How RSUs Are Taxed: A Guide for Tech and Startup Employees

At Mana, we see RSUs as one of the most powerful tools our clients use to build wealth. The most financially successful people we work with live comfortably within their salaried income and treat their RSUs as fuel for their biggest goals — buying a home, funding their kids’ education, or accelerating retirement.

The challenge is that RSUs don’t show up as “free money.” They come with tax rules that can be confusing, costly, and in some cases downright unfair if you don’t plan ahead.

Every year we meet employees who discover too late that their company withheld too little tax, or that they owe money on shares they can’t even sell yet. These aren’t small mistakes. They can mean tens of thousands of dollars out of pocket.

If RSUs are part of your compensation — whether at a private startup on the brink of IPO or a public tech giant — you need to understand how they’re taxed, where the common traps are, and how to make them work as part of your bigger financial plan. Let’s break it down.

The Two Big Tax Moments

1. Vesting: When Shares Become Income

Think of vesting like this. Instead of your boss handing you a $200,000 cash bonus, they hand you $200,000 worth of company stock. The IRS doesn’t care that it’s stock. To them, that’s income, and it shows up on your W-2 the same way your salary does.

Here’s where people get tripped up. Most companies withhold a flat 22% on RSU income. If your actual tax bracket is closer to 35%, you’ve got a gap. You’ll owe more than what was withheld, which means a surprise bill come April. A few companies let you adjust your withholding rate in advance. It is worth checking with HR before you get caught short.

2. Selling: When Capital Gains Enter the Picture

Once your shares vest, you face a new question: when do you sell?

Your cost basis, the number that matters for taxes, is the stock’s fair market value on the day your RSUs vest. Cost basis is simply the starting value of your shares for tax purposes. From there, any difference between the vesting price and your eventual sale price is a capital gain or loss.

• Sell within a year? That gain is taxed like income.

• Hold longer than a year? You may qualify for the lower long-term capital gains rate.

That’s why timing (and discipline) matter. If you sell immediately upon vesting, you can reliably predict both the income you’ll report and the taxes you’ll owe. It takes the guesswork out. If instead you roll the dice and hold your shares, two things can happen. The stock might climb, and you could walk away with a meaningful gain. Or it could fall, leaving you selling at a lower price than the one you were taxed on at vesting. Either way, the IRS already counted that higher price as income, which can make the downside sting even more.

The Forms That Confuse Everyone

When tax season rolls around, the alphabet soup begins. Your W-2 shows the income at vest. Then comes your broker’s Form 1099-B (from providers like Fidelity, E*TRADE, or Charles Schwab), which reports the proceeds when you sell shares. But here’s the catch: the 1099-B often shows an incomplete or incorrect cost basis, which means it doesn’t reflect the income you already paid tax on at vesting. That’s why many people feel like they’re being taxed twice.

This is where two IRS forms come in:

• Form 8949: This is where you list each stock sale from your 1099-B. If the cost basis on the 1099-B is wrong, you make the adjustment here so the IRS sees the correct numbers.

• Schedule D: This form summarizes all your sales from Form 8949 and shows your total capital gains and losses for the year.

Think of it like a chain. Your broker gives you the raw sales info (1099-B). You clean it up and make adjustments (Form 8949). Then you roll it all up into one picture of your gains and losses (Schedule D).

These forms aren’t here to trip you up. They’re designed to make sure you’re not paying tax twice on the same RSU income.

Three Ways to Handle RSU Taxes

There’s no one perfect strategy. Each choice comes with trade-offs:

Option 1: Adjust Withholding Early
If your company allows it, increase your RSU withholding rate to match your actual tax bracket. One tech employee we worked with made this switch and dodged a $40,000 surprise tax bill.

Option 2: Sell-to-Cover at Vesting
Many companies will automatically sell enough shares at vesting to cover your taxes. This protects you from being forced to sell later at a loss. The trade-off is obvious. You may miss out on future gains.

Option 3: Hold and Decide Later
You can hang onto all your shares and wait until tax season to sell what’s needed. This works if you believe strongly in your company’s growth. But it comes with the highest risk. If the stock tanks, you may be selling at the worst possible time just to pay the IRS.

These strategies assume you’re working with public company RSUs, where you can sell your shares freely. If you’re at a private company, your choices are more limited and often depend on when a liquidity event occurs.

Two Extra Traps Most People Miss

Concentration Risk

RSUs can create what we call the “triple stack of risk.” Your paycheck depends on the company. Your career trajectory depends on the company. And now, your wealth depends on the company too. If things go well, that can be a rocket ship. If things don’t, it can mean losses across every part of your financial life at once.

This is why we encourage our clients to set rules for themselves, like selling their vested shares right away no matter what. It can feel like you’re leaving money on the table, but you’re also buying freedom from being overexposed to a single stock.

State-by-State Tax Surprises

Another wrinkle is where you live and work when your RSUs vest. States like California and New York take a big bite out of RSU income. If you move mid-year, for example from San Francisco to Austin, you may need to split your income between states on your return. Your W2 may not correctly reflect this move. Some employees even end up double-taxed if they don’t file correctly. Keeping careful track of where you lived and worked during vesting can save you from messy and expensive surprises later.

Public vs. Private Company RSUs

If you work at a public company, you have the luxury of choice. You can sell your shares right after vesting, or hold and decide later. The tax rules are fairly predictable.

Private company RSUs, however, add another layer of complexity. You may owe taxes at vesting without a market to sell into. This creates what’s sometimes called “phantom income.” Planning for liquidity, whether through savings, secondary sales, or anticipating a company-led tender offer, becomes critical.

If you’re at a company that’s on the brink of IPO, this distinction matters. You don’t want to be caught with a tax bill you can’t pay because your shares aren’t tradeable yet.

RSUs can feel complicated, but the basic idea is simple:

• Vesting creates income.

• Selling creates gains or losses.

• Your forms connect the dots.

The real work is in deciding how to handle them within your bigger financial plan. Do you want the safety of selling right away? Or the upside and risk of holding? Do you have enough cash set aside to cover surprises? And how much of your net worth do you really want tied up in your employer?

Fall is the perfect time to revisit these questions. Pull your pay stubs and check whether your withholding is on target. A financial advisor or CPA can help you connect the dots. A little planning now can turn what feels like a messy tax season into a smooth one.

One client we’ve worked with for several years had an especially big year. He got married, bought a home in the competitive Bay Area market, renovated that home, and welcomed a baby — all within twelve months. When we first met, his company stock had become an outsized position in his portfolio. Together, we agreed upon a disciplined RSU strategy moving forward: negotiate RSUs each year, sell at vest, and invest the proceeds with flexibility in mind. That consistency meant when life came at him fast, he had the cash on hand to make each of those milestones possible. He was thrilled not only to check those boxes, but to do it all without financial strain.

That is what an RSU strategy really provides. Not just tax efficiency, but the ability to turn stock into the freedom to act when life happens.

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Stephanie Bucko and Cristina Livadary are fee-only financial planners based in Los Angeles, California. Stephanie is the Chief Investment Officer and Cristina is the Chief Executive Officer at Mana Financial Life Design (FLD). Mana FLD provides comprehensive financial planning and investment management services to help clients grow and protect their wealth throughout life’s journey. Mana FLD specializes in advising ambitious professionals who seek financial knowledge and want to implement creative budgeting, savings, proactive planning and powerful investment strategies. As fee-only fiduciaries and independent financial advisors, Stephanie and Cristina never receive commission of any kind. Stephanie and Cristina are legally bound by their certifications to provide unbiased and trustworthy financial advice.