Restricted Stock Units (RSUs) are a key part of a broader compensation package across industries, especially in technology, finance, and high-growth companies. These compensation packages often include RSUs alongside other forms of equity compensation, such as stock options or restricted stock awards.
A restricted stock unit (RSU) is a form of equity compensation that companies issue to employees and other service providers. RSUs are considered a type of stock award and stock grant, representing a promise of equity ownership in the company that typically vests over time. RSUs are used to incentivize employee retention and align their interests with those of shareholders. However, their value varies with stock price, offering both potential gains and risks.
For Arizona residents, understanding how RSUs are taxed is crucial to managing expectations, planning finances wisely, and avoiding surprise tax bills. This detailed guide covers what RSUs are, how they work, the tax process at both the federal and state levels, common mistakes to avoid, and strategic tips specific to Arizona taxpayers.
If you would like to speak with one of our ARQ Wealth advisors about RSUs or general financial planning, contact us at (480) 214-9572.
What Are Restricted Stock Units (RSUs)?
Restricted Stock Units (RSUs) are a type of equity compensation where an employer agrees to grant shares of company stock—or sometimes the cash equivalent—to an employee once certain conditions are met.
When discussing RSUs and stock options, it’s important to note that, unlike stock options, RSUs are granted without requiring the employee to purchase shares, and they represent a promise to deliver stock in the future rather than the right to buy at a set price.
The “restricted” aspect is based on vesting requirements. Vesting is the process by which the employee gains ownership rights to the units. Typical vesting schedules run 3 to 5 years, with shares becoming available based on a schedule, such as 25% after the first year (a “cliff” vest), then vesting quarterly or monthly thereafter. Some RSUs also include performance-based milestones, such as achieving company revenue goals.
Once RSUs vest, they convert into actual shares that the employee can hold or sell.
At the time of the grant, RSUs have no taxable value because the employee does not yet own the shares. Taxation occurs only upon vesting and settlement, when the shares are delivered. This delay in taxation sets RSUs apart from immediate cash bonuses but also creates planning complexities.
How Do RSUs Work in Practice?
The lifecycle of RSUs involves several stages:
- Grant Date: The employer awards a specific number of RSUs, outlined in an agreement detailing the vesting schedule.
- Vesting Period: The employee must remain employed (and sometimes meet performance goals) for the units to vest. For instance, a grant of 4,000 RSUs with a four-year graded schedule might vest 1,000 shares annually.
- Settlement Date: Upon vesting, the company transfers the shares to the employee’s brokerage account. Some plans allow for cash settlement instead of shares. RSUs are taxed when the vesting schedule is completed, meaning you owe taxes at the time the shares are delivered to you as part of your stock award.
- Post-Vesting Ownership: Once vested, the shares are fully owned. The employee can hold them for potential appreciation or sell them immediately. If your company is public, you can usually sell the shares you receive from your RSUs as soon as you meet the vesting criteria.
Double-trigger RSUs, common in private companies, require both time-based vesting and a liquidity event, such as an IPO or acquisition. However, taxation still follows standard rules upon settlement.
Most times, if you leave your company, you’ll get to keep your fully vested shares. Generally, if your RSUs are time-vested but not settled when you leave, you will still receive them when they settle in the future.
The Tax Process for RSUs: Key Taxable Events
RSUs are taxed at two milestones: when they vest and when they are sold. They are taxed as ordinary income at vesting, with the fair market value (FMV) of the shares on the vesting date—usually the closing stock price—reported as compensation income on your Form W-2.
Federal Taxation Details
The vested value is subject to federal income taxes at your marginal rate (progressive brackets up to 37% in 2026).
Additionally, FICA taxes apply: Social Security (6.2% on wages up to the 2026 wage base of $184,500) and Medicare (1.45%, plus an additional 0.9% for high earners on income exceeding $200,000 single/$250,000 married filing jointly).
Withholding Mechanics
Your employer is required to withhold taxes on RSUs at the time of vesting, but this withholding may not cover your total tax liability.
Employers consider RSU income as supplemental wages.
Federal withholding is generally applied at a flat 22% rate for supplemental income under $1 million annually (37% for amounts over). This rate often underwithholds for individuals in higher tax brackets (e.g., 32%, 35%, or 37%), which may result in additional tax liability when filing.
Many companies use “net settlement” or “sell-to-cover” mechanisms to help employees cover taxes and avoid out-of-pocket tax payments. In sell-to-cover, the employer automatically sells a portion of the vested shares to cover estimated tax withholding, sending the remaining net shares to the employee. However, this typically results in fewer total shares being received.
FICA taxes are withheld separately.
Arizona State Taxation of RSUs
Arizona fully conforms to federal treatment of stock compensation, including the vested FMV in Arizona taxable income.
- Arizona Income Tax Rate: As of 2026, Arizona maintains a flat 2.5% income tax rate on all taxable income, regardless of amount or filing status. This low, simple rate is one of the most taxpayer-friendly in the nation.
- RSU Tax Rate in Arizona: Thus, the state tax on vested RSUs is 2.5% of the FMV.
Arizona Withholding on RSUs
Arizona requires employers to withhold state income tax based on the employee’s Form A-4 (Arizona withholding election). Rates range from 0.5% to 3.5%, with a default of 2.0% if no form is submitted.
However, for out-of-state employers (common in the tech industry), Arizona state tax withholding on RSUs is often zero or minimal. This means Arizona residents may receive vested shares without state tax deducted, shifting some or all of the 2.5% liability to the tax filing season. Proactive planning—such as quarterly estimated payments—is crucial to avoiding underpayment penalties.
Taxation Upon Sale of RSU Shares
The second taxable event for RSUs occurs when you sell the shares after they have vested and been delivered to you.
Determining Sale Cost Basis
When RSUs vest, the fair market value (FMV) of the shares on the vesting date is taxed as ordinary income. When you are ready to sell, you’ve already paid income tax (federal and Arizona state) on that FMV amount, so the FMV becomes your cost basis in the shares. The cost basis is essentially what the IRS and Arizona consider your “purchase price” for the shares, even though you didn’t pay cash for them—it was compensation.
When you sell the shares, your capital gain (or loss) is calculated as: Sale Price – Cost Basis = Capital Gain/Loss
Taxation on Immediate Sale
An immediate sale happens when shares are sold on the same day or shortly after vesting, which is common with “sell-to-cover” for tax reasons. The sale price is usually very close to (or exactly) the FMV on the vesting date. This typically results in little or no capital gain or loss.
Tax Impact: No additional capital gains tax. You’ve already paid the full tax on the value as ordinary income at vesting. This is often the simplest option and avoids future market risk.
Taxation on Hold and Sell Later
If the stock price changes after vesting, you’ll have a capital gain (if the price rises) or loss (if the price falls).
Short-term holding (sold within 1 year of vesting):
- The gain is classified as short-term capital gains.
- If your RSUs vest and you sell the shares within a year, you will likely owe short-term capital gains tax on any gains.
- Federal Tax: Taxed at your ordinary income tax rates (up to 37%, same as wages or the RSU vesting income).
- Arizona State Tax: Taxed at the flat 2.5% income tax rate (treated like regular income; no special treatment for short-term gains).
- This can result in a higher overall tax rate if the stock appreciates quickly.
Long-Term Holding (sold after more than a year from vesting):
- The gain is classified as long-term capital gain.
- If you sell RSUs after holding them for more than a year, you may owe long-term capital gains tax on any gains.
- Federal Tax: Preferential rates of 0%, 15%, or 20%, depending on your total taxable income for the year (2026 brackets: 0% for lower incomes, 15% for most middle-to-high earners, 20% for very high incomes). High earners may also owe an additional 3.8% Net Investment Income Tax.
- Arizona State Tax: Arizona allows a 25% subtraction (deduction) for net long-term capital gains. This effectively reduces the state tax rate on these gains to 1.875% (2.5% × 75% of the gain). Note: This subtraction applies starting for tax years beginning January 1, 2026, and covers long-term gains from all assets.
Why Hold for Long-Term?
Holding an asset for over a year can significantly reduce your federal tax on any appreciation and help minimize taxes by qualifying for long-term capital gains rates. For example:
- If shares appreciate $10,000 shortly after vesting, a short-term gain is taxed at high ordinary rates.
- If the same $10,000 appreciation occurs after one year or later, a long-term gain is taxed at lower federal rates + Arizona’s reduced 1.875%.
You can also use the proceeds from the sale of vested RSUs to maximize tax-deferred contributions to accounts like a 401(k) or IRA.
Leaving a Company: What Happens to Your RSUs and Taxes
If you’re considering leaving your employer, it’s crucial to understand how your restricted stock units (RSUs) will be affected and what tax consequences you might face.
Unvested RSUs: When you leave a company before your RSUs have vested, you generally forfeit them. This means you lose the right to receive the company stock or cash equivalent associated with those unvested RSUs. Since you never actually receive the shares or their value, there are no tax implications for unvested RSUs that are forfeited upon departure.
Vested RSUs: If you have RSUs that have already vested before your departure, those shares are yours to keep. You will owe ordinary income tax on the fair market value of the vested shares as of the vesting date, even if you leave the company immediately after vesting. This income is typically reported on your W-2 for the year in which the RSUs vest. If your company allows for a cash equivalent payout instead of actual stock, the same tax treatment applies—the value you receive is taxed as ordinary income.
Advanced Considerations and Strategies for Arizona RSU Recipients
Underwithholding Risks: The 22% federal rate and potential zero Arizona withholding frequently lead to large April tax bills. Monitor pay stubs and consider:
- Increasing salary withholding
- Making quarterly estimated payments (federal Form 1040-ES, Arizona Form 140ES)
- Selling additional shares post-vesting to cover shortfalls
Part-Year or Nonresident Issues: If you move to/from Arizona mid-vesting, income allocation rules apply based on residency and work location.
Private Company RSUs: Double-trigger provisions delay settlement, but taxation follows vesting/liquidity.
Optimization Strategies:
- Hold for long-term capital gains qualification
- Use tax-loss harvesting to realize a capital loss, which can offset gains or reduce taxable income
- Donate appreciated shares to charity (avoid capital gains, deduct FMV)
- Coordinate with other income sources to manage brackets
- Consult a tax advisor for personalized tax planning and to optimize your RSU tax outcomes
- Develop an investment strategy tailored to your financial goals and risk tolerance when managing RSU shares and related tax implications
- Reporting: Vested value on W-2 (Box 1, 3, 5). Sales reported on Form 1099-B; adjust basis on Schedule D/Form 8949 to avoid double taxation
Bottom Line
While Arizona’s 2.5% flat rate simplifies state RSU taxation, the combined federal burden and withholding gaps require careful attention. Proper planning can help you keep more of the value of your equity compensation.
It’s crucial to consult with a qualified financial advisor or tax professional to analyze your specific RSU scenario, including holding periods, estimated taxes, and optimization strategies. They can help maximize your after-tax value based on your income, filing status, and goals.
We invite you to contact a fiduciary advisor at ARQ Wealth for personalized guidance on your RSU situation and financial planning. You can call us at (480) 214-9572.