A restricted stock unit (RSU) is a company’s contractual promise to deliver shares of its stock to an employee on a future date once stated conditions are met, taxed as ordinary compensation income at the moment the shares are actually delivered.
In plain terms
An RSU is not stock. It is an IOU for stock, and until it settles the holder owns nothing — no shares, no votes, usually no dividends. When the conditions are satisfied the company hands over real shares, and their market value lands on the employee’s W-2 as wages, exactly as a cash bonus would. What separates an RSU from an option is that it cannot be worthless: an option below its strike price is a promise worth nothing, while an RSU is worth whatever the share is worth. That safety is why RSUs displaced options as the default grant at large public companies — and why the tax bill arrives whether or not the recipient wanted to sell.
How it works
The grant sets a vesting schedule — most commonly four years with a one-year cliff, then quarterly. At a public company that schedule is the only condition: shares vest, shares settle, income is recognized. This is a single-trigger RSU.
Private companies almost always use a double trigger. Vesting is one condition; a liquidity event — an IPO, an acquisition, sometimes a tender offer — is the second. Nothing settles and nothing is taxed until both occur, which prevents the outcome that made pre-IPO RSUs untenable: a tax bill denominated in dollars against shares that cannot be sold for dollars.
At settlement the employer must withhold. The standard mechanic is sell-to-cover: the company sells a slice of the vesting shares, remits the proceeds to the IRS, and delivers the remainder. The rate applied is the flat supplemental-wage rate, not the employee’s actual marginal rate — which is where the trouble starts.
A narrow escape hatch exists. Section 83(i) lets employees of qualifying private companies defer federal income tax on settled RSUs for up to five years, but only if the company grants equity to at least 80% of its US employees in the same calendar year on the same terms. Few structure grants that way, so the election is rare — and it defers income tax only, leaving Social Security and Medicare due at settlement.
The numbers
- Supplemental withholding rate, 2026: 22% flat on the first $1,000,000 of supplemental wages in a year, 37% above that (IRS Publication 15).
- Top federal ordinary rate, 2026: 37%, starting at $640,600 of taxable income single and $768,700 joint (IRS, Rev. Proc. 2025-32).
- Net investment income tax: 3.8% above $200,000 of modified AGI (single) or $250,000 (joint) — unindexed since 2013.
- Typical vesting: four years, one-year cliff, then quarterly.
- Section 83(i) deferral: up to five years; requires grants to 80% of US employees in one calendar year.
- Jurisdiction: United States federal income tax. State and local withholding apply separately.
What people get wrong
That sell-to-cover settles the tax bill. It usually does not. Withholding on a vest defaults to the 22% supplemental rate, but an employee whose total income sits in the 35% or 37% bracket has just had roughly a third of the required tax withheld. The gap does not surface until the return is filed the following April, and on a large vest it is a six-figure surprise — produced not by a mistake but by the withholding rules working exactly as written.
The second error is quieter. Because RSU shares are received rather than purchased, the capital-gains clock starts the day they land, at a basis equal to the income already recognized. Holding them afterward is a fresh, undiversified investment decision that most people never consciously make; they do nothing, and a compensation event becomes a concentrated position by default.
Related
Read more: Equity Compensation: RSUs, ISOs, and the Tech Wealth Engine · Tech Wealth: How Founders and Investors Live Differently · Sudden Wealth: Liquidity Events, Lottery Winners, Athletes, and Inheritance Shocks
See also: ISO vs NSO · 83(b) election · Liquidity event · QSBS