Tax Withholding (Equity)
The taxes automatically deducted when RSUs vest or NSOs are exercised, often by selling shares.
Definition
When RSUs vest or NSOs are exercised, the company is required to withhold income and payroll taxes on the taxable amount. For RSUs, the company typically withholds shares at a fixed rate (often 22% federal plus state) to cover the tax. This means you receive fewer shares than the gross amount vesting. For NSOs, taxes may be withheld from the exercise proceeds or your paycheck.
Why it matters
Tax withholding means you receive fewer shares than your grant says. If 1,000 RSUs vest and withholding is 40%, you only receive 600 shares. The other 400 were sold to cover taxes. Plan your cash flow and tax strategy accordingly.
Example
1,000 RSUs vest at $50/share ($50K value). Federal withholding at 22% ($11K = 220 shares), state at 10% ($5K = 100 shares), Social Security/Medicare at 7.65% ($3,825 = 77 shares). You receive approximately 603 shares instead of 1,000.