The Short Answer

1. An RSU grant is usually a promise, not taxable stock

A standard RSU generally represents an employer’s promise to deliver stock or cash in the future if specified conditions are met.

That matters because receiving an RSU grant is different from receiving stock today.

Treasury Regulation §1.83-3(e) generally excludes an unfunded and unsecured promise to pay money or property in the future from the definition of “property” for IRC §83 purposes. As a result, a standard RSU generally is not treated as transferred property when it is granted.

Suppose your employer grants you 1,000 RSUs when the company’s stock trades at $30.

The grant may appear to represent $30,000 of compensation on an offer letter or benefits portal. But you generally do not have $30,000 of taxable wage income merely because the award was granted.

You still have to satisfy the vesting conditions, and the value of the stock may change before shares are actually delivered.

That is why the headline value of an RSU grant should not be treated the same way as cash salary.

2. Settlement usually creates the wage income for a stock-settled RSU

Most employee RSUs vest over time.

A four-year schedule, for example, might make a portion of the award vest each year or quarter as long as the employee satisfies the applicable service conditions.

For a typical arrangement in which the RSUs vest and are settled in shares at the same time, the fair market value of the shares at settlement generally becomes wage compensation.

For example:

100 RSUs vest and settle when the stock is worth $40 per share.

100 × $40 = $4,000.

The employee generally has $4,000 of wage income.

That amount is normally included in Form W-2 wages and is generally subject to applicable federal income tax withholding and employment taxes.

In many ordinary RSU plans, vesting and settlement occur together or very close together, so the distinction may not matter in practice.

But vesting by itself should not be treated as the universal federal income-tax event. A standard RSU is generally only a promise until stock or other property is transferred in settlement. If the plan allows settlement to occur later, the plan terms and applicable tax rules need to be reviewed separately. IRC §83 generally applies when property is actually transferred in connection with services.

3. Selling the shares is a separate tax event

Once the RSUs have settled in shares and the compensation has been recognized, the employee owns stock.

From that point forward, the tax question changes.

The amount already included as compensation generally becomes part of the employee’s tax basis in the shares. If the employee paid anything for the shares, that amount generally also contributes to basis.

A later sale produces capital gain or loss based on the difference between the sale proceeds and that tax basis.

Using the earlier example:

RSUs settle at $40 per share.

The employee receives 100 shares and recognizes $4,000 of wage income.

The shares are later sold for $46 each.

Sale proceeds: $4,600
Tax basis: $4,000
Capital gain: $600

The employee is not taxed on the entire $4,600 again.

The first $4,000 was already accounted for as compensation. The subsequent $600 increase represents gain from owning the stock.

How long the employee holds the shares after receiving them generally determines whether the capital gain or loss is short-term or long-term.

This distinction also makes basis records important. Stock compensation can create both W-2 income and a later brokerage transaction, and those two pieces need to be reconciled correctly.

4. Tax withholding is not your tax rate

When RSU compensation becomes taxable wages, employers often satisfy the withholding obligation by withholding cash, retaining shares, or selling a portion of the shares.

That can make it look as though the tax has already been fully calculated.

It has not.

Federal income tax withholding is a prepayment toward the employee’s eventual income tax liability.

For supplemental wages of $1 million or less, an employer may use the optional flat 22% federal withholding method when the applicable requirements are satisfied. If an employee’s supplemental wages from the employer exceed $1 million during the calendar year, the excess is generally subject to mandatory withholding at the highest individual income tax rate—37% for 2026.

The 22% number is a withholding rate.

It is not a special 22% tax rate for RSUs.

If the employee’s actual marginal federal income tax rate is higher, the withholding may not be enough. If it is lower, the employee may have withheld more than ultimately necessary.

Salary, bonus, RSU compensation, consulting income, investment income, deductions, credits, and other household income all come together on the tax return.

That is why a large RSU settlement can contribute to an unexpected balance due even when shares were withheld for taxes.

5. California taxes RSU compensation too

California residents are generally taxed on taxable income from all sources.

For nonresidents and part-year residents, California generally taxes compensation to the extent it is attributable to services performed in California.

FTB Publication 1004 specifically describes RSUs using the vesting date. If the employee is a California resident when the RSUs vest, California generally taxes the related wage income.

If the employee is a nonresident when the RSUs vest, California generally taxes the portion of the compensation attributable to services performed in California from the grant date through the vesting date. FTB describes a workday allocation as a reasonable method when services were performed both inside and outside California.

That means moving out of California before an RSU vests does not necessarily eliminate California tax on the award.

For example, if an employee works in California for part of the grant-to-vesting period and later moves to another state, a portion of the eventual RSU compensation may still be California-source wage income.

For someone who remains a California resident throughout the relevant period, the sourcing issue is usually much simpler because California generally taxes the resident’s taxable income regardless of source.

6. RSUs are not the same as restricted stock

The similar names cause confusion.

Restricted stock generally involves actual shares transferred to the employee while those shares remain subject to restrictions or a substantial risk of forfeiture.

A standard RSU generally represents only a contractual promise to deliver stock or cash later.

That difference matters for an IRC §83(b) election.

Section 83(b) allows a taxpayer in certain circumstances to elect immediate income inclusion when substantially nonvested property has actually been transferred in connection with services.

A standard RSU generally does not qualify because the employee has not received property at grant. The RSU itself is generally only an unfunded and unsecured promise to deliver property later.

So an employee should not assume that an 83(b) election is available simply because an award contains the word “restricted.”

Restricted stock and restricted stock units are different arrangements.

7. IRC §83(i) is a narrow exception

IRC §83(i) provides a specialized deferral election for certain employees of eligible private corporations.

If the requirements are satisfied, a qualified employee may elect to defer federal income inclusion for qualified stock received through certain broad-based stock-option or RSU programs.

The deferral can extend for up to five years, but it ends earlier if one of the statutory inclusion events occurs.

The rule has significant eligibility requirements. Among other things, the corporation must be privately held, the stock must qualify, and certain owners and senior executives are excluded from the definition of qualified employee.

IRS Publication 525 explains that qualified stock can include stock received in settlement of an RSU and describes the five-year maximum deferral and earlier inclusion events.

This is a special exception.

It is not the normal tax treatment for a typical RSU award.

8. What changed between 2025 and 2026?

The basic federal tax framework for a typical RSU did not materially change between Evan’s 2025 offer and the current-law review in 2026.

A standard RSU generally still does not produce taxable wage income merely because it is granted.

For a typical stock-settled award that vests and settles at the same time, the value of the shares received at settlement generally becomes wage compensation. A later sale of those shares is then analyzed separately for capital gain or loss.

The federal supplemental-wage withholding rules also continue to use the optional 22% flat withholding rate when the applicable requirements are satisfied. For 2026, supplemental wages above the $1 million threshold remain subject to mandatory withholding at 37% on the excess.

Common Mistakes

Treating the grant-date value as cash compensation.
A $50,000 RSU grant is not necessarily worth $50,000 when shares are ultimately delivered, and the grant itself generally is not the taxable wage event.

Assuming vesting is always the federal tax event.
Vesting and settlement often occur together, but they are not conceptually the same. For a standard stock-settled RSU, the transfer of the shares at settlement is the key event.

Assuming 22% withholding means a 22% tax rate.
Withholding is only a prepayment. Your final tax depends on your overall taxable income and tax situation.

Calling the entire stock sale a capital gain.
The value already recognized as compensation generally becomes part of the tax basis. Capital gain or loss generally reflects the subsequent change in value.

Confusing RSUs with restricted stock.
A standard RSU generally is a promise to receive property later. Restricted stock generally involves actual stock that has already been transferred subject to restrictions. That difference matters for IRC §83 and the availability of a Section 83(b) election.

Ignoring California after a move.
Leaving California before vesting does not necessarily eliminate California tax. Compensation attributable to services previously performed in California may remain California-source income.

The Key Distinction

1. The grant generally gives you a future contractual right, not currently transferred stock.
2. Settlement generally creates wage income for a typical stock-settled RSU. Vesting and settlement often occur together, but not always.
3. A later sale of the shares creates a separate capital gain or loss.

And one more distinction matters in practice:

Tax withholding at settlement is not the same as your final tax liability.

An RSU offer can be valuable compensation. But the number shown in an offer letter is not the same thing as cash salary, and understanding when the award actually becomes yours matters both for taxes and for evaluating what the job offer is really worth.

Reference

Federal — RSU Taxation and IRC §83

IRC §83 — Property Transferred in Connection With Performance of Services
Provides the basic rules for property transferred in connection with services, including §83(b) elections and the specialized §83(i) rules.
26 U.S.C. §83

Treas. Reg. §1.83-3 — Meaning and Use of Certain Terms
Defines property and transfer for §83 purposes and provides that an unfunded and unsecured promise to pay money or property in the future generally is not §83 property.
Treas. Reg. §1.83-3

IRS Publication 5992 — Equity (Stock)-Based Compensation Audit Technique Guide
Discusses RSU grants, vesting, stock settlement, §83, §83(b), and FICA timing.
IRS — Publication 5992

IRS Publication 525 — Taxable and Nontaxable Income
Explains qualified equity grants and the specialized deferral rules under IRC §83(i).
IRS — Publication 525

Federal — Withholding

2025 IRS Publication 15 — Employer’s Tax Guide
Provides the supplemental-wage withholding rules applicable in Evan’s 2025 story year.
IRS — 2025 Publication 15

2026 IRS Publication 15 — Employer’s Tax Guide
Explains the 2026 supplemental-wage withholding rules and continuation of the 22% / 37% rate structure following P.L. 119-21.
IRS — 2026 Publication 15

California

California FTB Publication 1004 — Equity-Based Compensation Guidelines
Explains California taxation of RSUs and sourcing when an employee’s residency or work location changes between grant and vesting.
FTB — Equity-Based Compensation Guidelines

See This Rule in the Story

The Offer

Evan’s new job offer includes a $150,000 salary, a target bonus, and RSUs.

The salary is easy to put into his spreadsheet. The equity is harder. Its value depends on whether he stays long enough for the award to vest, what the stock is worth when shares are delivered, and what happens after he owns them.

That is the distinction behind the Episode: a compensation package can have one headline number while its pieces work very differently in real life—and for tax purposes.

READ THE EPISODE →