Commentary · Tax Strategy / Equity Compensation

The Vest Is Not the Tax Bill.

Written by the William Allan team · Published 2026-09-22

Why RSU withholding, basis, and your W-2 often disagree

Restricted stock units have a clean reputation.

Shares show up. Payroll withholds something. A broker sells a slice to cover taxes. The rest sits in the account. It feels like the tax part already happened.

The reputation is not wrong. It is incomplete.

The vest is the income event. The withholding is a deposit. The basis is a record that has to match the income you already reported. Those three pieces are related. They are not the same job.

What happens on the vest date

For typical stock-settled RSUs that settle when they vest, the fair market value of the shares delivered is generally ordinary wage income. It belongs on Form W-2. That is the IRS framework for restricted stock units: compensation income when the award vests and settles, not a capital-gain story yet.

From that moment, each share you keep usually has a cost basis equal to the per-share fair market value included in income, consistent with the IRS basis rules for property received for services. Later, when you sell, the gain or loss is generally measured from that basis, not from zero, and not necessarily from the number shown on a brokerage statement.

Sell-to-cover is common. The company or broker sells enough shares to fund withholding and delivers the remainder. That is a convenience. It is not a guarantee that the dollars withheld will equal the tax you will eventually owe.

Withholding is a prepayment

For many employees, federal income tax on RSU vesting is withheld using the IRS supplemental-wage rules in Publication 15 (Circular E). In broad terms, for supplemental wages paid in a calendar year that do not exceed $1 million, the optional flat rate method currently uses a 22% federal income-tax withholding rate. Supplemental wages above that threshold are subject to a higher flat rate (37% under current Pub 15 guidance for the excess).

Those percentages are withholding rates. They are not your final tax rate, and they are not a forecast of what your return will show.

Your actual federal income tax depends on the rest of the year’s picture: filing status, other wages, deductions, credits, state tax, and whether the vest pushed you into a higher bracket than the withholding assumed. Some households get a refund that feels like a windfall. Others owe in April and wonder why “taxes were already taken out.” Both outcomes can be true for the same rulebook.

State withholding, Social Security, and Medicare follow their own rules. A sell-to-cover that funds federal withholding may still leave a gap once everything else is stacked on top.

Illustration (not a prediction): Suppose shares vest and $10,000 of fair market value is included in W-2 wages. Federal income tax withheld at the 22% supplemental rate would be $2,200 before other payroll items. If that household’s true marginal federal rate on the extra income turns out higher than 22% once the full year is assembled, the difference shows up later as tax still due—or as a smaller refund than expected. If the true rate is lower, the extra withholding sits as a credit until the return is filed. The $10,000 figure is for arithmetic only. Your vest, your brackets, and your other income decide the real result.

Basis is where quiet mistakes live

The income on the W-2 and the basis in the shares are supposed to tell the same story.

What often happens instead: the broker’s Form 1099-B shows proceeds from a later sale and reports cost basis as $0 or leaves it blank. Under the IRS broker-reporting rules, a broker cannot increase the initial basis for compensation income recognized on equity awards granted or acquired after 2013. If you report that 1099-B as printed, you can look like you sold the entire position for pure gain—even though you already paid ordinary tax on the vest.

The usual fix is not to ignore the 1099-B. It is to report the sale correctly on Form 8949 (and Schedule D), with the proper basis and any required adjustment codes under the IRS Form 8949 instructions so the return matches the income you already included. The paperwork is dull. Getting it wrong is expensive.

Keep the vest confirmation, the FMV used for payroll, the number of shares delivered, and the sell-to-cover details. When the 1099-B arrives the following year, those records are how you prove the basis was never zero.

Keeping shares is a second decision

After the vest, two questions get mixed together.

One is tax administration: Was the income reported? Was enough withheld for this year’s estimate? Will the 1099-B need an adjustment?

The other is portfolio concentration: Do you want this employer’s stock as a large slice of net worth, or do you want diversification over time?

Sell-to-cover answers only the payroll problem. It does not answer whether the remaining shares belong in the plan you would choose if the ticker were not also your paycheck. That second question is planning. It depends on cash needs, other compensation, risk tolerance, trading windows, and tax lot timing. It is not a one-size recommendation, and it is not what this article is trying to decide for you.

The questions that actually decide it

• What FMV and share count hit W-2 income on each vest date this year.
• What federal (and state) withholding was taken, and whether estimated payments still match the year you are actually having.
• Whether any sale after vest will show $0 basis on the 1099-B, and whether you have the documents for Form 8949.
• How much of net worth now sits in employer stock after the shares you kept.
• Whether another vest, bonus, or liquidity event is still on the calendar before year-end.

If you cannot answer those yet, you are not behind. You are where most households are the first time equity compensation stops feeling theoretical.

What we would tell a friend

If a friend asked over dinner, without the software, the honest answer would go something like this.

Treat the vest as W-2 income first. The capital-gain story, if there is one, starts after that.

Do not confuse the 22% supplemental withholding rate with your final tax bill. One is a deposit rule. The other is the return.

When the broker says basis is zero, check whether the reported figure leaves out compensation income. Match the sale to the income you already reported.

And if the shares you kept are starting to look like a second career risk sitting next to the first one, that is a portfolio conversation—not a payroll one. Those are allowed to be different meetings.

That picture, for a year with vesting, is an afternoon. It is the sort of thing worth laying out with someone whose job is to put the W-2, the withholding, and the 1099-B on the same page before April makes the disagreement expensive.

Educational only. Not tax, legal, or investment advice. Equity compensation treatment depends on plan design and individual facts. Confirm withholding and reporting with your payroll provider, broker, and tax professional. William Allan Wealth Management is an SEC-registered investment adviser (CRD 133147). Tax preparation and tax advice, when provided, are through affiliated Crawshaw CPAs under a separate engagement.