The 3 Tax Mistakes Tech Employees Make with RSUs

Key Takeaways

• Restricted Stock Units (RSUs) are taxed as ordinary income when they vest

• Many companies withhold about 22 percent for federal taxes, which may be lower than your actual tax bracket

• Holding too much company stock can create concentration risk over time

• Waiting until an IPO or liquidity event to plan around equity can limit tax planning opportunities

• A thoughtful diversification strategy can help turn equity compensation into long-term wealth

Equity Compensation Can Be a Powerful Wealth Builder

Equity compensation can be one of the most powerful wealth building opportunities available to tech professionals.

Restricted Stock Units (RSUs), stock options, and employee stock purchase plans can grow quickly when a company performs well.

Many professionals in their 30s and 40s suddenly find themselves earning far more than expected while equity compensation becomes a meaningful part of their net worth.

But despite this opportunity, the tax strategy around equity compensation is often unclear.

Many decisions happen reactively when shares vest or when tax season arrives. Over time that approach can quietly cost tens or even hundreds of thousands of dollars. This is part of what we call the RSU tax trap, and it's worth understanding in more detail.

Working with tech professionals over the years, the same patterns tend to appear again and again.

1. Assuming RSU Withholding Covers the Tax Bill

One of the most common surprises happens after a large RSU vest.

Shares vest.

Taxes are automatically withheld.

Everything appears handled.

Then April arrives and the tax bill is larger than expected.

The reason is simple.

Most companies withhold about 22 percent for federal taxes when RSUs vest.

However, many professionals in higher income brackets fall into higher marginal tax brackets than that withholding rate accounts for.

Example

RSU vest value: $100,000

Federal withholding: $22,000

Depending on income level and filing status, the actual tax owed could be significantly higher. If this is the first year RSU income has pushed you into a new bracket, we cover what to actually do differently here.

This gap between withholding and your true tax rate is one of the reasons employees encounter what is often called the RSU tax trap.

Understanding how RSUs are taxed can help you avoid surprises and plan ahead.

2. Letting Taxes Prevent Smart Diversification

Another common pattern appears as careers progress.

RSUs vest. ESPP shares accumulate. The company stock performs well.

Over time both income and net worth can become heavily tied to the same company.

At that point many employees hesitate to sell shares because they want to avoid paying taxes.

But there is an important detail many people overlook.

RSUs are already taxed as ordinary income when they vest.

The stock price on the vesting date becomes the cost basis of the shares.

Selling shortly after vesting often creates little additional tax.

A helpful way to think about RSUs is to ask a simple question:

If this value arrived as a cash bonus today, would you choose to invest that money into your company's stock?

If the answer is no, diversification may deserve consideration.

Reducing concentration risk can help transform equity compensation into diversified long-term wealth.

3. Waiting Too Long to Plan Around Equity Compensation

Many tech professionals assume tax planning begins when a major event occurs.

Examples include:

• an IPO

• a liquidity event

• a large option exercise

However, by the time these events arrive many tax planning opportunities have already passed. We walk through what to actually do

Equity compensation planning often involves decisions such as:

• when shares are sold

• how company stock fits into a diversified investment strategy

• how equity income interacts with other taxes

• how equity compensation fits within long-term financial goals

These decisions are often far more effective when they are made years in advance rather than months before a major event.

The Bigger Picture

Equity compensation can create extraordinary financial opportunity.

However income alone rarely determines whether someone builds lasting wealth.

What often matters more is the structure surrounding the opportunity.

That includes:

• thoughtful tax planning

• managing concentration risk

• coordinating equity compensation with long-term investment strategy

• aligning financial decisions with long-term goals

With the right structure in place, equity compensation can become a powerful tool for building diversified wealth over time. We've also rounded up the most common questions we hear from clients in a similar position.

Frequently Asked Questions

How are RSUs taxed?

Restricted Stock Units are taxed as ordinary income when they vest. The value of the shares at vesting appears on your W-2 and is taxed similarly to salary or bonuses.

Why do RSUs sometimes create unexpected tax bills?

Many companies withhold around 22 percent for federal taxes when RSUs vest. Professionals in higher tax brackets often owe more than that withholding covers, which can create an additional tax bill when filing.

Should I hold or sell RSUs after they vest?

That decision depends on diversification, tax planning, and your overall financial strategy. Many employees choose to gradually diversify company stock to reduce concentration risk.

What is the RSU tax trap?

The RSU tax trap occurs when employees assume withholding covers taxes or hold large amounts of company stock without considering diversification and tax planning.

About the Author

Anthony Syracuse, CFP® is the founder of Dynamic Financial Planning, a fee-only fiduciary financial planning firm based in Scottsdale, Arizona. Learn more about his background here.

He works with tech professionals and growing families building meaningful wealth who want to turn equity compensation into long-term financial security.

Take the Next Step

This is exactly the kind of decision worth a second opinion on — take the Fiduciary Audit™ to see whether your equity strategy is actually coordinated with the rest of your plan.

Prefer to talk it through directly? Schedule your initial call here.

Dynamic Financial Planning works with tech professionals and growing families in Scottsdale, Phoenix, and clients nationwide.

Disclosure: This content is for educational and informational purposes only and should not be construed as personalized investment, tax, or legal advice. All strategies discussed are general in nature and may not be suitable for all individuals. Past performance does not guarantee future results. Before making any financial decisions, consult a qualified financial advisor, CPA, or attorney who can assess your specific situation, risk tolerance, and financial objectives. Dynamic Financial Planning does not provide tax or legal advice.