How Does RSU Vesting Work? | Turn Equity Into Real Shares

RSUs turn into shares on set dates or milestones, and the value on that vest date is treated as paycheck income.

Restricted stock units (RSUs) look tidy on an offer letter. Then vest day hits, shares arrive, taxes get taken out, and you’re left asking what just happened.

This guide breaks RSU vesting into plain steps: what you own (and don’t) at grant, what changes at vesting, how taxes usually show up, and how selling fits in.

How RSUs work at a glance

An RSU grant is a company promise to deliver shares (or cash equal to shares) later. Before vesting, you do not own stock. After vesting, the shares are yours, subject to plan rules like blackout windows.

Key terms you’ll see in grant paperwork

• Grant date: the day the company awards the RSUs and sets your schedule.
• Vesting date: the day a portion becomes yours.
• Cliff: a first vest that happens after a waiting period, often 12 months.
• Tranche: each slice that vests on a date or after a goal.
• Fair market value (FMV): the share price used to value the vest.

How Does RSU Vesting Work In Real Paychecks

On each vesting date, your employer treats the vested value like wage income. Taxes and payroll withholding can apply even if you keep every share. The U.S. SEC’s Investor.gov glossary explains RSUs as a form of compensation that can convert into stock after vesting conditions are met. Investor.gov’s RSU glossary entry is a solid baseline definition.

Here’s the usual flow on a vest date:

1. Your plan calculates how many units vest that day.
2. The plan values those shares using FMV on the vest date.
3. Taxes and payroll withholdings are collected.
4. Net shares (or cash) land in your brokerage account.

If you see fewer shares than the number that vested, shares were used to cover withholding. Plans label this “net settlement” or “sell-to-cover.”

Why withholding can surprise you

Withholding is a prepayment, not your final tax bill. Payroll often uses rules for “supplemental wages,” a bucket that can include equity compensation. IRS Publication 15 lists the flat federal withholding rate: 22% up to $1 million of supplemental wages in the year, then 37% on amounts above that threshold. IRS Publication 15 (Employer’s Tax Guide) covers those rates and the basic methods employers use.

If your marginal rate is higher than the flat withholding, you can owe more at filing time. State and local rules can change the gap.

Common RSU vesting schedules you’ll see

Schedules are plan choices. These three patterns cover most grants:

• 4 years with a 1-year cliff: a larger first vest at month 12, then smaller vests monthly or quarterly.
• Monthly vesting: a small vest each month after the first month or quarter.
• Quarterly vesting: vests four times per year on set dates.

Performance and private-company twists

Performance RSUs tie vesting to targets like revenue or product milestones, so payout timing or share count can change. Private-company RSUs often add a liquidity condition, so shares are delivered only after an IPO or acquisition event defined in the plan.

IRS Publication 525 notes a Section 83(i) election that can allow certain eligible employees at private corporations to defer income tax for up to five years after vesting on qualified stock granted under broad-based programs that can include RSUs. The limits are tight and eligibility is not automatic. IRS Publication 525 is the IRS starting point for that topic.

What taxes apply at vesting

For many employees, vesting is the main tax moment. The vested value is treated as compensation, so federal income tax withholding can apply, plus Social Security and Medicare taxes, plus state and local taxes where applicable.

How the numbers are usually calculated

• Vesting income = shares that vest × FMV on the vest date.
• Tax basis for those shares usually starts at that same FMV per share.

That basis matters later when you sell. You generally pay capital gains tax only on price moves after vesting.

How taxes get paid on a vest

• Net settlement: the plan keeps some shares to cover withholding and deposits the rest.
• Sell-to-cover: the broker sells part of the vested shares right away to raise cash for withholding.
• Cash payment: you pay withholding from your own funds and receive all shares.

Table: RSU vesting events and what they mean

The table below maps the moments people mix up: grant, vest, delivery, and sale, plus what to save for records.

Event	What changes for you	What to track
Grant date	You receive a promise, not shares	Grant notice, schedule, award type
Cliff vest	A larger tranche vests at once	FMV on vest date, withheld shares
Regular tranche vest	Smaller tranches vest on set dates	Vest confirmations, per-share FMV
Performance certification	Targets are met and payout gets set	Goal results notice, payout factor
Share delivery date	Shares land in your brokerage account	Broker statement showing share count
Withholding settlement	Shares or cash cover payroll taxes	How many shares were withheld or sold
Sale of shares	You realize capital gain or loss	1099-B, basis, sale date and price
Job change before vest	Unvested units are often forfeited	Last day on payroll vs vest calendar

What happens when you sell after vesting

If you sell right away on the vest date, your gain or loss is often close to zero because the sale price is close to the FMV used for wage income. If you hold shares, price changes after vesting become capital gain or loss when you sell.

Cost basis is where people get burned

Some brokerage tax forms can show a basis that doesn’t reflect the amount already taxed at vesting. That can create double taxation if you report the sale without fixing basis. Keep the vest confirmation that shows FMV and match it against the broker’s lot details before you file.

Trading limits and resale rules that can affect you

Owning shares does not always mean you can sell today. Public companies can restrict trading during blackout windows. Some shares can also be treated as restricted or control securities.

Rule 144 in plain terms

The SEC’s Rule 144 publication explains when restricted securities and control securities can be resold in public markets and what conditions can apply. SEC Rule 144: Selling Restricted and Control Securities is the official overview.

Many employees never touch Rule 144 for standard public-company RSUs that settle into freely tradable shares. People run into it more with private-company stock, affiliate status, or special legends on shares.

Decisions to make on each vest date

Each vest forces a simple choice: sell, hold, or split. A clean mental model is to treat vested shares like cash you just got paid. If you wouldn’t buy your employer’s stock with that cash today, selling is a reasonable default.

Three common approaches

• Sell all: convert the vest to cash and cut single-stock exposure.
• Sell enough for taxes: keep the rest as stock.
• Hold all: accept price swings and plan for any tax gap if withholding falls short.

Table: Vest-day choices and what they trade off

This table keeps the trade-offs tight so you can pick a default and stick with it across many vests.

Choice	Why people pick it	What to watch
Sell all on vest	Turns equity pay into cash right away	Trading windows, order type, fees
Sell-to-cover only	Keeps some shares while paying withholding	Withholding may be below final tax
Hold all shares	Bet on long-term price gains	Cash plan for taxes, price swings
Stage sells over time	Spreads timing risk across multiple days	Blackout dates, market volatility

RSU vesting mistakes that cost money

Assuming vesting is tax-free until you sell

Vesting is commonly taxed as wage income. Selling later is a second step tied to price moves after vesting.

Assuming withholding equals what you owe

Flat withholding can under-collect for higher earners and over-collect for lower earners. If you see a large vest ahead, check your year-to-date withholding and plan your cash flow.

Reporting the wrong basis on a sale

If the basis is wrong, your reported gain can be too high. Save vest confirmations and reconcile them with your 1099-B lots.

What to expect on your tax forms

After a vest, you’ll usually see the income rolled into your W-2 wages for the year, since payroll treats it like pay. Your paystub for that pay period may show a line item tied to stock compensation, along with withholding that looks larger than normal.

If you sell any shares, the broker generally issues Form 1099-B for the sale. The 1099-B is about the sale only. It does not replace the W-2 income that was created at vesting.

• W-2: captures the vest value as wages and shows withholding collected through payroll.
• 1099-B: captures proceeds, dates, and whatever basis the broker reports for the shares sold.
• Vest confirmations: tie the two documents together by showing share count and FMV on each vest date.

Simple recordkeeping that makes tax season calmer

• Grant notice and vesting schedule
• Each vest confirmation (share count, FMV, taxes withheld)
• Year-end W-2
• Broker statements and Form 1099-B for sales
• Company trading policy or blackout calendar

If you ever need to prove basis, the vest confirmation is the cleanest receipt for the FMV used at vesting.

Self-check before your next vest

• Do you know the next vest date and estimated share count?
• Do you know whether your plan uses net settlement or sell-to-cover?
• Have you picked a default: sell, hold, or split?
• Do you have a folder for vest confirmations and sale records?

Once those answers are set, RSUs become a repeating pay event you can handle with one steady routine.