Tax Withholding on RSUs
Definition
When RSUs vest, the value is treated as ordinary income and the company must withhold taxes — typically by automatically selling a portion of your shares ("sell-to-cover"). Federal withholding is usually 22% (37% for amounts over $1M), plus state tax, Social Security (6.2%), and Medicare (1.45%). The net shares deposited to your account are fewer than the number that vested.
Real-World Example
You vest 1,000 RSUs worth $150/share ($150,000). Tax withholding at ~40% total rate: $60,000. The company sells 400 shares to cover taxes. You receive 600 shares in your brokerage account. Your "1,000 RSU grant" actually nets you 600 shares.
Common Mistake
Being shocked when you receive fewer shares than expected. The sell-to-cover is not optional at most companies. Also, the default withholding rate (22% federal) may be lower than your actual tax bracket, meaning you could owe additional taxes when you file your return.
Why It Matters
Understanding that RSU grants are effectively ~60% of face value (after taxes) is critical for comparing offers and planning finances. A 10,000 RSU grant nets approximately 6,000 shares after withholding.
Related Terms
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