Last Updated: April 2026
Restricted Stock Units (RSUs) are one of the largest components of compensation for technology, finance, and startup employees — and the state income tax treatment of RSUs can create a difference of hundreds of thousands of dollars over a career for employees in high-tax vs no-tax states. This guide covers how RSUs are taxed federally, how each state treats RSU income, and the complex multi-state allocation rules that apply when you move between states during a vesting schedule.
RSUs follow a specific federal tax treatment:
RSUs are taxed as ordinary income when they vest (become unrestricted). The taxable amount is the Fair Market Value (FMV) of the shares on the vest date multiplied by the number of shares vesting. This income appears on your W-2 in Box 1 (wages). Employers typically withhold federal income tax at the 22% supplemental rate (or 37% for amounts above $1 million in a year). FICA (Social Security + Medicare) is also withheld. After vesting, your cost basis for capital gains purposes is the FMV on the vest date.
If you hold RSU shares after vesting: appreciation above the vest-date FMV is taxed as capital gains. Short-term (held less than 12 months from vest): taxed as ordinary income (up to 37% federal). Long-term (held 12+ months from vest): taxed at preferential 0%, 15%, or 20% rates depending on income. For most tech workers, selling RSUs immediately at vest (to avoid single-stock concentration risk) means only the ordinary income tax at vest applies — no capital gains component.
Many employees are under-withheld on RSU income. Employers withhold at 22% (the supplemental rate), but employees in high tax brackets actually owe 37% federal + state. The deficiency must be paid through estimated quarterly taxes (Form 1040-ES) or the employee faces underpayment penalties. This is one of the most common tax surprises for tech employees receiving large RSU grants.
State income tax on RSUs is imposed by the state where you lived and worked on the vest date:
| State | RSU Tax Rate | Notes |
|---|---|---|
| California | 1–13.3% | Most tech workers: 9.3–13.3% |
| New York (state + NYC) | 6.85–14.78% | NYC adds 3.88% on top of NY state 10.9% |
| Massachusetts | 5% (+ 4% above $1M) | Fair Share Amendment: 9% on income over $1M |
| Oregon | 9.9% (+ Portland metro) | Portland: up to 13.9% combined |
| New Jersey | 1.4–10.75% | Top rate on income above $1M |
| Washington State | 0% income tax | 7% capital gains tax on gains above $262K after vest |
| Texas, Florida, Nevada | 0% | No state income tax |
| Colorado | 4.4% | Flat rate |
| Illinois | 4.95% | Flat rate |
If you move between states during a multi-year vesting schedule, states may allocate RSU income based on your workdays in that state during the vesting period (from grant date to vest date). Example: You receive a 4-year RSU grant while living in California, then move to Texas after 2 years. When the remaining RSUs vest: California asserts the right to tax 50% of the vest value (the 2 years when you worked in California / 4-year total vesting period). Texas has no income tax. Result: you owe California income tax on half the vest value — even though you no longer live in California. This is called 'source-based allocation' of RSU income and California is aggressive in asserting this right.
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RSU Tax Help for US Expats →Possibly — if you received the RSU grant while in California, California will allocate a portion of the vest income to California based on the fraction of the vesting period you worked in CA. Example: 4-year vesting, moved to Texas after 2 years, vest occurs now. CA claims 2/4 = 50% of the vest value as CA-source income. You owe California tax on that 50% as a non-resident. You must file a California non-resident return (540NR) and pay California income tax on the CA-allocated portion. The longer you were in California during the vesting period, the higher your California allocation.
Most financial advisors recommend selling RSUs immediately at vest (same-day sale) unless you have specific reasons to hold the stock. The tax rationale: holding RSUs creates single-stock concentration risk (if the stock falls, you can't recover the taxes already paid at vest). Only upside appreciation after vest qualifies for capital gains treatment. If you're in a high-tax state at vest, the ordinary income tax is already owed regardless of when you sell. The main reason to hold: if you expect the stock to appreciate significantly and you're comfortable with the concentration risk — holding 12+ months converts future gains to long-term capital gains rates.
Employers withhold federal income tax on RSU income at the 22% supplemental rate (for RSU values under $1 million in a year; above $1 million, withholding jumps to 37%). However, your actual marginal federal rate may be 32%, 35%, or 37% depending on total income. The 22% withholding creates a deficiency that you must make up through quarterly estimated tax payments (Form 1040-ES due April 15, June 15, September 15, January 15) to avoid underpayment penalties. Many tech employees face a large tax bill in April because they relied only on employer RSU withholding without supplemental estimated payments.
California: $200,000 RSU income at 13.3% state tax = $26,600 in California state income tax. Texas: $0 state income tax. Annual difference: $26,600 for one vest event. For a tech worker with $200,000/year in vesting RSUs over 4 years: $106,400 in cumulative California state income tax vs $0 in Texas. This is the single most cited tax differential in tech worker departure discussions — particularly among senior engineers and managers at Bay Area tech companies.