When restricted stock units (RSUs) vest, the fair market value of the shares generally becomes ordinary W-2 income. Employers and plan brokers (Fidelity Stock Plan Services, E*TRADE Equity Edge, Morgan Stanley at Work, Shareworks, and similar) usually withhold tax by selling some shares (“sell-to-cover”) or holding back shares. That withholding is often at the IRS flat supplemental wage rate—which may be lower or higher than your actual marginal rate. The gap shows up as a refund or a balance due at filing.
Sibling equity-comp paths: ESPP basics and Net unrealized appreciation (different rules for certain retirement-plan employer stock). Filing orientation: Filing taxes for beginners. After shares settle they usually sit in a taxable brokerage. Large one-time equity income can also interact with AMT for W-2 workers in ISO-heavy years—RSUs themselves are typically ordinary income, not an ISO preference item.
Supplemental withholding vs your real tax
| Piece | Plain meaning |
|---|---|
| Vest FMV × shares | Ordinary income on that day’s W-2 / pay stub |
| Supplemental federal withholding | Flat percentage many employers use on bonuses and RSU income (rate set by IRS rules—confirm current %) |
| Social Security / Medicare | Still apply up to wage-base rules |
| State withholding | Flat or formula—varies by state (CA, NY, TX none, etc.) |
| Sell-to-cover | Broker sells enough shares to fund estimated tax withholdings |
| Net shares to you | What lands after cover + fees |
If your combined federal+state marginal rate is above the supplemental flat rate, sell-to-cover alone can under-withhold. If your rate is lower, you may get a larger refund—or you over-sold shares you meant to keep for concentration-risk reasons.
Ways people close the gap
- Extra paycheck withholding (W-4 Step 4 extra dollar amount) for the rest of the year after a big vest.
- Estimated tax vouchers (Form 1040-ES) if wages alone will not cover.
- Sell additional shares after vest (taxable sale—track basis carefully on the 1099-B).
- Same-day sale of all vested shares when you want cash and less single-stock risk—still ordinary income on the vest FMV; capital gain/loss only on moves after vest.
Do not confuse RSU ordinary income with ESPP discount timing or NUA elections—those are different regimes.
Worked example: under-withheld vest
Riley’s employer grants RSUs. On vest day, 200 shares at $150 = $30,000 W-2 income. The plan withholds federal at a flat supplemental rate that funds about $6,600 federal (illustrative 22% pattern—use the current IRS supplemental rate for your year), plus Social Security/Medicare and California state withholding. Riley’s actual federal+state marginal stack on the next dollars is closer to 35%+ combined.
Rough gap: several thousand dollars of tax on the $30,000 may still be due in April unless Riley adds W-4 extra withholding or estimates. Riley’s paycheck stub and year-end W-2 Box 1 / Box 2 should be reconciled in tax software before celebrating the “net shares” landing in Fidelity.
Riley also notes: basis of the kept shares for later capital-gain purposes generally starts at the income already recognized (vest FMV), so a later sale at $150 is roughly flat for capital gain before fees—confirm with the broker’s cost-basis lot.
Practical habits
- Before a large vest, estimate total tax using last year’s return and the vest FMV.
- Compare plan default sell-to-cover % to your marginal stack.
- Set W-4 extras or 1040-ES the same month as the vest—not in March.
- Download the plan release confirmation and match it to the W-2 and 1099-B.
- Decide a diversification rule so one employer ticker does not dominate investable assets.
Checklist
- Read the RSU grant / stock-plan FAQ for sell-to-cover vs hold-and-withhold cash.
- Model federal supplemental rate + state + FICA against your real bracket.
- Adjust W-4 or estimates in the vest quarter.
- Track lot basis after vest for future sales.
- Separate RSU ordinary income from ESPP/ISO events on the same W-2.
- Revisit concentration risk after each vest wave.
ISO exercise-and-hold AMT (Form 6251) is a different problem than RSU supplemental withholding: ISO AMT adjustment basics.
NSO vs ISO tax timing (ordinary income vs AMT) beside RSU vesting: NSO vs ISO tax basics.
ESPP disqualifying dispositions put ordinary income on the W-2 beside other equity pay: ESPP disqualifying disposition basics.
Educational only. Not tax, legal, or investment advice. Withholding rates, plan defaults, and state rules change; confirm with payroll, current IRS supplemental-wage guidance, and a qualified tax professional.