Restricted Stock Units (RSUs) are a key part of compensation when you work in the tech industry. The RSUs count as income when they vest (you earn ownership). Therefore, RSUs can increase your tax bill and may require strategic planning to avoid tax implications and to maximize value.
This article breaks down how RSUs work and why vesting RSU schedules matter. Additionally, we explain how RSUs are taxed and how the tax implications can impact your financial goals. Lastly, we provide tips on how you can build a smart strategy around RSUs.
What are RSUs?
Key RSU Concepts:
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Restricted Stock Units (RSUs) are a form of equity compensation commonly offered to tech professionals. Unlike stock options, RSUs grant you actual shares of company stock, typically for no cost, once they vest.
For example, to make a job offer more attractive, a software engineer might receive the following compensation:
- Base salary: $120,000/year
- RSU grant: 4,000 RSUs over 4 years
- Vesting schedule: 25% per year (1,000 shares per year)
If the company’s stock is worth $50 per share when the 1,000 RSUs vest after one year, they would be worth $50,000. At the same price, the 4,000 RSUs would total $200,000 after four years. Say the stock price rises to $100 per share, then the total RSU value doubles to $400,000 in four years.
RSUs vs. stock options
Unlike stock options that companies offer at fixed (strike) prices for employees to purchase, RSUs are basically an award. They provide you company shares in the future when they vest.
RSUs can be less risky given that they typically maintain their worth. On the other hand, stock options can lose their worth once they go below the strike price. The timing of taxation as well as timing of vesting differs for each.
These are the main distinctions between RSUs and stock options:
| Feature | RSUs | Stock Options |
| Cost | No purchase required | Buy at strike price |
| Vesting | Shares delivered when they vest | Gain the right to buy shares as they vest |
| Tax Timing | Taxed when shares vest | Taxed when exercised or sold |
| Downside Risk | Lower (unless stock becomes worthless) | Higher (if stock price stays below strike price) |
| Upside Potential | Moderate | Potentially higher if stock grows |
How RSUs are taxed
The timing of vesting is important as it relates to taxation because that’s the first tax hit. When you decide on selling the shares after they vest, that’s the second taxation event. Holding the shares longer than one year after they vest is generally more advantageous tax-wise than selling within one year.
- Taxation at vesting: When RSUs vest, the market value is ordinary income that will record on your W-2. As a result, you will owe federal and state income taxes, even if you don’t sell the shares. For instance, if 1,000 shares vest at $50 per share, income tax will apply to $50,000. Your employer could withhold the taxes through your paycheck.
- Capital gains (post-vesting): Once you own the shares, if you hold them for less than a year, they will incur short-term capital gains. This means taxes will apply at the same rate as income tax when you sell RSUs. If you hold the shares for more than one year, they will incur long-term capital gains, typically at lower rates than income tax. For example, if the RSUs vested at $50 per share and you sold them at $70 per share, you would pay capital gains tax on the $20 per share profit.
Withholding shortfalls
Most companies only withhold 22% for federal taxes, but your tax bracket may be higher. For instance, if 1,000 RSUs vest at $100 per share, the taxable income is $100,000 and the company may withhold 22% or $22,000. However, if your tax rate is 35%, you’ll owe an additional $13,000 at tax time for a total of $35,000.
Pro tip: Don’t assume the company withheld enough. At Mercer Advisors, we often advise clients to pre-pay estimated taxes, sell additional shares to cover the gap, or increase their state and federal withholdings.
When to hold, when to sell RSUs
The decision of when to sell RSUs should be dependent on your goals, market view, and tax plan.
- If you sell when the shares vest, it simplifies taxes as you’ll incur the implications all at once. However, you could miss out significantly if there’s substantial future growth in the stock value.
- If you sell enough units to cover the taxes on vesting, but hold remaining shares, you will still have partial exposure to stock value loss.
- Holding the stock for gains may be beneficial for long-term, lower capital gains tax. However, there’s risk of all the stock declining in value. Additionally, you risk having concentrated shares in your portfolio. There are two common ways to evaluate whether you have a concentrated stock position: (1) the shares constitute a material portion of your overall portfolio (such as 20%, 50%), or (2) you have enough exposure with the shares to feel anxiety when the stock declines.
Job changes, IPOs, and other complex scenarios
When you choose to leave the company, you typically forfeit your unvested RSUs. You keep the vested RSUs but will still owe taxes on any future gains.
If a company acquisition or IPO happens, the RSUs could vest immediately, convert to new company shares, or be available to cash out. If it’s a private company, the RSUs may not be available to sell until the IPO or acquisition is complete.
If you receive equity compensation from a private company, the IRS 83(b) election can be helpful when you report the RSUs on your tax return. The rule allows you to pay income taxes on the fair market value of the RSUs when they were granted versus when they were vested. This could save significantly on taxes if the stock value has increased but not be beneficial if the stock lost value or didn’t vest.
How RSUs fit into a financial plan
Having a financial plan usually means you have identified certain financial goals and are taking steps to achieve them. In addition to being part of an investing strategy, RSUs should also factor into cash flow management, savings goals, tax planning, and retirement planning. For instance, you could use RSUs for down payments on a big purchase such as a house or a long-term goal like education savings for children.
RSUs may be subject to estate tax if they have vested at the time of your death. In 2025, the federal estate tax exemption is $13.99 million per individual and $27.98 million per couple.1 The total value of your estate will include vested RSUs, real estate, investments, and other assets. If it exceeds the exemption, the excess may incur tax at a 40% federal estate tax rate. To reduce your estate taxation, consider how you will structure trusts, gifting strategies, and beneficiary designations to include RSUs.
Donating appreciated RSUs (or proceeds) via donor-advised funds (DAF), instead of selling and donating the proceeds, can reduce your tax burden while supporting your favorite causes. A 501(c)(3) organization maintains and operates DAFs to help ensure the funds go to an IRS-qualified public charity and are used for charitable purposes. When you donate appreciated stock directly to a DAF, you may be able to eliminate capital gains tax on the appreciated assets if they were held for more than a year.
RSU annual planning calendar
To help with planning around the vesting and potential sale of RSUs, refer to this calendar in your financial planning:
| Quarter | Action |
| Q1 | Review grant vesting timeline |
| Q2 | Run tax estimates; evaluate concentration risk |
| Q3 | Adjust portfolio or consider charitable planning |
| Q4 | Execute sale, gifting, or rebalancing strategy |
Get personalized help
RSUs are key to tech professionals’ pay but may come with tax challenges. Consider consulting with financial professionals to help manage vesting, minimize taxes, and build a strong financial strategy.
At Mercer Advisors, we specialize in helping tech professionals turn RSUs from a confusing tax liability into a powerful financial asset. Our in-house wealth advisors, tax specialists, and estate attorneys can create personalized equity plans to help you reduce tax exposure, build a diversified portfolio, and plan for major life goals.
| We have first-hand experience advising professionals at leading Tech companies: |
If you’re not already a Mercer Advisors client and want to know more about how we can help you with building wealth and navigating the complexities of RSUs and other types of compensation, let’s talk.
1 “What is the Gift Tax Exclusion for 2024 and 2025?” Kiplinger, April 28, 2025.
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