What Are Restricted Stock Units (RSUs)? How They Work, Pros and Cons
By Markets & Investing DeskUpdated Nov 10, 2026
Definition
A restricted stock unit (RSU) is an employer's promise to give an employee company shares, or their cash value, once vesting conditions such as time served or performance goals are met.
Key takeaways
- RSUs are not taxed at grant; their fair market value at vesting is ordinary income reported on the W-2.
- Shares received at vesting carry a cost basis equal to their vesting value, so later price changes create capital gains or losses.
- Employers often withhold federal tax at the flat 22% supplemental rate, which can leave higher earners owing more.
- Unlike stock options, an RSU keeps value when the stock falls and requires no strike price or exercise.
A restricted stock unit (RSU) is a company’s promise to give an employee shares of its stock, or sometimes the cash value of those shares, once certain conditions are met. Those conditions are usually staying with the employer for a set period, hitting performance goals, or both. Until the conditions are satisfied (the RSU “vests”), the employee owns no shares, cannot sell anything, and has no shareholder rights. On the vesting date, each unit typically converts into one share of common stock at its fair market value, and that value counts as taxable income.
RSUs appear in job offers alongside salary and bonus, especially at publicly traded companies. The “restricted” part refers to the vesting conditions, not to a special class of stock.
How RSUs Work
An RSU award moves through three stages.
1. Grant. The employer awards a number of units, often expressed in an offer letter as a dollar value (for example, “$40,000 in RSUs”) that is converted into units using a recent share price. The grant date sets the schedule but creates no shares and no tax in the employee’s hands.
2. Vesting. The award vests on a schedule. Common structures include:
- Graded vesting: a portion vests at regular intervals, such as annually or quarterly, over several years.
- Cliff vesting: nothing vests until a first milestone date, after which a block vests at once, sometimes followed by graded vesting.
- Performance vesting: units vest only if targets such as revenue, earnings or relative stock return are met, and the number of shares delivered can depend on how far those targets are exceeded or missed.
- Double-trigger vesting: used by some private companies, where units vest only after both a service period and a liquidity event such as an IPO or acquisition.
Plan rules decide what happens in special situations. Some plans allow vesting to continue if an employee retires or becomes disabled. In most cases, resigning before the schedule ends means the unvested units go back to the company.
3. Settlement. When units vest, the company delivers shares (or cash, if the plan says so). Because the value is taxable income, the employer withholds tax, commonly by keeping back a portion of the shares (“net share settlement”) or selling some on the employee’s behalf (“sell to cover”). The remaining shares land in the employee’s brokerage account and behave like any other stock.
Employees do not “exercise” RSUs. That term belongs to stock options, where the holder pays a strike price to buy shares.
How RSUs Are Taxed
In the U.S., taxation of restricted stock and RSUs falls under Section 83 of the Internal Revenue Code, and the IRS treats RSU income as compensation.
- At grant: no tax.
- At vesting (settlement): the fair market value of the shares received is ordinary income, reported on the employee’s W-2 and subject to income and payroll taxes. This applies even if the employee keeps every share.
- At sale: the shares’ cost basis equals their fair market value at vesting. Selling above that value creates a capital gain; selling below creates a capital loss. Whether the gain is short-term or long-term depends on how long the shares were held after vesting (more than one year for long-term treatment).
RSUs are not eligible for an 83(b) election, the choice that lets holders of actual restricted shares pay tax at grant instead of at vesting. The IRS does not treat an RSU as property transferred to the employee until shares are delivered, so there is nothing to elect on earlier.
Withholding can fall short. Employers often withhold federal tax on RSU income at the flat supplemental wage rate, 22% on supplemental wages up to $1 million in a year. Someone whose marginal rate is higher may owe more when filing. State and local taxes apply separately.
Example of RSUs
Hypothetical example; figures are for illustration only and not any company’s terms.
An employee receives a grant of 400 RSUs that vest 100 units per year over four years.
Year 1 vest. The stock trades at $50 on the vesting date.
- Ordinary income: 100 × $50 = $5,000
- Assume the employer withholds 30% of the shares for taxes: 30 shares withheld, 70 shares delivered
- Cost basis of the delivered shares: $50 each, or $3,500 total
Later sale. If the employee sells the 70 shares at $60, the capital gain is (60 − 50) × 70 = $700. If the price drops to $40 and the employee sells, the result is a $700 capital loss. The $5,000 of ordinary income from vesting does not change in either case.
Leaving early. If the employee resigns after the second vest, they keep the 200 units that vested (minus shares withheld for tax) and forfeit the remaining 200.
The grant’s dollar value in the offer letter is only an estimate. What the employee actually receives depends on the share price on each vesting date.
Why Companies Use RSUs
RSUs spread from senior management to broader employee ranks in the mid-2000s, after the Financial Accounting Standards Board, responding to the Enron and WorldCom scandals, required companies to record stock options as an expense. Among Fortune 1000 companies, the median number of stock options granted per person fell by 40% between 2003 and 2005, while the median number of RSU awards rose by nearly 41%.
For employers, RSUs offer several things:
- Retention. Unvested units that would be forfeited give employees a financial reason to stay, and grants are often refreshed so a new tranche is always pending.
- Alignment. Employees’ compensation rises and falls with the share price, linking pay to company performance.
- Delayed dilution. Shares are issued only at vesting, so the increase in shares outstanding is spread over time rather than happening at grant.
- Simple administration. There is no exercise process or strike price to manage, and forfeited units simply return to the plan.
Advantages and Disadvantages of RSUs for Employees
Advantages
- No purchase required. The employee pays nothing to acquire the shares beyond the tax due.
- Value in a falling market. An RSU is worth the share price itself, so it loses value if the stock drops but does not become worthless unless the stock does.
- Participation in growth. Shares kept after vesting can appreciate, and gains above the vesting value are taxed as capital gains.
- Predictability. Time-based vesting dates are known in advance, which makes RSUs easier to plan around than options.
Disadvantages
- Forfeiture. Leaving before units vest usually means losing them.
- No control over tax timing. Income is recognized at vesting whether or not the employee sells.
- Possible under-withholding. Flat supplemental withholding can leave a balance due at tax time.
- No dividends or votes before vesting. Some plans pay dividend equivalents instead.
- Concentration risk. Salary, bonus and a growing block of stock all depend on the same employer, so a downturn at the company can hit both job security and savings.
RSUs vs. Stock Options vs. Restricted Stock
These three awards are often confused because all of them involve vesting.
| RSUs | Stock options | Restricted stock (RSAs) | |
|---|---|---|---|
| What the employee holds before vesting | A promise to deliver shares | The right to buy shares at a set strike price | Actual shares, subject to forfeiture |
| Cost to the employee | None | Strike price paid at exercise | Sometimes none, sometimes a purchase price |
| Value if the stock falls below the grant price | Still worth the current share price | Worthless if below the strike (“underwater”) | Still worth the current share price |
| Taxable event (U.S.) | Vesting | Exercise or sale, depending on option type | Vesting, or grant with an 83(b) election |
| 83(b) election | Not available | Not applicable to standard options | Available |
Hypothetical: a stock is at $50 when an employee receives either one RSU or one option with a $50 strike. If the price falls to $40, the RSU is still worth $40, while the option has no exercise value. If the price climbs to $80, the RSU is worth $80 and the option $30 (the $80 price minus the $50 strike). This is why companies often grant more options than RSUs for the same intended value: an option carries more upside per unit but can expire worthless.
Voting Rights and Dividends
Unvested RSUs carry no voting rights and receive no dividends, because no shares have been issued. Once units vest and convert into common stock, the employee has the same rights as any other holder of that share class. Some employers pay dividend equivalents on unvested units, amounts matching the dividends the shares would have earned. These can be paid in cash, credited as additional units, or held in escrow until vesting, depending on the plan.
FAQs
Should you sell RSUs as soon as they vest?
The tax math is neutral at vesting: ordinary income is owed on the vesting value whether you sell or not, so keeping vested shares is economically similar to receiving that amount in cash and buying the stock. Selling immediately usually produces little or no capital gain because the sale price is close to the cost basis. The main considerations are how much of your net worth already depends on your employer and whether you want long-term capital gains treatment on future growth.
The Bottom Line
RSUs matter to anyone weighing a job offer or holding equity at a publicly traded company. Their value depends on the share price at each vesting date, and the income is taxable at vesting even if the employee keeps every share. Holders should check whether withholding covers their actual tax rate and keep in mind that salary and stock both depend on the same employer.
