Why your RSU 'bonus' feels smaller than promised
If your offer letter says '$600k over 4 years' you might assume $150k/year added. The reality after a flat 22% federal, ~9% state in CA, and 7.65% FICA: you keep about 61%. Of that $150k, you actually take home around $91k. And if your real marginal federal bracket is 32% (most senior ICs), you owe another $15k at tax time — bringing real take-home closer to $76k.
- • Always model RSUs at your marginal rate (typically 32% or 35%), not the 22% withholding.
- • Cross $1M in supplemental wages in a year and the federal flat jumps to 37% on the excess.
- • California, NY, NJ, OR, MA all tax RSUs at full state ordinary income rates.
Sell-to-cover vs cash-to-cover vs net-share
Most companies default to 'sell-to-cover' (broker sells enough shares to pay statutory withholding). 'Net-share' withholds shares without selling. 'Cash-to-cover' lets you wire cash and keep all shares — good if you believe in the stock long-term. None of these change your tax bill, only your share count and brokerage cash position.
The double-trigger trap (private companies)
Pre-IPO RSUs typically have a double-trigger: time-based vesting + a liquidity event (IPO or acquisition). At IPO, every share that's met its time-vest becomes taxable income on the same day — potentially a 7-figure ordinary income event that pushes you into the 37% bracket and 0.9% additional Medicare. Companies often allow extending withholding via supplemental election; check your equity admin (Carta, Shareworks) months in advance.
Capital gains on shares you keep
Once shares vest and tax is paid, your cost basis is the vest-day FMV. If you sell within 12 months of vest, gains are short-term (ordinary income). Hold for over 12 months and gains become long-term (0/15/20% federal + Net Investment Income Tax 3.8% over $200k single / $250k joint). The clock starts at vest, not grant.
FAQ
Why does my paystub show I 'received' $50k of RSU income but my paycheck didn't change?
Because the company simultaneously credited the income and debited taxes by selling shares. The net cash effect is roughly zero on your paycheck — the income shows up on your W-2 in Box 1 and Box 14, the withholding shows up in Box 2 (federal) and Box 17 (state).
Should I sell at vest or hold?
Personal finance orthodoxy: sell at vest and diversify, because 'would I buy this many shares of my employer with cash today?' is almost always no. Reality: most tech employees hold and concentrate. If you do hold, set rules in advance (e.g., 'sell anything that vests above $X') so you're not making the decision emotionally each quarter.
What is sell-to-cover exactly?
Your employer or broker (Fidelity, E*Trade, Morgan Stanley, Schwab) automatically sells ~22% of your vesting shares on vest day, sends the cash to the IRS for federal withholding, plus enough for state and FICA. The remaining shares show up in your brokerage account.
Why do I owe more at tax time when withholding already happened?
The 22% supplemental rate is far below the marginal rate most RSU recipients are in (32% or 35%). On a $200k vest at 32% marginal, you'd owe an extra $20k beyond what was withheld.
Can I increase withholding to avoid the shortfall?
Yes — your HR / equity admin usually has a 'supplemental withholding election' that lets you bump federal to 28%, 32%, or 35% on equity. Or you can make quarterly estimated payments to the IRS (Form 1040-ES).
Are RSUs taxed twice?
No, but it feels that way. You pay ordinary income tax when shares vest (based on FMV that day). You then pay capital gains tax on any appreciation if you sell later — but only on the gain above the vest-day price, not the full sale price.
How are RSUs taxed if I move states between grant and vest?
Many states (CA, NY) use 'allocation' — the income is split between states based on where you were working during the vest period. Move from CA to TX and only the pre-move portion is CA-taxable. This is a common audit area; document your move date and work location.
What's the difference between RSUs and stock options (ISOs/NSOs)?
RSUs are shares you receive automatically when they vest, taxed as ordinary income at vest. Options give you the right to buy shares at a strike price, taxed on exercise (NSO) or sale (ISO with AMT considerations). RSUs are simpler; options have more upside if the strike is far below market.
Do RSUs count toward 401(k) contributions?
Usually no — RSU income is typically excluded from 'eligible compensation' for 401(k) contributions. Your salary deferral percentage applies only to base salary and cash bonuses, not to RSU vests.
What happens to unvested RSUs if I quit?
They're forfeited 100%. There's no acceleration unless your grant or a change-of-control provision says so. Always check vest dates before resignation timing — leaving 30 days before a major cliff or cliff-tranche can cost six figures.
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