Sell at vest. Pay the taxes. Diversify into a broader portfolio. You've already been compensated. Now protect it.
Your RSUs just vested. $200,000 worth of company stock hit your account. Congrats.
Except your take-home was $105,000.
Where'd the other $95,000 go? The IRS. State tax authority. Social Security (up to the cap). Medicare. And supplemental wage withholding that somehow still left you with a surprise $8,000 tax bill in April.
Welcome to the RSU tax trap.
The Part Nobody Explains Until After Vesting
RSUs are taxed as ordinary income on the day they vest. Not when you sell. Not when you exercise. The moment they vest, the IRS treats them like a cash bonus even though you received stock you can't immediately liquidate (hello, trading windows and blackout periods).
Here's the math on a $200,000 vest:
- Federal income tax: ~$61,000 (assuming 32% marginal bracket)
- State income tax: ~$13,000 (assuming 6.5% state rate)
- Social Security: $10,453 (if you haven't hit the wage base cap yet)
- Medicare: $2,900 (1.45% base + 0.9% additional Medicare tax over $200K)
- Total tax hit: ~$88,340
Your employer will withhold some of this at vesting typically 22% federal supplemental wage rate plus state withholding. That's around $57,000. Which leaves you with a $30,000+ shortfall at tax time.
That's the surprise bill that shows up in April.
The Default Withholding Mistake
Most companies default to "sell to cover" withholding. They sell just enough shares to cover the mandatory withholding (usually 22% federal + state), then give you the rest.
The problem? 22% is almost never your actual marginal rate if you're making tech money.
If your base salary is $150K and you vest $200K in RSUs, your total W-2 income is now $350K. That puts you solidly in the 35% federal bracket (for 2026, the 35% bracket starts at $256,225 for single filers).
So they withheld 22%, but you actually owe 35%+ on the RSU income. That 13-point gap? That's your April surprise.
The Strategies That Actually Work
1. Increase your withholding to match your marginal rate
Most equity platforms (E*TRADE, Schwab, Fidelity, Morgan Stanley) let you customize your withholding percentage. If you're in the 35% bracket, tell them to withhold 40% (to cover federal + state + FICA).
Yes, it sucks to see less stock hit your account. But you know what sucks more? Writing a $30K check to the IRS in April.
2. Sell immediately to derisk and diversify
This is controversial, but hear me out: if you vest $200K in RSUs, you now have $200K worth of a single stock in your portfolio. That's concentration risk.
If your employer is already 30-40% of your net worth (which is common for tech employees), adding another $200K of company stock makes it worse.
Sell at vest. Pay the taxes. Diversify into a broader portfolio. You've already been compensated. Now protect it.
3. Plan around vesting dates for the year
Most RSU grants vest quarterly or annually. Map out your vesting schedule for the year and calculate the total tax impact.
If you're vesting $300K across the year, you need to set aside ~$135K for taxes. Don't spend the early vests thinking you're flush—the tax bill is cumulative.
4. Use tax-loss harvesting if the stock drops post-vest
If you hold the stock after vesting and it drops, you can harvest the capital loss to offset other gains. But this requires you to actually track your cost basis (which is the FMV on vest date) and stay on top of wash-sale rules.
Most people don't bother. Which is why selling at vest is cleaner.
5. Consider a mega backdoor Roth or deferred comp to offset
If your company offers after-tax 401(k) contributions with in-service conversions (mega backdoor Roth), you can shield some income in the vest year. Same with deferred compensation plans—though those have their own risks.
This is advanced planning. Work with an advisor who actually understands tech comp.
The Scenarios Nobody Talks About
Scenario 1: Your company goes public and your RSUs skyrocket
You vest $200K in RSUs at IPO. Six months later, the stock doubles. You now have $400K worth of stock, but you paid taxes on $200K at vest.
If you sell now, you'll owe long-term capital gains on the $200K increase. But that's a much better tax problem than the ordinary income hit you took at vest.
Scenario 2: Your company stock craters after you vest
You vest $200K in RSUs, owe $87K in taxes, hold the stock, and watch it drop 50%. Now you're sitting on $100K in stock value but you still owe $87K in taxes on the original $200K vest.
This happened to a lot of people in the 2022 tech correction. They held post-vest, got crushed, and still owed taxes on the original value.
This is why "sell at vest" is the default advice.
Scenario 3: You have multiple vests in a single year
You have $80K vesting in Q1, $80K in Q2, $80K in Q3, $80K in Q4. Each vest gets withheld at 22% federal. But your total W-2 income (including base salary) is now well into the 35% bracket.
By Q4, you're under-withheld by $40K+. Make estimated tax payments throughout the year or increase withholding on later vests to catch up.
What to Do Right Now
If you have RSUs vesting this year:
- Pull your equity grant docs and map out the vesting schedule
- Calculate total vest value + your base salary to determine your actual marginal tax rate
- Adjust your withholding percentage in your equity portal (aim for 40-45% total to cover federal + state + FICA)
- Decide now: sell at vest or hold? Default to sell unless you have a strong reason to hold
If you just vested and didn't adjust withholding:
- Check how much was withheld vs. how much you'll actually owe
- Set aside the shortfall in a high-yield savings account
- Consider making an estimated tax payment if the gap is large (to avoid underpayment penalties)
If you're negotiating an offer with RSUs:
- Understand the vesting schedule (common: 25% after year 1, then quarterly for 3 years)
- Ask about refresh grants (additional RSU grants after your initial grant starts vesting)
- Model the tax impact at your expected income level—don't just look at the headline number
The Bottom Line
RSUs are great compensation. But they're taxed brutally, and the default withholding almost always under-withholds.
If you don't plan for it, you'll get the April surprise. If you do plan for it, you'll sell at vest, pay your taxes, diversify, and sleep better.
Stop treating RSUs like lottery tickets. They're income. Treat them accordingly.
Advisors associated with Chesapeake Financial Planners may be either (1) LPL Financial Registered Representatives offering securities through LPL Financial, Member FINRA and SIPC, and investment advisor representatives offering investment advice through Great Valley Advisor Group; or (2) solely investment advisor representatives offering investment advice through Great Valley Advisor Group and not affiliated with LPL Financial. Great Valley Advisor Group, and Chesapeake Financial Planners are separate entities from LPL Financial.
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