How RSUs Are Taxed in California

Published September 6, 2026 · By Shane Weng, BookBright Solutions LLC

If you work at Apple, NVIDIA, Adobe, Meta, Cisco, or any other Bay Area employer that pays part of your compensation in Restricted Stock Units, there is a good chance you have opened a tax return in April and thought: I already had taxes withheld on this — why do I still owe thousands more? This article walks through exactly how RSUs are taxed, where the shortfall comes from, what California adds on top, and the specific moves that reduce the bill.

RSUs are taxed at two separate moments

1. At vesting — ordinary income, reported on your W-2

When RSUs vest, the fair market value of the shares on the vest date is treated as ordinary wage income. It is added to Box 1 of your W-2, right alongside your salary and bonus. There is no separate "RSU tax rate" — that value is taxed at your ordinary marginal rate, the same as any other paycheck.

Most employers handle withholding through sell-to-cover: they automatically sell a portion of the newly vested shares and send the proceeds to the IRS and the state. The shares you keep have a cost basis equal to that vest-date value.

2. At sale — capital gain or loss

When you later sell the shares you kept, you have a capital gain or loss equal to the sale price minus that vest-date cost basis. Hold more than a year after vesting and the gain is long-term (preferential federal rate); sell within a year and it is short-term (ordinary rates). If the stock dropped after vesting, you may have a capital loss — useful, but it does not undo the ordinary income you already recognized at vesting.

Why you still owe in April: the withholding gap

This is the single most common surprise we see. RSU vesting is supplemental wage income, and employers are generally allowed to withhold federal tax on it at the flat supplemental rate of 22% (rising to 37% only on supplemental wages above $1 million in a year).

But if your total household income puts you in the 32%, 35%, or 37% federal bracket — which a single six-figure tech salary plus RSUs usually does — then 22% withholding leaves a 10-to-15 percentage point hole on every dollar of RSU income. On $200,000 of vesting, that is $20,000–$30,000 of federal tax that was never withheld. Multiply across a full year of vests and the April balance due gets large fast.

Two more factors widen the gap:

• Additional Medicare Tax (0.9%) on wages above $250,000 (married filing jointly) is frequently under-withheld, especially in a two-earner household where each employer only sees its own payroll.
• Net Investment Income Tax (3.8%) applies to capital gains once your income crosses the threshold — and nothing is withheld for it at all.

The California layer

California taxes RSU vesting income as ordinary wages, with a top marginal rate of 13.3% and no preferential rate for long-term capital gains — a share sale is taxed the same as salary at the state level. California's own supplemental withholding rate on stock compensation (10.23% for most equity) also tends to run below a high earner's actual California marginal rate, so the state balance due follows the same pattern as the federal one.

If you changed states during a vesting period — moved to California mid-grant, or left California while grants were still vesting — the income generally has to be allocated between states based on your work location over the vesting period. California is aggressive about taxing the portion of equity income earned while you worked in the state, even if you vest after leaving. This is worth getting right before you file, not after a notice arrives.

The cost-basis trap that makes people overpay

When you sell RSU shares, your broker issues a Form 1099-B. For shares acquired through equity compensation, the broker is often only permitted to report a cost basis of $0 or the discounted purchase price — not the vest-date value that was already taxed as wages on your W-2.

If that 1099-B figure is entered as-is, you get taxed a second time on income you already paid ordinary tax on at vesting. The fix is to adjust the cost basis to the correct vest-date value (found on the broker's supplemental statement or your equity portal) so only the true gain since vesting is taxed. We see returns every season where this single adjustment changes the outcome by five figures.

Levers that actually move the number

• Fix withholding now, not next April. File an updated Form W-4 requesting additional federal withholding per paycheck, or make quarterly estimated payments sized to the real bracket. Meeting a safe-harbor amount (generally 110% of last year's tax for high earners) stops underpayment penalties even if a balance remains.
• Decide deliberately whether to hold or sell at vest. Holding is an investment decision — a concentrated bet on your employer's stock — not a tax strategy. Any tax benefit only comes after a year, and only if the stock rises.
• Coordinate vests with other income events. A large vest in the same year as a bonus, a spouse's liquidity event, or a Roth conversion can push you into a higher bracket or trigger phaseouts. Modeling the year in advance is where planning pays for itself.
• Donate appreciated shares instead of cash. Gifting long-term shares to a donor-advised fund removes the embedded gain from your return and gives a deduction at fair market value, subject to AGI limits.
• Harvest losses against RSU sale gains. If some lots are underwater, selling them can offset gains elsewhere — watch the wash-sale rule if you are still receiving vests.
• Max the tax-advantaged accounts the income unlocks. 401(k), mega-backdoor Roth if your plan allows it, and HSA contributions all reduce the ordinary-income side of the equation.

Bottom line

RSUs are not complicated once you see the structure: ordinary income at vesting, capital gain or loss at sale, chronic under-withholding in between, and a cost-basis form that is usually wrong in the government's favor. The taxpayers who avoid April surprises are the ones who look at the whole year in the spring or summer — while there is still time to adjust withholding and time decisions — rather than in March of the following year.