RSUs — restricted stock units — are how modern tech companies print millionaires. They look like free money: shares vesting on a schedule, no strike price, no decisions required. But RSUs come with tax bills that surprise first-timers, concentration risk that can torpedo your finances, and timing choices worth tens of thousands of dollars. Whether you are at a FAANG giant or a late-stage startup, understanding your RSUs is not optional — for many tech workers, they are the largest component of compensation. This guide explains RSUs completely: how they work, how they are taxed, when to sell, and the mistakes that cost tech employees fortunes.
How RSUs Actually Work
An RSU is a promise: after you satisfy the vesting schedule, you receive actual company shares. Typical Big Tech vesting: 4 years, quarterly or annual vesting after any initial cliff (some companies vest monthly from day one; others use a 1-year cliff). Example: a $400,000 RSU grant over 4 years with quarterly vesting delivers $25,000 in shares every quarter. Unlike stock options, RSUs always have value at vesting (unless the stock goes to literally zero) — there is no strike price to pay. At vesting, shares land in your brokerage account, your employer withholds taxes (usually by selling a portion — “sell to cover”), and the rest is yours. Simple — until taxes and concentration enter the picture.
How RSUs Are Taxed (The Part Everyone Gets Wrong)
At vesting: the full market value of vesting shares is taxed as ordinary income — federal, state (California takes 9.3–13.3%), Social Security, and Medicare. A $25,000 quarterly vest can mean $8,000–$10,000 in combined taxes for a Californian. Withholding is usually too low: employers withhold federal at the 22% supplemental rate (37% over $1M), which under-withholds for high earners — expect an April bill if you do not adjust. After vesting: your cost basis is the vesting-day price; future gains/losses are capital gains — hold 1+ year for long-term rates, or sell immediately to lock in the known tax treatment. California specifics: RSU income is sourced to California based on work location during the vesting period — remote workers across states face multi-state allocation complexity (and if you work from home, see how to deduct your home office on taxes). Double-tax trap: your W-2 already includes vested RSU income — do not report the 1099-B proceeds as if the basis were zero; adjust basis to avoid paying tax twice, the most common RSU tax error.
The Concentration Problem (Your Salary AND Savings in One Stock)
Here is the risk nobody mentions at onboarding: your human capital and financial capital are 100% correlated. If the company stumbles, you could lose your job and watch your portfolio crater simultaneously — the exact scenario that devastated Enron and Lehman employees. Rules of thumb: no single stock above 10–15% of net worth (including unvested grants); sell RSUs at vesting by default and diversify into index funds — you already have massive economic exposure through your salary and future grants; the “would I buy it?” test: if you would not invest $25,000 cash in your employer’s stock today, sell the $25,000 that just vested. Loyalty is for mission statements; portfolios are for diversification. Our budgeting and saving guide keeps the rest of your plan on track too.
When to Sell: The Decision Framework
Default: sell at vesting. This is the academically and practically sound baseline — it eliminates concentration, locks in known taxes, and removes emotion. Consider holding when: you have genuine non-public conviction (rare and dangerous to assume), you are managing around a specific tax event (bunching gains into a low-income year), or selling would trigger wash-sale complications with ESPP purchases. Consider selling faster when: concentration exceeds 15%, you are planning to leave (unvested grants vanish — derisk vested ones), or the stock has had a massive run (rebalance like any winner). Never hold because of taxes: “I will sell next year for long-term rates” while holding a concentrated position through earnings is tax-tail-wagging-dog — a 15% tax saving is meaningless against a 40% drawdown. Set up automatic selling (many brokerages offer auto-sale at vesting) to remove willpower from the equation.
RSUs vs. Options vs. ESPP: The Full Equity Picture
Tech compensation is a portfolio: RSUs (stable value, taxed at vesting — sell and diversify), stock options (leverage, complex taxes — see our tax guide before exercising), ESPP (buy at 15% discount — nearly always worth maxing, then selling promptly per most analyses). Coordinate them: total company exposure across all three should respect the 10–15% concentration limit; tax-manage vesting/exercise events across calendar years; and remember that refresh grants mean the treadmill never stops — your sell-at-vesting system must run permanently, not once.
Common RSU Mistakes
Never selling (“it keeps going up” — until it does not); double-paying taxes via the 1099-B basis error; ignoring under-withholding until April’s bill arrives; holding through blackout periods without a 10b5-1 plan (insiders need pre-planned selling programs); counting unvested RSUs as net worth (they are not yours yet — layoffs erase them); letting loyalty override diversification; and failing to adjust estimated taxes after big vest years, incurring underpayment penalties.
Frequently Asked Questions
Should I sell my RSUs immediately at vesting?
For most people, yes — it eliminates concentration risk, simplifies taxes, and enforces diversification automatically. The main exception is a deliberate, sized-bet decision to hold, made with full awareness of the concentration you are accepting.
How are RSUs taxed in California?
As ordinary income at vesting — federal plus California’s 9.3–13.3% brackets, plus payroll taxes. Withholding at vesting often under-covers the total; plan for an additional payment or adjust W-4 withholding.
What is the difference between RSUs and stock options?
RSUs are granted shares with value at vesting and no purchase needed; options are the right to buy at a set price, valuable only if the stock exceeds it. RSUs are simpler and lower-risk; options offer more leverage at earlier stages.
Do I pay taxes on RSUs if I do not sell them?
Yes — the tax bill arrives at vesting, not at sale. Many first-timers are shocked to owe thousands while holding shares they have not sold. The withholding at vesting covers part of it; the rest is your responsibility.
What happens to my RSUs if I leave the company?
Vested shares are yours permanently. Unvested RSUs are forfeited on departure (with rare exceptions for retirement-eligible employees at some companies). Time your departure with vesting dates in mind — leaving a month before a big vest is expensive.
Conclusion
RSUs are simple instruments with high-stakes decisions wrapped around them: understand the vesting-to-tax pipeline, fix the withholding gap before April surprises you, treat concentration as the emergency it is (sell at vesting, diversify by default), and coordinate RSUs with your options and ESPP as one equity portfolio. The tech workers who build lasting wealth from equity comp are not the ones who held the longest — they are the ones who harvested systematically and diversified relentlessly. Set up auto-selling, check the basis on every 1099-B, and get a CPA who speaks equity comp fluently. Your equity compensation is likely your largest wealth-building tool — treat it with the seriousness it deserves. For the tax mechanics, the IRS stock option and RSU guidance is the reference; FINRA’s equity compensation insights explain the mechanics plainly; for the planning layer, our How do i choose between a cruise and an all inclusive resort keeps your broader finances on track.