What is an RSU? Definition, Benefits, & Taxes

Restricted stock units (RSU): Definition, benefits, and taxes

Author:

Hilary Friesen

Published date:

February 5, 2025

Learn about restricted stock units—a type of equity—including how RSUs work, how they are taxed, and benefits for employees.

What is a restricted stock unit?

A restricted stock unit (RSU) is a form of equity compensation that companies issue to employees and other service providers. An RSU is a promise from your employer to grant you shares of the company’s stock (or the cash equivalent) on a future date—if certain restrictions are met. The process of meeting these restrictions is called vesting.

RSU grants are an alternative to stock options (like ISOs or NSOs), which give employees the chance to buy company stock at a set price. With RSUs, you don’t have to pay anything to get the stock. Instead, you are usually only responsible for paying the applicable taxes when you receive your shares. Unlike with restricted stock awards (RSA), you won’t acquire the shares underlying the RSUs until they vest.

RSUs vs. options

Want to know more about the differences between RSUs and stock options? Read our guide.

How do RSUs work?

In order for you to receive your RSUs, you have to meet the vesting conditions outlined in your RSU agreement.

RSU vesting and conditions

Vesting conditions within your RSU agreement may include any of the following:

  1. Time-based (e.g., you must stay at the company for a certain amount of time)
  2. Milestone-based (e.g., your company must IPO or be acquired, or you have to complete a performance milestone or project)
  3. A combination of the two

Single trigger vs. double trigger RSUs

Private companies have two options to help their employees cover taxes for their RSU awards: single-trigger or double-trigger. The main difference between the two is that single-trigger RSUs only have one type of vesting condition, whereas double-trigger RSUs have two types (usually both time-based and milestone-based).

How are RSUs taxed?

With RSUs, you usually have to pay ordinary income tax on the fair market value (FMV) of the shares when you acquire them, which is when they settle. This differs from how stock options are taxed.

RSU tax rate

Your RSU shares are initially taxed as supplemental income. Employers are required to withhold 22% for federal income taxes on the first $1 million in supplemental income for employees, and 37% of any amount exceeding $1 million.

Sell-to-cover

Your company may allow you to sell a portion of your vested shares to cover the tax obligation your employer must withhold, a strategy called “sell-to-cover.”

Capital gains tax

When you sell RSUs, you may also need to pay capital gains tax on the spread. The spread is the increase between the cost basis (the FMV of the shares when you received them) and the sale price. How long you hold the shares usually determines whether you will pay short-term or long-term capital gains tax.

RSU tax implications
Action Tax implication
Your company gives you an RSU grant. No immediate tax implication.
Your RSUs vest and are settled. You’ll owe ordinary income tax on the FMV of your shares at the time of settlement.
Your RSUs are settled and you sell the shares immediately at the FMV. You’ll owe ordinary income tax on the FMV of the shares you acquired and no capital gains tax on the sale of the shares.
You sell your shares within one year of receiving them. If you sell at a price higher than the FMV of your shares at vesting, you’ll also likely owe short-term capital gains tax on the difference.
You sell your shares after holding them for more than a year. If you sell at a price higher than the FMV of your shares at vesting, you’ll also likely owe long-term capital gains tax on the difference.

When can I sell my RSUs?

Depending on your own financial situation or your confidence in your company’s future success, you may consider selling your RSUs to access immediate liquidity. When thinking about whether to sell your RSUs, consider things like:

Public company RSUs

If your company is public, you can usually sell the shares you receive from your RSUs as soon as you meet the vesting criteria and receive your shares.

Private company RSUs

If your company is private, you’ll need to wait for a liquidity event to sell your shares.

What happens to RSUs when I leave a company?

Most times, if you leave your company, you’ll get to keep your fully vested shares. You’ll likely lose any shares that aren’t time-vested. Generally, this is the same whether you leave voluntarily or are laid off.