How are RSUs taxed in California?
RSUs are taxed as income the day they vest, and California adds rules of its own. Here’s how the tax works — and why the planning belongs before each vest date.
Key takeaways
- RSUs are taxed as wages when they vest, and as capital gains or losses after.
- Default withholding — 22% federal, 10.23% California — is often below a high earner’s real rate.
- California taxes capital gains as ordinary income and can tax RSUs even after you move.
- The planning happens before each vest date, not after the W-2 arrives.
The short answer
In California, RSUs are taxed as ordinary income when they vest. The shares’ market value that day is added to your wages and taxed by the IRS and by California. Any later gain or loss is a capital gain — which California also taxes as ordinary income. The catch is timing: default withholding is often too low for a high earner, so the gap comes due at filing.
When to act
Before the year’s first vest
Map every vest date and estimate total income, so withholding and estimated payments match the year you’re actually having.
Before each vest date
Decide whether sell-to-cover withholding is enough, or whether to add withholding or set cash aside.
April 15 and June 15
California front-loads estimated tax: 30% of the year’s estimate is due in April and 40% in June, with nothing due in September.
One year after each vest
Shares held past this date qualify for federal long-term capital-gains rates. California taxes the gain the same either way.
Two taxable events: the vest and the sale
An RSU is a promise to deliver shares later. Nothing is taxed when the grant is made. Tax arrives on the vest date, when the shares become yours: their market value that day is treated as wages, just like salary or a bonus. It appears on your W-2 and is subject to federal and California income tax, Social Security (up to the annual wage base), Medicare and California State Disability Insurance.
That vest-date value becomes your cost basis. When you later sell, only the change since vest is a capital gain or loss. Hold the shares more than one year after vesting and a federal gain is long-term; sell sooner and it’s short-term, taxed at ordinary rates. Higher earners may also owe the 3.8% net investment income tax on the gain.
Why the withholding usually falls short
Most employers withhold on RSUs by selling some of the vested shares — “sell to cover” — at flat supplemental rates: 22% federal on supplemental wages up to $1 million in a year, 37% on the excess, and 10.23% for California. Those rates are set by rule, not by your bracket.
For a high earner, the real marginal rate can be much higher: up to 37% federally and up to 13.3% in California, where a 1% surcharge applies to taxable income over $1 million. The difference doesn’t disappear. It shows up as a balance due in April, sometimes with an underpayment penalty on top.
California adds a wrinkle. Once your adjusted gross income reaches $1 million, you generally can’t rely on last year’s tax to avoid the state’s underpayment penalty; you need to pay in based on this year’s income. In a large vesting year, that means planning ahead, not catching up.
Timing helps here too. For federal purposes, withholding is generally treated as paid evenly through the year, so extra withholding on a later vest or paycheck can still close a gap that estimated payments would have missed.
What’s different in California
Federal rules are the same everywhere. A few California rules change the math:
- No capital-gains break. California taxes capital gains as ordinary income, so holding shares past the one-year mark can help federally but not on your state return.
- Moving doesn’t reset the clock. California generally taxes RSU income by the share of workdays you spent in the state between grant and vest — even if you’ve moved away by the vest date.
- SDI has no wage cap. California State Disability Insurance applies to all wages, including a large vest.
- The SALT deduction shrinks as income rises. Under current federal law, the higher cap on deducting state and local taxes phases back toward $10,000 once income passes roughly $500,000, so a big vest year can limit the federal deduction for your California tax.
An illustrative example
Consider a hypothetical household already in the top federal bracket that has $400,000 of RSUs vest in one year, lifting total income above $1 million. Default withholding at the supplemental rates takes about 32% of the vest (22% federal plus 10.23% California). At the margin, though, that income may be taxed at 37% federally and up to 13.3% in California. The gap — roughly 18 percentage points, or about $70,000 in this example — would be due at filing unless it was planned for before the vest. Hypothetical and simplified; it ignores deductions, credits and payroll taxes, and every situation differs.
Hypothetical and simplified, for illustration only — not a prediction or a guarantee. Real outcomes depend on your facts and on current law, which can change.
Where the timing decisions are
You usually can’t choose when RSUs vest. You can choose almost everything around the vest date — and each choice has a deadline. None of these moves is complicated on its own; the value is in sequencing them against the calendar, with your CPA, before the dates pass.
- Before the year starts: estimate total income across salary, bonus and every scheduled vest, then set withholding and estimated payments to match.
- Before each vest: decide whether the default withholding is enough, or whether to add more or set cash aside.
- At vest: decide what to keep. Selling at vest usually creates little additional tax, because your basis equals the vest-date value. Holding is an investment decision about concentration, not a tax strategy in itself.
- In a high-income year: consider pairing the vest with deductions you control — for example, giving long-held appreciated shares to charity or a donor-advised fund, or maximizing pre-tax retirement contributions. New federal limits on charitable deductions apply from 2026, so model the benefit first.
- At a private company: many RSUs are “double-trigger,” vesting only at an IPO or acquisition. Years of grants can become income on a single date, so the plan belongs before the deal closes.
One filing trap: income counted twice
Your W-2 already includes the vest-date value of your shares. But the Form 1099-B from your broker can show a cost basis of zero for RSU shares, or leave it blank. File it as-is and you can be taxed twice on the same income — once as wages and again as a “gain.”
The fix is an adjustment on Form 8949, using the supplemental basis information your broker or plan administrator provides. It’s worth confirming with your CPA before you file.
Common questions
If I hold my RSU shares instead of selling, do I avoid the tax?
No. The tax at vest applies whether you sell or hold. Holding only affects how any later change in value is taxed — and in California, even that gain is taxed as ordinary income.
I’m moving out of California. Do I still owe California tax on future vests?
Often, in part. California generally allocates RSU income by the share of workdays you spent in the state between grant and vest, so shares granted while you worked here can carry California tax after you leave. Model it with your CPA before the move date.
Can I file an 83(b) election on RSUs?
No. The 83(b) election applies to restricted stock you receive up front, not to RSUs, which are a promise to deliver shares later. If you also hold restricted stock as a founder or early employee, its 30-day 83(b) window is a separate deadline.
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Educational only. Rates, thresholds and examples are illustrative, reflect current law as of September 2026 and are subject to change; they are not a guarantee of any result. This is not tax, legal or investment advice. Consult your CPA or attorney about your own situation before acting.