How to Handle RSUs Without Overpaying in Taxes

Learn when RSUs are taxed, how to plan for the tax hit, and smart strategies to avoid overpaying the IRS on your stock compensation.

1. Understand when you owe taxes on RSUs. You owe income tax when RSUs vest, not when you sell the shares. The fair market value on the vesting date becomes taxable ordinary income, just like salary. Your employer typically withholds 22% for federal taxes, but your actual rate might be higher if you're in a higher bracket.
2. Calculate your likely tax shortfall. If you're in the 32% or 37% tax bracket, the 22% withholding leaves you short. Add state taxes on top. For example, if $50,000 worth of RSUs vest and you're in the 32% bracket in California, you might owe $18,000 total but only have $11,000 withheld.
3. Decide whether to sell immediately or hold. Most financial experts recommend selling RSUs as soon as they vest to avoid concentration risk. You already have job risk tied to your company — adding investment risk compounds the danger. The shares you receive have a cost basis equal to their value at vesting, so immediate sales have minimal capital gains impact.
4. Set aside cash for taxes owed. From your RSU sale proceeds, immediately move the tax shortfall into a separate savings account. Don't spend this money or invest it in risky assets. You'll need it for estimated quarterly payments or next year's tax bill.
5. Make estimated tax payments if needed. If your RSU income is large relative to your salary, make quarterly estimated payments to avoid underpayment penalties. You're generally safe if you pay 100% of last year's tax liability (110% if your prior-year income exceeded $150,000) through withholding and estimated payments combined.
6. Invest the remaining proceeds systematically. After setting aside tax money, invest leftover proceeds in diversified index funds rather than keeping them in your company stock. Consider dollar-cost averaging if you're nervous about market timing, spreading purchases over 3-6 months.