How your employer collects RSU taxes: sell-to-cover vs. net settlement
When RSUs vest, your employer is legally required to withhold taxes before handing you the shares. There are three ways they do it. The important thing to know up front: your tax bill is identical under all three — only the mechanics differ.
Option 1: Sell-to-cover (most common)
Your broker sells just enough of your newly vested shares — at the market price that day — to cover the withholding, and sends the cash to your employer. If 100 shares vest at $50 and the withholding is $1,100, about 22 shares are sold and 78 land in your account.
One subtlety: that sale is technically a sale of shares you now own. If the sale price differs even slightly from the vest-day fair market value, you get a tiny capital gain or loss. Same-day sales are usually within pennies of zero — nothing to plan around, just don't be surprised if a $2 gain shows up on your 1099-B.
Option 2: Net settlement (share withholding)
Instead of selling, your employer simply keeps the shares needed to cover withholding and delivers the rest. Using the same example: 22 shares go back to the company, 78 arrive in your account. No sale transaction, no 1099-B line item, same $1,100 of withholding on your W-2.
Some people prefer this because the share count math is cleaner. Economically, it's the same as sell-to-cover.
Option 3: Pay cash
A minority of plans let you wire cash (or have it pulled from payroll) to cover withholding so you keep 100% of the shares. This only makes sense if you specifically want maximum share exposure and have the cash sitting around. Most employees never see this option — check your plan documents.
The $1 million rule
Normally your employer withholds a flat 22% federal on RSU income. But if a single vesting event exceeds $1,000,000, IRS rules require 37% withholding on the amount above $1 million — automatically, with no election from you. So a $1.2M vest sees 22% on the first $1M and 37% on the remaining $200k. This is withholding, not your final tax rate; it just changes the size of the check you settle up (or refund you receive) in April.
What actually matters
- Count your shares, not the method. Whichever method your plan uses, verify the number of shares you received matches (vested shares − withholding shares). Errors are rare but do happen.
- Withholding ≠ your tax. The 22% (or 37%) your employer withholds is a down payment. If your marginal rate is higher, the gap is still yours to cover — see why your RSU withholding is wrong.
- You usually can't choose. The method is set by your employer's plan. Knowing which one applies just stops the "where did 22 of my shares go?" panic on vest day.