RSU
RSU is a grant of company stock that vests over time according to a defined schedule. At each vesting event, the fair market value of the vested shares is taxed as ordinary income (W-2 wages), and the employee receives the shares (or cash equivalent for cash-settled RSUs).
RSUs have largely replaced stock options at most public technology companies because they avoid the underwater-option problem (when the stock price falls below the strike price). RSUs always have value at vesting unless the company is bankrupt — making them a more reliable retention tool than options.
At vesting, the employer typically performs 'sell-to-cover' withholding: a portion of the vested shares is sold automatically to cover federal, FICA, state, and local taxes, with the net shares delivered to the employee. The fair market value at vesting becomes the employee's tax basis for the remaining shares.
The canonical RSU vesting schedule is 4-year graded with 1-year cliff (no shares vest until the 1-year mark; then 1/4 vests at 1 year and the remaining 3/4 vests in equal monthly increments over the following 3 years). Refresh grants typically use 4-year graded without cliff. Senior executives may receive performance-based RSUs (PSUs) where vesting depends on company-performance metrics in addition to time.
For planning purposes, RSU income is highly taxable (ordinary income at top brackets for most recipients) and concentrated (vesting events are typically quarterly). Many financial planners recommend selling vested shares immediately to manage concentration risk; holding adds market risk on top of compensation risk.
Synthetic RSU grants need: grant date, total shares, vesting schedule (cliff months + total months + cadence), vested-to-date count, FMV-at-each-vesting-event for basis tracking, sell-to-cover withholding rate. Multi-grant households (4+ overlapping grants from refresh cycles) are the typical mid-career engineering-manager pattern; vesting events should be distributed across the year, not concentrated at year-end.
Common pitfalls
- Treating RSU income as a single year-end event — vesting is typically quarterly with separate W-2 reporting per event.
- Letting concentrated post-vest holdings accumulate without rebalancing — the post-tax shares are still concentrated single-stock risk.
- Forgetting that RSUs DO qualify for QSBS at-vest under §1202 if the company is a qualifying small business — most retail employees miss this.
- Underwithholding via supplemental rate (22%) when actual marginal rate is 37% — produces April-15 underpayment with penalty.
Examples
RSU grant 16,000 shares, 4-year graded with 1-year cliff. Year-1 cliff (Q5): 4,000 shares vest. FMV at vesting: $120 → $480,000 ordinary income. Sell-to-cover at 22% federal + 7.65% FICA + 6% state = ~36% withholding = ~1,440 shares sold. Net delivered: 2,560 shares + cost-basis $120/share. Subsequent quarterly vesting: 1,000 shares per quarter × 12 quarters = 12,000 more shares.