Understanding RSUs is an important step toward building a long-term wealth plan.
RSUs are Part of a Compensation Package for New Hires and Annual Reviews.
Restricted Stock Units (RSUs) are among the most common forms of equity compensation, especially at publicly traded companies. Let’s say you just got a job offer at a technology, biotech, or healthcare company. You’re getting a great salary and competitive benefits, but you notice a few lines in your offer letter that say something like:
“You are granted 1,200 Restricted Stock Units (RSUs), subject to a 4-year vesting schedule.”
That’s exciting, but it can also be confusing.
RSUs are one of the most misunderstood elements of equity pay. Most people don’t make mistakes because they’re careless. They just haven’t been shown how the whole picture fits together: vesting, taxes, trading windows, and long-term strategy.
What Are RSUs?
RSUs, or Restricted Stock Units, are a form of equity compensation. Simply put, your company promises to give you stock in the future if you stay with the company long enough (and meet other conditions). You don’t have to pay to exercise RSUs like you would with other forms of equity compensation, like stock options and ESPPs. Once your shares vest, they’re yours, no buying required.
Let’s break it down:
- Restricted – You must meet certain conditions to receive the stock, usually continued employed over time. There may also be trading restrictions, such as blackout periods. Basically, you don’t own the shares outright until they vest.
- Stock – These are actual shares of company stock.
- Units – The number of shares you’re granted (1,200 RSUs = 1,200 potential shares).
What to Expect with RSU Grants & Vesting Schedules
A vesting schedule is a predetermined timeline that dictates when an employee gains full ownership of company-granted assets, like stock options or retirement funds. This timeline restriction incentivizes long-term commitment by gradually releasing benefits to the employee.
If the employee leaves the company before vesting, they forfeit the unvested portion.
Most RSUs vest over time, a common structure could be a 4-year vesting schedule with a 1-year cliff. Here’s how that could work.
Example:
- Grant Date: The grant date is the day your employer awards equity compensation (like RSUs) to an employee. For this example, let’s say the grant date is January 15, 2026.
- RSUs Granted: 1,200
- Vesting Schedule: 4 years, 1-year cliff, quarterly thereafter
Why That Means:
- Year 1: On January 15, 2027, 25% of your RSUs vest (300 shares). That satisfies the 1-year cliff.
- Years 2–4: The remaining 900 shares vest quarterly over the next 3 years (75 shares every 3 months).
This structure encourages employee retention. The idea is, employees earn more stock the longer you stay with the company. Other rules may apply and this varies by employer. You’ll usually see these details laid out in your equity portal (Fidelity, Schwab, E*TRADE, etc.).
Keep in mind that some companies have blackout periods and trading windows. A blackout period means employees cannot sell company stock within a certain time period. A trading window is different from a blackout period because it describes a time when employees can trade company stock.
What Happens When Your RSUs Vest?
Each vesting event is a taxable event.
Let’s say 300 shares vest and your company’s stock is worth $100 per share on that day:
- 300 × $100 = $30,000 in taxable income
That $30,000 will be added to your regular income for the year. You’ll often see a line labeled “RSU” on your pay stub. Again, that exact language can vary by employer. From the IRS’s point of view, this is taxable income.
How Are RSUs Taxed?
Your employer will usually withhold taxes around 22% (unless you opt for a higher rate) and automatically sell a portion of your shares to cover the cost. This is called, sell to cover.
- RSUs are taxed as ordinary income on the day they vest
- Company withholds taxes by selling shares (sell to cover)
- Federal withholding is usually 22% (may not be enough if you’re in a higher tax bracket)
- You may owe more at tax time if your income exceeds certain thresholds
- Selling later triggers capital gains taxes, based on how long you hold the stock
Here’s an example:
- $30,000 in value (RSU)
- ~30% withheld for taxes (22% federal, plus Social Security & Medicare)
- $9,000 withheld
- 90 shares sold
- You’re left with 210 net shares in your account
Just like with your paycheck, you receive the net amount after taxes have been deducted.
If you’d like to learn more about how RSUs are taxed, read our next blog that’s dedicated to taxes. We understand that RSUs can have a big impact on your equity compensation and financial planning. This is why we wrote a series on RSUs.
You Deserve Clarity and Confidence
RSUs don’t have to be a point of stress. With the right guidance and a clear plan, your equity can stop being a source of stress and start becoming a source of opportunity.
Let’s recap on what you learned:
- What RSUs are: a promise of future company stock that becomes yours once it vests, no purchase require.
- How vesting schedules work, including common timelines like a 4-year schedule with a 1-year cliff and quarterly vesting after.
- What happens when RSUs vest: each vesting event creates taxable income based on the stock price that day.
- How taxes are usually handled: your company often withholds by selling some shares (“sell to cover”), and the default withholding rate may not match your true tax bracket.
- Why a plan matters: understanding vesting, tax timing, and trading restrictions helps you make smarter decisions about when to hold, when to sell, and how RSUs fit into your bigger financial picture.
At ECA, we specialize in helping employees like you make sense of your equity compensation, optimize your tax strategy, and build long-term wealth.
