How Restricted Stock Units (RSUs) are Taxed in California

What You Should Know About Your Income Tax

If you’re earning Restricted Stock Units (RSUs) in California, you’re playing in one of the most heavily taxed arenas in the U.S. And if you don’t understand how RSUs are taxed—from vesting to sale—you could end up giving away more than you need to.

RSUs can be a powerful tool for building wealth. But without a plan, they can just as easily become a tax liability.

This guide breaks down what actually matters so you can make smarter decisions with your equity.

Let’s dive in.

Understanding RSUs

RSUs are a form of equity compensation offered by companies to employees. Unlike stock options, RSUs don’t require employees to purchase shares—they’re simply granted as part of a compensation package.

However, RSUs come with a catch: they are subject to a vesting schedule, meaning you don’t fully own the shares until certain conditions are met, such as staying with the company for a set period or achieving performance milestones. Once vested, RSUs convert into actual shares of company stock, which can be held or sold.  But either way, the IRS is watching.

Taxation of an RSU: From Vesting to Sale

RSUs are taxed at two key stages: when they vest and when you sell the shares.

• Taxation at Vesting: At vesting, the fair market value (FMV) of the shares is treated as ordinary income and reported on your W-2. This income is subject to:
  • Federal Taxes: Withholding rates are 22% for income under $1 million and 37% for income exceeding $1 million.
  • California State Taxes: A mandatory withholding rate of 10.23% applies to RSU income. California treats all capital gains as ordinary income, so any future gains from selling RSU shares will also be taxed at your state income tax rate at the time of vesting.
  • Payroll Taxes: Social Security (6.2%, up to the wage cap), Medicare (1.45%, plus an additional 0.9% for high earners), and California’s State Disability Insurance (SDI) tax (0.9%, with no wage cap).
  • Note that RSU income can push you into higher tax brackets, resulting in additional taxes owed when filing your return.
• Taxation at Sale: After vesting, any profit from selling RSU shares is subject to capital gains tax federally:
  • Federal Capital Gains Tax: If sold within one year of vesting, gains are taxed as short-term capital gains at ordinary income rates. If held for more than one year, they qualify for lower long-term capital gains rates (0%, 15%, or 20%, depending on your income).
  • California Capital Gains Tax: California does not differentiate between short-term and long-term capital gains; all gains are taxed as ordinary income.

Key Differences Between Withholding and Taxation

Withholding: An estimate or prepayment of taxes based on statutory rates (22% federal and 10.23% state). It does not necessarily reflect your final tax liability. Withholding is a guess—an upfront tax payment based on standard rates.

Taxation: Your total tax owed is calculated based on your full taxable income for the year, including RSU vesting and other sources of income. This amount may exceed what was withheld.

Potential Shortfalls: If withholding falls short of actual taxes owed due to higher marginal tax rates or significant RSU income, you may face additional taxes or penalties when filing.

Example Scenario

Let’s say your RSUs vest at $100 per share, and you sell them at $120:

At Vesting:

• The $100 FMV per share is treated as ordinary income and taxed accordingly.
• For 1,000 shares, this results in $100,000 of taxable income added to your W-2.
• Federal withholding at 22% would amount to $22,000, while California tax withholding at 10.23% would add $10,230. Payroll taxes would also apply.

At Sale:

• If sold within one year at $120 per share, the $20 gain per share ($120 – $100) is taxed as short-term capital gains federally and ordinary income in California.
• If held for more than one year before selling at $120 per share:
  • Federal taxes apply at long-term capital gains rates (e.g., 15% or 20%).
  • California still taxes the $20 gain as ordinary income.

What if I Sell at a Loss?

Let’s say the stock drops from $100 to $90 before you sell. That’s a $10 loss per share.

Good news: that’s a capital loss. You can use it to offset other capital gains or deduct up to $3,000 from your income on your federal return.

Sell-to-Cover Mechanism

Many companies use a “sell-to-cover” method where some shares are automatically sold at vesting to cover withholding taxes. For example:

Example:

If federal withholding is $22,000 and the stock price is $100/share, 220 shares may be sold to cover taxes. Your taxes are partially covered—but not necessarily fully. Keep an eye on your total tax liability.

What if I Relocated?

If you earned RSUs while living in California—even if they vest after you move—California still wants its cut.

The taxable portion is based on the ratio of workdays spent in California between the grant and vesting dates to the total workdays during that period. For example:

If you worked in California for 3 out of 5 years between grant and vesting, 60% of the RSU income could be taxed by California—even if you’ve moved to a no-tax state like Texas before vesting.

RSUs granted after leaving California are not subject to this rule. However, if you return to California before vesting, 100% of the income may be taxed by the state.

Don’t Wing It

The tax side of RSUs isn’t something you want to DIY—especially in California. Working with a California financial advisor can be invaluable. Summitry’s advisors specialize in California’s taxation landscape and can help you optimize timing, minimize taxes, and align your stock compensation with broader financial goals.

A good tax advisor will:

• Model your tax liability accurately
• Spot withholding shortfalls
• Optimize your RSU sales
• Help plan for relocation or major income changes

Whether you’re a current resident, planning to leave the state, or seeking guidance on tax-efficient strategies, Summitry provides expertise you can trust.

The content provided in this article is for informational purposes only. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances.