No tax at grant, tax at vesting
RSUs are a promise of shares that convert to real stock on a schedule. Nothing is taxed when they are granted. The taxable event is vesting: on the day shares vest, their full market value is treated as ordinary income and added to your W-2, exactly like salary — subject to federal and state income tax plus Social Security and Medicare.
The 22% withholding gap
Employers usually withhold federal tax on RSU income at the 22% supplemental rate, often by selling a portion of the shares ("sell to cover"). If your real marginal rate is higher — 32%, 35% or 37% — that 22% is not enough, and the shortfall lands on you at filing. High earners are routinely surprised by a large April bill for exactly this reason. The fix is to adjust your W-4 or make an estimated payment in the quarter you vest.
The cost-basis double-tax trap
This is the mistake that costs the most. When RSUs vest, you already pay income tax on their value — and that value becomes your cost basis. But brokers frequently report a $0 cost basis on the 1099-B. File it unchanged and the IRS taxes the entire sale proceeds as a capital gain, taxing money you already paid income tax on a second time. The fix: on Form 8949, adjust the basis to the vesting-date fair market value (adjustment code B). Keep the statement that shows your vesting value.
What happens when you sell
After vesting you own ordinary shares and the capital-gains clock starts on the vesting date. Sell within a year and any gain above the vesting price is short-term, taxed at your ordinary rate; hold more than a year for long-term rates of 0/15/20%. Many people sell immediately at vesting — because the basis roughly equals the sale price, there is little or no gain, which is a valid way to diversify out of concentrated company stock.
Should you sell at vesting or hold?
Financially, vesting is the same as receiving a cash bonus and immediately buying your employer's stock. If you would not choose to buy that much company stock with a cash bonus, selling at vesting and diversifying is often the rational move. Holding only makes sense if you have genuine conviction and can afford the concentration risk — and even then, the long-term holding period is what earns you the lower rate.
A quick example
200 shares vest at $50 = $10,000 of income. At a 32% marginal rate your employer withholds only 22% ($2,200), but you actually owe about $3,200 in federal income tax — a roughly $1,000 gap before FICA and state. Your cost basis is $50/share. Sell a year later at $70 and your gain is just ($70 − $50) × 200 = $4,000. But if the broker reported a $0 basis, you would be taxed on $14,000 — overpaying tax on the $10,000 you already reported at vesting.