The day your RSUs vest, you owe ordinary income tax on the full market value of the shares, whether you sell them or not. Your employer withholds a flat percentage that often falls short of your real tax rate, and your cost basis resets to the vest-day value. Here is exactly what happens on vesting day and what to check before you move on.

What is the taxable event when RSUs vest?

Vesting is the taxable event. An RSU is a promise of future shares, and nothing is taxed at grant. When the shares vest, typically because you stayed employed through the vesting date, the fair market value of the shares on that day (minus anything you paid, usually zero) is compensation income. It appears on your W-2 as wages, and it is taxed at your ordinary income rates. Because an RSU is an unfunded promise rather than property (Treas. Reg. §1.83-3(e)), income tax applies when the shares are actually delivered to you, which in most plans is at or within days of vesting; the delivered shares' full value is then income under IRC §83(a). If your plan defers delivery past vesting, income tax waits until delivery, but Social Security and Medicare tax is generally due at vesting (IRC §3121(v)(2)).

The part people miss: the tax is due whether you sell or hold. Vesting 1,000 shares at $200 creates $200,000 of taxable income even if you never touch the shares. Holding is an investment decision you make with after-tax shares, not a way to defer the tax.

How does employer withholding work on vest day?

Employers handle the tax in one of three ways, and your plan documents say which one applies to you:

1. Sell-to-cover (net settlement). The employer sells just enough of your vested shares to cover the withholding and deposits the rest into your brokerage account. This is the most common method.

2. Same-day sale. All vested shares are sold immediately; you receive the cash net of withholding.

3. Cash withholding. You pay the withholding amount out of pocket (or from your paycheck) and keep all the shares.

For federal income tax, the vest is supplemental wages. Most employers withhold at the optional flat rate of 22% on supplemental wages up to $1 million for the year (an employer may instead use the aggregate method), and withholding at 37% is mandatory on supplemental wages above $1 million. Social Security (6.2%, up to the 2026 wage base of $184,500 across all your wages from that employer) and Medicare (1.45%, plus a 0.9% Additional Medicare Tax that your employer must withhold once your wages from it pass $200,000) are withheld on top of that (IRS Publication 15).

The 22% rate is where the trouble starts. If your marginal federal rate is 24% or higher, the 22% withholding falls short, and at 32%, 35%, or 37% the shortfall is large. If your other income already puts you in the 37% bracket (over $640,600 single or $768,700 married filing jointly for 2026), a $400,000 vest with 22% withheld leaves a $60,000 federal income tax gap (15% of $400,000) to settle at filing time, before any state tax or Additional Medicare Tax shortfall. Check your pay stub after every vest: confirm the income amount, the federal withholding, and the state withholding, then decide whether you need to adjust your W-4 or make estimated payments (IRS Publication 505).

What is your cost basis after vesting?

Your tax basis in each vested share equals the amount you included in income: the vest-day fair market value. If 500 shares vested at $180, your basis is $90,000 total, or $180 per share.

When you later sell, only the change in value after vesting is a capital gain or loss, and that gain (unlike the vest-day wages) can also be subject to the 3.8% net investment income tax if your modified AGI exceeds $200,000 single or $250,000 married filing jointly. Sell at $200 and you have a $20-per-share gain. Sell at $160 and you have a $20-per-share loss. Hold more than a year from the vesting date and the gain or loss is long-term; the holding period starts at vesting, not at grant (IRC Section 83(f)).

Verify your 1099-B. When you sell, your broker reports the proceeds on Form 1099-B, but for equity awards granted after 2013 brokers are not allowed to add the income you were taxed on at vesting to the basis they report to the IRS, so the reported basis is often $0, understated, or blank, even though your true basis is the vest-day value. If the reported basis is wrong, you do not just accept it and pay tax twice on the same income. On Form 8949, if the incorrect basis was reported to the IRS, enter that reported basis in column (e), code B in column (f), and the correction in column (g); if basis was not reported to the IRS, enter the correct vest-day basis in column (e), code B in column (f), and -0- in column (g) (IRS Instructions for Form 8949). Keep your vesting confirmations; they are the proof of what you already paid tax on.

What about dividend equivalents?

Many RSU plans credit you with dividend equivalents: cash payments mirroring the dividends paid on the underlying stock while your units are unvested. These are taxed as ordinary compensation income when paid, not as qualified dividends, and they show up on your W-2. Once your shares have vested and you hold actual stock, real dividends you receive are taxed under the normal dividend rules (IRS Publication 525).

What should you do on vesting day?

• Read the pay stub. Confirm the income picked up matches shares vested times the vest-day price, and note the federal and state withholding amounts.

• Quantify the shortfall. Compare the 22% withheld against your actual marginal rate. If there is a gap, increase W-4 withholding or calendar an estimated payment; do not discover it in April.

• Decide sell or hold deliberately. Selling immediately locks in your basis and ends the concentration risk. Holding is a bet on the stock with after-tax dollars. Either is defensible; drifting is not.

• File the confirmation. Save the vesting statement with the share count, price, and date. You will need it to prove your basis when you sell, possibly years later.

Pending review by Brian Thomas, EA. Updated September 25, 2026.

This article is free educational content, not tax advice for your specific situation. If you want a plan built around your actual numbers, that is what our paid tax planning engagements do.