RSU tax and diversification tips

A lot of highly paid tech workers get surprised twice by company stock: once when restricted stock units vest, and again the next April when the tax bill is bigger than the payroll withholding suggested. The Internal Revenue Service still lets employers use a flat 22% federal withholding rate on many supplemental wages in 2026, even though the employee’s actual marginal rate can be much higher. (irs.gov, irs.gov) A restricted stock unit is not taxed when it is granted. It is usually taxed when it vests and turns into shares or cash, and that value is treated as ordinary wage income on the employee’s Form W-2 wage statement. (fidelity.com, fidelity.com) That timing creates the bracket shock people complain about. An employee with $350,000 of salary who has $120,000 of restricted stock units vest in one year has $470,000 of wage income before counting bonuses, spouse income, or investment income, so a 22% withholding setting can undershoot the final federal bill. (irs.gov, irs.gov) Many plans solve the immediate cash problem with “sell to cover.” That means the broker sells part of the newly vested shares right away and sends the proceeds to cover withholding taxes, instead of asking the employee to write a check out of pocket. (fidelity.com, fidelity.com) “Sell to cover” does not solve concentration risk. If most of the remaining shares stay in the employer’s stock, the employee is still tying salary, future bonuses, and a growing investment account to the same company, which is the financial version of building your paycheck and your nest egg on one pillar. (fidelity.com, fidelity.com) That is why many advisers push deliberate sales after vesting. The practical question is not whether the stock feels familiar, but whether you would take fresh cash from your bank account today and buy that same dollar amount of your employer’s shares at the current price. (fidelity.com) The tax rule that gets mixed into these conversations is the Section 83(b) election. The Internal Revenue Service says that election applies when substantially nonvested property is transferred for services, which usually means actual restricted stock or certain early-exercised option shares, not standard restricted stock units that do not deliver stock until vesting. (irs.gov, irs.gov) That distinction matters because an 83(b) election is a timing choice. You are choosing to pay tax up front on property you received before it vests, and the Internal Revenue Service says the election generally cannot be revoked without its consent. (irs.gov, irs.gov) For someone with company options, the election usually comes up only in narrower cases, such as an early exercise that produces unvested shares. Internal Revenue Service guidance says a Section 83(b) election can be made on substantially nonvested property received on exercise, while an option itself qualifies only if it had a readily ascertainable fair market value at grant, which most startup-style employee options do not. (irs.gov) The simple playbook is less glamorous than stock-compensation marketing makes it sound. Know the vesting dates, estimate the real tax rate instead of trusting the default withholding, use “sell to cover” for cash management, and decide in advance how much employer stock you are willing to keep after each vest instead of letting the position grow by inertia. (irs.gov, fidelity.com, fidelity.com)