If you work in tech, you probably have RSUs, ESPP access, or both. Most people know they exist. Far fewer know what they actually owe in taxes, or when.
RSUs and ESPPs sound similar. They’re not. The tax treatment is different, the timing is different, and getting them confused is an expensive mistake. Here’s how they actually work.
What’s the difference between RSUs and ESPPs?
RSUs are shares that your employer grants you that vest over time. You don’t pay for them, but you pay ordinary income tax when they vest. ESPPs let you buy company stock at a discount (typically 10-15%) through payroll deductions. The tax treatment at sale depends on how long you hold the shares.
RSU vs. ESPP: The Key Differences Explained
Both give you a way to own company stock. That’s where the similarity ends.
RSUs (Restricted Stock Units) are shares your employer grants you as part of your compensation. You don’t buy them. You just wait for them to vest, then you own them. Even if the stock price stays flat, RSUs still have value as long as the company is solvent.
For a deeper look at how RSUs work, including vesting schedules and tax treatment, here’s a full breakdown of restricted stock units.
ESPPs (Employee Stock Purchase Plans) work differently. You contribute money from your paycheck over an offering period, then use that accumulated cash to buy company stock at a discount, typically 10-15% below market price. That built-in discount is the whole point.
| Feature | RSUs | ESPPs |
|---|---|---|
| How you get them | Granted by employer | Purchased via payroll deductions |
| When you own them | After vesting | After the offering period purchase |
| Tax timing | Taxed at vesting as ordinary income | Taxed at sale (timing determines the rate) |
| Guaranteed value? | Yes, as long as the company has value | Depends on market price at purchase |
Vesting Schedules and Offering Periods
Your access to the shares depends on timing, and the rules are different for each.
RSUs typically vest over time. Four-year schedules are common, either annually (25% per year) or quarterly. Once shares vest, they’re yours, but selling them has tax consequences.
ESPPs run on offering periods, usually six months. Your payroll deductions accumulate during that window, then the company uses that money to buy shares at the discounted price. Some ESPPs include a lookback provision, which means the discount applies to whichever price was lower, the start of the offering period or the end. That can make the effective discount larger than it first appears.
RSU and ESPP Tax Treatment: What You Actually Owe
RSU Tax Treatment
When your RSUs vest, the fair market value of the shares on that date is treated as ordinary income. It shows up on your W-2 alongside your regular salary. You owe tax on that value even if you don’t sell a single share.
Your employer withholds taxes at vesting, usually by selling a portion of your shares to cover the bill. The problem is that they’re required to withhold at the IRS flat supplemental rate of 22% (see IRS Publication 15). If you’re in the 32%, 35%, or 37% bracket, that leaves a gap.
Once the shares are yours, any gain or loss from that point forward is a capital gain or loss. Hold for more than one year after vesting, and you qualify for long-term capital gains rates. Hold for less, and it’s short-term, taxed at ordinary income rates.
For a deeper look at how to manage the withholding gap, see our RSU tax withholding guide.
ESPP Tax Treatment: Qualifying vs. Disqualifying Dispositions
This is where most people get tripped up. The tax treatment of your ESPP shares depends entirely on when you sell.
Qualifying Disposition (lower tax)
To qualify, you must hold the shares for:
- At least two years from the start of the offering period, AND
- At least one year from the purchase date
Meet both requirements and your gain splits into two pieces. The ordinary income portion is the lesser of: (a) the discount calculated using the offering date price, or (b) your actual gain on the sale. Everything above that is taxed as long-term capital gains at the lower preferential rate. (IRS Publication 525 covers the full calculation.)
The key benefit over a disqualifying disposition is that the ordinary-income component is capped at the original discount. In a disqualifying disposition, ordinary income is calculated on the full spread between your purchase price and the fair market value at purchase, which can be a much larger number when there is a lookback provision.
Disqualifying Disposition (higher tax, lower risk)
Sell before meeting either requirement, and it’s a disqualifying disposition. The full spread between your discounted purchase price and the fair market value on the purchase date is taxed as ordinary income. Any gain beyond that is taxed as a capital gain, short-term or long-term, depending on how long you held the shares after purchase.
The tradeoff is real. A qualifying disposition reduces the ordinary income portion but requires you to hold a concentrated single-stock position for over a year. A disqualifying disposition potentially costs more in taxes but lets you lock in the discount and walk away immediately.
Should You Sell RSUs and ESPP Shares Right Away?
For a deeper look at the sell-or-hold decision specifically for ESPP, see ESPP: Sell Right Away or Hold the Shares?
The Concentration Risk Problem
It’s tempting to hold. Nobody wants to sell a stock they think will keep going up. But consider the full picture: your paycheck already depends on your employer. Adding a large chunk of your investment portfolio to the same company doubles that exposure.
A diversified portfolio isn’t just a buzzword. It’s the thing that protects you if the stock drops 40% in a year, which tech stocks have done, more than once. The practical question most tech professionals face is how much company stock is too much, and there is no universal answer.
Three Approaches to Selling
Sell immediately at vesting (or purchase)
For RSUs, this simplifies your taxes. You’ve already paid ordinary income tax at vesting. Selling immediately means little to no additional capital gain to worry about. For ESPPs, this is a disqualifying disposition, but it locks in the discount and eliminates market risk.
Hold for long-term capital gains
For RSUs, hold more than one year after vesting, and any appreciation is taxed at the lower long-term rate. For ESPPs, meet both holding requirements and you’ve made a qualifying disposition. Both strategies require patience and a willingness to stay concentrated in one stock.
Partial divestment
Sell enough to cover your tax bill and diversify a meaningful portion. Hold the rest. This is the middle path and often the most practical one, but it requires knowing your numbers, your bracket, your basis, and your overall portfolio allocation.
None of these is automatically right. The answer depends on your tax bracket, how much of your net worth is tied to the stock, and what else is going on in your financial plan.
RSU and ESPP Planning Tips for Tech Employees
Know your vesting schedule cold. Mark every vest date on your calendar. If you’re thinking about leaving your job, check what vests in the next 90 days before you give notice. Leaving two weeks before a large vest is an expensive mistake.
Plan for the tax gap. Your employer’s 22% federal withholding is rarely enough for high earners. Review your W-4, consider quarterly estimated payments, or set aside the difference in cash so you’re not scrambling in April.
Understand your ESPP’s lookback provision. Not all ESPPs are the same. Some offer a lookback, some don’t. Knowing whether you have one, and how it works, changes how valuable your ESPP actually is.
Don’t let concentrated stock sneak up on you. RSUs vest quietly, a few times a year, and the position grows. How much company stock is too much? A lot of tech professionals wake up one day with 40% or 50% of their net worth in one stock. That’s a problem worth addressing before it’s a crisis. Read our guide on managing concentrated stock positions for more on this.
Get the full picture before selling. Tax brackets, NIIT thresholds, Washington’s capital gains tax, your spouse’s income, your 401(k) contributions — all of it interacts. A transaction that looks simple on the surface can get complicated fast.
Your 401(k) is the other place where company stock concentration can quietly build up — here are the most common 401(k) mistakes tech professionals make.
Frequently Asked Questions: RSUs and ESPPs
What’s the difference between RSUs and ESPPs?
RSUs are shares your employer grants you as part of your compensation. You don’t pay for them, but you have to wait for them to vest before you own them. ESPPs work differently. You contribute money from your paycheck over an offering period, then use that money to buy company stock at a discount, typically 10-15% below market price. The big tax difference: RSU income hits your W-2 as ordinary income the day they vest. ESPP taxation depends on how long you hold the shares after purchase.
Are RSUs taxed as ordinary income?
Yes. When your RSUs vest, the fair market value of the shares on that date is treated as ordinary income, reported on your W-2 alongside your regular salary. You owe tax on that value even if you don’t sell a single share. Any gain or loss after vesting is treated as a capital gain or loss when you eventually sell, with the holding period starting from the vesting date. (IRS Publication 525 covers the full treatment.)
Why is my RSU tax withholding probably not enough?
Your employer withholds taxes when RSUs vest, but they’re required to use a flat 22% federal rate for supplemental wages, which is what RSU income is classified as under IRS Publication 15. If you’re in the 32%, 35%, or 37% bracket, that leaves a real gap. Add a spouse’s income, a bonus, or a large vest in the same year, and you could owe thousands in April that weren’t withheld. The fix is adjusting your W-4, making quarterly estimated tax payments, or setting money aside yourself throughout the year.
What is a qualifying vs. disqualifying ESPP disposition?
It comes down to how long you hold the shares. A qualifying disposition means you held for at least two years from the start of the offering period and at least one year from the purchase date. Meet both and your gain splits into two pieces. The ordinary income portion is capped at the lesser of your original discount or your actual gain on the sale. Everything above that is taxed at long-term capital gains rates. A disqualifying disposition is anything shorter. Sell early, and the full spread between your purchase price and the fair market value at the time of purchase is taxed as ordinary income, which can be larger than the discount alone. Any gain beyond that is taxed as short-term or long-term capital gains, depending on your holding period.
Should I sell my RSUs as soon as they vest?
There’s no universal right answer, but selling immediately is more common than most people admit. When RSUs vest, you already owe income tax on their full value regardless of what you do next. Holding them means betting that one stock, your employer’s, will outperform a diversified portfolio. That’s a real risk when your paycheck and your investments are tied to the same company. Many people sell enough to cover taxes and diversify the rest. What makes sense depends on your tax bracket, your overall financial picture, and how much of your net worth is already tied up in company stock.
What happens to my RSUs if I leave my job?
Anything that hasn’t vested yet is forfeited. Your employer’s promise to release those shares was contingent on you staying through the vesting date. Shares that have already vested are yours to keep. This is why your vesting schedule matters a lot when you’re thinking about a job change. Leaving two weeks before a large vest can cost you real money. Always check your upcoming vest dates before you give notice.
Do RSUs count as income in Washington state?
At vesting, no. Washington has no state income tax, so RSU income at vesting is only taxed at the federal level. When you sell the shares, it’s a different story. Washington’s capital gains tax applies to long-term gains, meaning shares held more than one year. For 2025, the first $278,000 in gains is exempt. Gains above that are taxed at 7% up to $1 million, and 9.9% on anything above that. Short-term gains, shares held less than a year, are not subject to Washington’s capital gains tax. (Washington Department of Revenue has current rates and deduction amounts at dor.wa.gov.)
What is the NIIT and does it apply to RSU income?
The Net Investment Income Tax is an extra 3.8% tax on investment income for higher earners. For 2026, it kicks in at $200,000 MAGI for single filers and $250,000 for married filing jointly. RSU income at vesting is classified as wages, not investment income, so it’s not directly subject to NIIT. But a large vest pushes your MAGI up, which can pull your other investment income — like gains from selling ESPP shares or other stocks — across the threshold. In a high-income year with both RSU vesting and stock sales, NIIT is worth modeling before you sell.
Can I hold ESPP shares to get long-term capital gains treatment?
Yes, but it’s more nuanced than most people expect. If you meet both holding requirements, a qualifying disposition, your gain splits into two pieces. A portion is still taxed as ordinary income, specifically the lesser of your original discount or your actual gain. Everything above that gets long-term capital gains treatment. The real benefit isn’t eliminating ordinary income entirely. It’s capping the ordinary income piece at the original discount rather than the potentially larger spread used in a disqualifying disposition. The tradeoff is market risk. You’re holding a concentrated single-stock position for over a year to capture that tax difference, and the stock could drop in the meantime. Whether that tradeoff makes sense depends on the size of the discount, your tax bracket, and how concentrated your portfolio already is.
Take Control of Your Equity Compensation
RSUs and ESPPs can build real wealth. They can also create real tax surprises if you’re not paying attention. Knowing how each one works, and what you actually owe, is the starting point.
If you want help building a tax-efficient selling strategy around your equity comp, let’s talk.