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Why You Owe the IRS After Selling RSUs
Short answer: Most people owe after selling RSUs or company stock for two reasons. The tax withheld when the shares vested was too low for their bracket, and the broker's Form 1099-B shows a $0 or partial cost basis, so the same income can be taxed twice unless the basis is corrected on Form 8949.
Key takeaways
RSUs are taxed as wages when they vest, and that value is already in Box 1 of your W-2.
Employers usually withhold federal tax on stock wages at a flat 22% (37% on supplemental wages over $1 million), which is often less than your actual bracket.
Your 1099-B often leaves out the amount already taxed as wages, so your true cost basis has to be adjusted on Form 8949.
ESPP, NSO and ISO shares each follow different rules, and ISOs can trigger the alternative minimum tax.
Estimated payments in the quarter your shares vest or sell can prevent a surprise balance and an underpayment penalty.
The withholding gap
Many employees are surprised by their bill in April. Shares were sold to cover taxes, so it looked handled. Often it was not.
The IRS treats vested RSUs as supplemental wages. Employers can withhold federal tax on supplemental wages at a flat 22%, and must use 37% on supplemental wages over $1 million in a year. If your income puts you in the 32%, 35% or 37% bracket, the 22% withheld leaves a gap, and you owe the difference when you file. The larger the vest, the larger the gap. Many states also withhold at a flat supplemental rate that can fall short.
With sell-to-cover, your employer sells some of the vesting shares to pay that withholding. The withholding is still at the flat rate, so selling shares to cover it does not close the gap.
The double-tax trap on your 1099-B
This is the most common reason we see inflated tax bills on stock sales.
When RSUs vest, their market value is added to your W-2 and taxed as wages. That value becomes your cost basis in the shares.
When you later sell, your broker issues Form 1099-B. For shares received as compensation, brokers generally cannot include the amount you were already taxed on in the basis they report. So the 1099-B often shows a $0 or partial basis.
If those numbers go straight onto your return, the vest value is taxed twice: once as wages on your W-2 and again as a capital gain. The fix is on Form 8949. You report the sale as the broker did, enter code B in column (f), and put the basis adjustment in column (g). Your broker's supplemental statement (sometimes called a supplemental information or cost basis statement) shows the adjusted basis you need.
Holding period: short term or long term
The holding period for RSU shares starts the day after the shares vest, not on the grant date.
Sold one year or less after vesting: a short-term gain or loss, taxed at your ordinary rates.
Held more than one year after vesting: a long-term gain or loss, taxed at the lower long-term capital gains rates.
Many people sell right away. That keeps the gain small because the sale price is close to the vest value, which is your basis.
ESPP shares: qualifying and disqualifying sales
Employee stock purchase plan shares follow their own rules, and the result depends on when you sell.
Qualifying disposition: you sell at least two years after the offering (grant) date and at least one year after the purchase date. The ordinary income part is the smaller of the plan discount (figured on the offering-date price) or your actual gain. The rest is long-term capital gain.
Disqualifying disposition: you sell before both of those dates. The difference between the market value on the purchase date and the price you paid is ordinary income, usually reported on your W-2. Any further gain or loss is capital gain or loss.
ESPP shares have the same 1099-B basis problem as RSUs. The ordinary income part has to be added to your basis on Form 8949, or it gets taxed twice.
Stock options: NSOs, ISOs and the AMT
Nonqualified stock options (NSOs): when you exercise, the difference between the market value and your strike price (the spread) is taxed as wages and appears on your W-2. Your basis is the strike price plus that spread.
Incentive stock options (ISOs): exercising does not create regular income tax. But if you exercise and hold the shares past year-end, the spread is an adjustment for the alternative minimum tax on Form 6251. You can owe AMT for that year even though you sold nothing, and even if the stock drops later. AMT paid because of ISOs can often be recovered over later years through the minimum tax credit on Form 8801. If you sell ISO shares before the required holding periods, part of the gain becomes ordinary income instead.
The 3.8% net investment income tax
Gains from selling stock are investment income. If your modified adjusted gross income is over $200,000 (single or head of household) or $250,000 (married filing jointly), a 3.8% net investment income tax can apply on Form 8960. It applies to the smaller of your net investment income or the amount your income is over the threshold. These thresholds are not indexed for inflation. The wage part of your RSUs is not investment income, but it does count toward the threshold.
State tax and moving between states
Equity compensation is generally taxed by the state where you earned it, not only where you live when it vests or sells. Many states, including California, allocate RSU and option income by the share of workdays spent in the state between the grant date and the vest date. If you moved during that period, part of the income can still be taxable in your old state. Getting the allocation wrong, or missing a credit for tax paid to another state, can mean paying tax twice or getting a state notice later.
Estimated payments and the safe harbor
The IRS expects tax to be paid during the year. A large vest or sale can push your withholding well below what you owe, and an underpayment penalty can apply on Form 2210.
You generally avoid that penalty if your withholding and timely estimated payments cover at least 100% of last year's total tax, or 110% if last year's adjusted gross income was over $150,000 ($75,000 if married filing separately). Meeting the safe harbor avoids the penalty, but you still owe the balance when you file.
How we help
I am Sabih Shafi, an IRS Enrolled Agent, federally licensed to represent taxpayers before the IRS in all 50 states. We have worked through many RSU, ESPP and stock option cases, and we work remotely, in English or Spanish.
Basis review: we compare your 1099-B, broker supplemental statements and W-2 to find income that was taxed twice.
Corrected returns: we prepare Form 8949 correctly, or amend a past return with Form 1040-X when the basis was missed.
Notices and balances: if you already got an IRS notice or owe a balance you cannot pay at once, we handle the response and the payment plan.
A flat fee quoted in writing before work starts.
General information, not tax advice for your situation.
Frequently Asked Questions
My company withheld taxes on my RSUs. Why do I still owe?
The withholding was usually a flat 22% federal rate. If your income puts you in a higher bracket, the difference is due when you file.
How do I find my real cost basis?
Use your broker's supplemental statement for the year, not only the 1099-B. It shows the basis including the amount already taxed on your W-2.
Does the AMT apply to RSUs?
No. The AMT adjustment applies when you exercise incentive stock options and hold the shares. RSUs are taxed as regular wages when they vest.
Can losses on other investments offset my stock gains?
Yes. Capital losses offset capital gains. If losses are larger than gains, up to $3,000 a year ($1,500 if married filing separately) can offset other income, and the rest carries forward.
What happens if I file with the $0 basis from my 1099-B?
You overstate your gain and pay too much. If you already filed that way, you can usually fix it with Form 1040-X within the refund deadline.
Last reviewed: October 2026 by Sabih Shafi, EA
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This article is general information, not individual tax advice. If you want to talk through your own IRS or state balance, book a free 20-minute review or call or text us directly.
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