vest is the sensible default. The tax is already triggered at vest whether you sell or not, so holding the shares is equivalent to taking your bonus in cash and buying your company's stock with it. If you wouldn't do that with a cash bonus, don't do it with RSUs. The main reasons to hold are a deliberate concentrated-stock strategy or a trading window restriction. Selling immediately also means little to no capital gain on top of the ordinary income you already recognized.

Question 4

Do RSUs get taxed twice?

Accepted Answer

No, but sloppy reporting can make it look that way. Your cost basis in the shares equals the market value on the vest date — the same amount already taxed as W-2 income. When you sell, only the gain or loss relative to that basis is taxable. The trap: brokers sometimes report a $0 cost basis on Form 1099-B, and if you don't correct it, you pay tax on the full sale price a second time. Always verify the basis on RSU sales.

Question 5

What's the difference between RSUs and ISOs?

Accepted Answer

RSUs are taxed as ordinary income at vest with no election available — you can't defer or convert the income. Incentive stock options (ISOs) work differently: there's no regular income tax at exercise, though the spread is an AMT preference item, and if you meet the holding-period rules the entire gain can be long-term capital gain. ISOs offer more planning leverage but carry AMT risk; RSUs are simpler but give you almost no timing control. Many employees at later-stage companies have both, which is where coordinated planning pays off.

Question 6

Does the extra 0.9% Medicare tax apply to my RSUs?

Accepted Answer

Usually, yes, if you're a high earner. Employers must withhold the 0.9% Additional Medicare Tax on wages above $200,000, and RSU income counts as wages. Your actual liability is settled on your return using the $200,000 (single) or $250,000 (married filing jointly) thresholds, so married couples where both spouses earn under $200K individually can still owe it jointly — another common source of a surprise balance due.

Question 7

Can I avoid an underpayment penalty in a big RSU year?

Accepted Answer

Yes, with planning. The IRS safe harbor generally protects you from penalties if your withholding covers 110% of last year's total tax (for higher earners) or 90% of this year's. In a year with a large vest, you can ask payroll to withhold extra from regular paychecks, make quarterly estimated payments, or sell a slice of the vested shares specifically to fund the tax gap. The key is doing the math before December, not after the W-2 arrives.

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