The RSU Tax Trap: Are You Prepared?

Mike got a big payday. His RSUs vested, adding $50,000 to his income. He assumed his company had taken care of the taxes. Then April came.

Instead of a small refund, he owed $12,000. His company had only withheld 22% for taxes (this is the standard for 99% of people), but his actual tax rate was much higher (also standard for people in tech).

He panicked, scrambling to sell shares at the worst possible time.

This happens ALL THE TIME. Companies issue RSUs as a reward, but they don’t know your personal finance situation, so it’s impossible for them to tailor it to your tax situation. Many people find this out the hard way.

In the spirit of tax day coming up soon, if you have RSUs vesting, let’s make sure you’re not caught off guard.

What Happens When Public RSUs Vest

Restricted stock units get taxed the moment they vest, not when you sell them. That means RSUs create two tax events:

1. RSU Vesting Triggers Ordinary Income Taxes

The second your RSUs vest, their total market value is added to your taxable income.

Example:

• 1,000 RSUs vest at $50 per share

• You now have $50,000 in additional taxable income

If the standard 22% tax withholding isn’t enough (again, it usually isn’t), you could owe more than you expected.

This is a problem.

A lot of people end up spending the money and then have to scramble to cover the difference.

2. Future Stock Sales Can Trigger Capital Gains Taxes

If you hold onto the shares and the price goes up, you’ll owe capital gains tax when you sell. If you hold for less than 1 year, it’ll be short-term gains, which are taxed at your ordinary rate. If you hold for more than 1 year, it will be long-term gains, which for many people will mean a lower tax rate.

3. The RSU Withholding Trap - What Do I Actually Owe?

Most companies automatically withhold 22% in federal taxes on vested RSUs. Sounds great and it makes you feel like you got way more than you expected.

If you’re in the 35% or 37% bracket, you’re going to owe much more than that. Let’s break down just how much you’ll need:

• Jane’s RSUs vest, adding $200,000 to her income

• Company withholds $44,000 (22%)

• But her actual tax rate is 35% ($70,000 owed)

• She still owes $26,000 at tax time

Many people don’t realize this until they file their taxes. That’s why it’s critical to check your withholding before it’s too late.

Your Next Steps

Before your next RSU vesting event, take control. Here’s how:

1. Check Your RSU Vesting Schedule

Know when and how many RSUs are vesting this year. This will help you estimate how much additional income you'll have and if it could push you into a higher tax bracket.

2. Compare Withholding vs. Actual Taxes Owed

Look at your pay stub to see how much tax is being withheld. If your withholding is too low, you may need to:

• A. Adjust your W-4 form with your employer to increase paycheck withholding (the easiest way is to add an extra amount to be withheld per paycheck in Step 4c of the form)

  
  

• B. Make estimated tax payments to cover the shortfall

  • Go to: Payments | Internal Revenue Service

    • Pay from your IRS account > Individual Online Account > Click “pay in online account” button

    • Sign in to your online account (create one if you haven’t done so before)

    • Select “make a payment”

3. Decide Whether to Sell or Hold

When your RSUs vest, you have these options:

• Sell to Cover: Sell just enough shares to cover estimated taxes while keeping the rest in your company stock. This is usually what your company will do by default.

• Sell Everything Immediately: Covers taxes upfront and invest the cash elsewhere. This is my usual recommendation. Having your stocks and employment tied to one company can be overly risky (e.g., bad times can lead to both layoffs and stock price decline)

4. Plan for Future Stock Sales

If you hold onto shares, know when and how you’ll sell to minimize taxes. Waiting at least a year qualifies for lower long-term capital gains rates, but that comes with stock market risk.

5. Use RSU Proceeds for Smart Financial Moves

RSU income can be used strategically:

• Max out tax-advantaged accounts like 401(k)s and HSAs

• Donate appreciated stock to charity for tax deductions (good if you’re charitably inclined, but not a way to make money, per se)

• Use in tandem with tax-loss harvesting if you have other investments at a loss to offset any gains.

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Wrap-Up

RSUs can be an incredible wealth-building tool. If you plan for taxes. Without a strategy, they can create avoidable stress, big tax bills, and forced stock sales at the wrong time.

Take five minutes to check your RSU plan now. It could save you thousands later.

If you need help sorting through your tax strategy, let’s talk.

Schedule a complimentary “Are You On Track” snapshot today to see where your financial path is taking you.