What Are Restricted Stock Units
And How Do They Actually Work?

An RSU is a promise of future shares

A Restricted Stock Unit (RSU) is a promise from your employer to give you company shares on a future date, as long as you're still employed when that date arrives. That's the whole concept. At grant, you don't own anything you can sell, vote, or borrow against — you own a commitment that converts into real shares over time.

The word that trips people up is "restricted." The restriction isn't on the price or the type of stock — it's a vesting condition. Until you satisfy it (usually just staying employed for a set period), the units can be clawed back if you leave. Once a tranche vests, the restriction lifts, the shares are deposited into your brokerage account, and they're yours outright.

For most tech employees, RSUs are not a side perk — they're the majority of total compensation. A senior engineer at NVDA, META, or GOOG can easily have more equity value vesting each year than their base salary. That makes understanding the mechanics — grant, vest, tax, and what to do next — a six- or seven-figure decision, not a footnote.

Grant, vest, and sale — three distinct moments

Every RSU passes through three events, and each has different ownership and tax consequences. Confusing them is the root of nearly every RSU planning error. Here's the full lifecycle of a single grant.

Read that timeline twice. The single most common RSU misconception is thinking the tax happens when you sell. It doesn't — the big tax hit is at vest, whether or not you sell a single share. For the full breakdown of the tax mechanics at each stage, see How are RSUs taxed?

How vesting schedules actually work

A vesting schedule is the timeline that controls when each chunk of your grant becomes yours. Two structures dominate, and most companies blend them.

Many grants also carry a double-trigger at private companies: shares require both a time/service condition AND a liquidity event (IPO or acquisition) before they vest and become taxable. That's why pre-IPO engineers can sit on 'vested' units that haven't actually been delivered or taxed yet. For how vesting interacts with the tax bill and the share-selling mechanics at vest, see RSU vesting schedules and sell-to-cover.

Why RSUs are taxed as ordinary income at vest

Here's the rule that surprises people: RSUs are taxed as ordinary income the moment they vest — not at grant, not at sale. The taxable amount equals the number of shares that vested multiplied by the stock's fair market value (FMV) on the vest date. That figure flows straight into Box 1 of your W-2, exactly like salary or a bonus.

Example: 1,000 RSUs vest when your stock trades at $400. That's $400,000 of ordinary income added to your W-2 this year — taxed at your marginal rate, whether you sell the shares or not. There's no special equity rate at vest. It's wages.

On top of federal income tax, vesting also triggers Social Security (6.2% up to the annual wage base), Medicare (1.45%, plus an extra 0.9% on wages over $200K), and state income tax — which in CA, NY, or NJ adds another big layer. The full mechanics, bracket math, and planning moves live in How are RSUs taxed?

Withholding, sell-to-cover, and cost basis

Because the tax at vest is owed in cash but you're being paid in shares, your employer needs a way to fund the withholding. The most common method is sell-to-cover: the broker automatically sells just enough of your freshly vested shares to cover the tax, and deposits the remaining net shares in your account. Other methods include net (share) withholding, where the company holds back shares instead of selling, and cash transfer, where you fund the tax from your own bank account to keep all the shares.

Now the part that quietly overcharges thousands of tech employees every year. Your cost basis in vested RSUs is the FMV on the vest date — the exact amount already taxed as ordinary income. When you later sell, your capital gain or loss is just (sale price − vest-date FMV). Hold more than a year from vest and it's long-term; a year or less and it's short-term.

And don't be alarmed by W-2 Box 14 showing a line labeled 'RSU' with a dollar figure. That's informational only — it's already included in your Box 1 wages, not a separate or additional tax. For the full reporting walkthrough — 1099-B, Form 8949, the basis correction, and TurboTax steps — see RSU tax reporting and cost basis.

RSUs vs. stock options vs. RSAs

RSUs are one of three equity-comp instruments you'll run into. The differences matter because they change when you're taxed, whether you pay anything to get the shares, and whether the equity has value if the stock goes nowhere.

The third instrument is the Restricted Stock Award (RSA) — easy to confuse with an RSU but mechanically different. With an RSA you receive actual shares at grant (usually for a nominal price), so you get voting rights and dividends immediately, and you can file an 83(b) election to be taxed at grant when the value is low. RSUs are only a promise of future shares: no 83(b) election is available, and you're taxed at vest. RSAs show up at very early-stage startups; RSUs dominate at public and late-stage companies.

The practical takeaway: RSUs are the lowest-risk, lowest-flexibility form of equity. They can't go underwater, but you also can't control the timing of the tax — it hits on the vesting schedule no matter what. For the deeper trade-offs, scenarios, and tax timing, see RSUs vs. stock options.

What to do once your shares vest

Here's the strategic part almost nobody plans for. The day RSUs vest, you've been taxed at full ordinary rates — and you now own a chunk of a single company's stock. Vest after vest, year after year, that quietly compounds into a concentrated position: often 50%, 70%, even 90% of an engineer's net worth sitting in one ticker.

The hard data is sobering. Across the long history of public stocks, single names suffer 50–80% drawdowns far more often than a diversified index does, and the majority of individual stocks underperform the market over their lifetime. Loving the company you work for doesn't change the statistics. The real question is how much concentration is prudent — covered in How much concentrated stock is too much?

That last point is where most people get stuck. Selling to diversify works, but it triggers capital gains tax on every appreciated share. The usual alternatives each have a catch: direct indexing helps at the margins, and exchange funds diversify but lock you up for seven years and pay no income. The concentrated-stock diversification guide walks through every path.

For a concentrated, fully-taxed RSU position, the most efficient move is often the one that generates income without selling. Embark's §721 SPV is built for exactly this: you can read the full mechanics in income without selling your stock, or estimate your own numbers in the tax and income calculator.

Common questions about restricted stock units

Do I pay tax when RSUs are granted?
No. At grant you only hold a promise of future shares, and there's nothing to tax. The taxable event is vesting, when shares are delivered and their full value is added to your W-2 as ordinary income.

Am I taxed again when I sell my vested RSUs?
Only on the gain since vesting. Your cost basis is the vest-date market value (already taxed as income), so you owe capital gains tax only on (sale price − vest-date value). Held over a year from vest = long-term rates. Just watch the $0-basis 1099-B trap so you don't pay twice.

What is sell-to-cover?
It's the default withholding method: your broker automatically sells a portion of your newly vested shares to pay the tax, and leaves you the remaining net shares. See vesting and sell-to-cover for the alternatives.

Why do I still owe tax in April if my employer already withheld?
Because the default 22% supplemental withholding usually under-covers high earners in the 32–37% bracket. The shortfall — plus state tax — is due with your return. Set aside the difference or make estimated payments.

What's the difference between an RSU and an RSA?
An RSA gives you actual shares at grant (with voting rights, dividends, and an optional 83(b) election); an RSU is only a promise of future shares, taxed at vest, with no 83(b) available. RSAs are common at very early startups; RSUs at public and late-stage companies. More in RSUs vs. options.

My RSUs vested into a huge single-stock position. What should I do?
First, confirm your basis is correct, then decide your concentration limit. If you want to reduce risk and generate income without triggering a tax bill from selling, look at the §721 income strategy and run your numbers in the calculator.