RSU Vesting in 2026: What Tech Employees Need to Know
Restricted Stock Units have become the dominant form of equity compensation across Silicon Valley. From Apple and Google to mid-stage startups, RSUs are how most tech employees receive a meaningful share of their company's value. Yet despite their prevalence, many employees are caught off guard by the tax bill that arrives when their shares vest.
If you have RSUs vesting in 2026, understanding the tax mechanics is essential to keeping more of what you earn. This guide walks through exactly how RSU taxation works, the withholding methods your employer may use, and the planning strategies that can save you thousands of dollars. For a broader overview of equity compensation planning, visit our equity compensation tax services page.
How RSUs Are Taxed at Vesting
Unlike stock options, RSUs have no exercise price and no decision to make at vesting. On the date your RSUs vest, the fair market value of the shares is treated as ordinary income and added to your W-2. This is the single most important concept to understand: RSU income is taxed just like your salary, at your marginal tax rate.
For example, if 500 shares vest when the stock price is $200, you recognize $100,000 of ordinary income on that date. This amount is subject to federal income tax, Social Security tax (up to the wage base), Medicare tax, California state income tax, and any applicable local taxes.
The total combined marginal rate for a Bay Area tech worker can easily exceed 50% when you add federal (37%), California (up to 13.3%), Medicare (2.35% with the additional Medicare tax), and Social Security together.
Withholding Methods: Sell-to-Cover vs. Net Shares
Because RSU income is substantial, your employer must withhold taxes at the time of vesting. The two most common methods are:
Sell-to-Cover
Your employer sells enough shares on the open market to cover the tax withholding and delivers the remaining shares to your brokerage account. This is the most common approach at large public companies. If 500 shares vest, your employer might sell 220 shares to cover taxes and deposit 280 shares into your account.
Net Share Withholding
Your employer withholds a portion of the vesting shares (rather than selling them) to satisfy the tax obligation. The withheld shares never appear in your account. The result is similar to sell-to-cover, but the mechanics differ slightly for tax reporting purposes.
The Supplemental Wage Withholding Problem
Here is where many tech employees run into trouble. Federal supplemental wage withholding is set at a flat 22% for amounts up to $1 million and 37% above that threshold. California supplements are withheld at 10.23%. For high earners, these flat rates are often lower than your actual marginal rate, which means you may owe a significant balance when you file your return.
| Tax | Supplemental Withholding Rate | Potential Actual Rate |
|---|---|---|
| Federal Income Tax | 22% (up to $1M) | 32%–37% |
| California State Tax | 10.23% | 11.3%–13.3% |
| Medicare | 1.45% | 2.35% (with surtax) |
| Social Security | 6.2% (up to wage base) | 6.2% (up to wage base) |
The gap between supplemental withholding rates and actual marginal rates frequently results in an underpayment of $10,000 to $50,000 or more for employees with large vesting events. If you do not make estimated tax payments to compensate, you could also face underpayment penalties.
Why Section 83(b) Does Not Apply to RSUs
A common question we receive is whether a Section 83(b) election can be filed for RSUs. The short answer is no. Section 83(b) allows you to recognize income at the time of grant rather than vesting, but it only applies to property that has been transferred to you subject to a substantial risk of forfeiture. Standard RSUs are not transferred to you until they vest, so there is no property to elect on.
Some companies offer "early settlement" RSUs that may qualify for an 83(b) election, but these are rare. If your grant agreement mentions early settlement or restricted stock awards (as opposed to units), consult with a tax professional to determine whether an 83(b) election is available and beneficial.
Tax Planning Strategies for RSU Vesting Events
Proactive planning around vesting dates can meaningfully reduce your tax burden. Here are the strategies we recommend to our clients:
- Make quarterly estimated payments. Calculate the expected shortfall between your supplemental withholding and your actual tax liability. Make estimated payments to the IRS (Form 1040-ES) and the California Franchise Tax Board (Form 540-ES) to avoid underpayment penalties.
- Maximize pre-tax retirement contributions. Contribute the maximum to your 401(k) ($23,500 in 2026, plus $7,500 catch-up if you are 50 or older). If your employer offers a mega backdoor Roth option, consider after-tax contributions with in-plan conversions to shelter additional income.
- Bunch charitable donations. If you are charitably inclined, consider donating appreciated vested shares directly to a donor-advised fund. You avoid capital gains tax on the appreciation and receive a fair market value deduction, which is especially valuable in high-income years.
- Harvest capital losses. If you hold other investments with unrealized losses, consider selling them in the same year as a large vesting event to offset other gains and reduce your adjusted gross income.
- Coordinate with other income sources. If you have flexibility in the timing of other income, such as consulting fees, business income, or the exercise of stock options, coordinate these events with your vesting schedule to manage your overall tax bracket.
Coordinating RSU Income with Your Full Tax Picture
RSU income does not exist in isolation. It affects your eligibility for various deductions and credits, can trigger the Net Investment Income Tax (3.8% on investment income above certain thresholds), and impacts your California tax bracket. For dual-income households in the Bay Area, a single large vesting event can push combined income into the highest brackets at both the federal and state level.
We recommend that tech employees with significant RSU compensation schedule a tax projection meeting at least once per year, ideally in Q3, before year-end planning deadlines pass. A projection allows you to model the impact of upcoming vesting events, plan estimated payments, and identify opportunities to reduce your effective tax rate.
What to Do After Your Shares Vest
Once shares are deposited into your brokerage account, you need to decide whether to hold or sell. From a tax perspective, holding beyond the vesting date does not change the ordinary income already recognized. However, any subsequent gain or loss will be treated as a capital gain or loss. If you hold for more than one year after vesting, the gain qualifies for long-term capital gains rates (0%, 15%, or 20% plus the 3.8% NIIT).
That said, concentration risk is real. Holding a large position in your employer's stock means your wealth is highly correlated with your employment income. Many financial advisors recommend a systematic diversification plan after vesting to reduce this risk.
The Bottom Line
RSU vesting events are among the most significant tax events in a tech employee's financial life. The combination of ordinary income treatment, inadequate supplemental withholding rates, and California's high marginal rates means that planning ahead is not optional but essential. If you have RSUs vesting in 2026, now is the time to model the tax impact and develop a strategy.
At Silicon Valley Tax, we specialize in helping tech professionals navigate the complexities of equity compensation taxation. Schedule a consultation to review your vesting schedule and build a personalized tax plan.