The difference between an RSU and a PSU comes down to what you have to do to earn the shares. Restricted Stock Units vest on time alone: stay employed through the vesting date and the shares are yours. Performance Stock Units require both continued employment and the company hitting specific targets, and the payout can range from zero to roughly double the target grant depending on results. Both are taxed the same way once shares actually land in your account.
How RSUs Vest
An RSU is a promise from your employer to deliver shares after you meet a time-based vesting requirement. No shares change hands at grant. You receive a document stating how many units you’ve been granted and the schedule on which they convert into real shares.
Two vesting schedules are common. A cliff schedule releases all shares at once after a set period, often one year. A graded schedule releases shares in installments, such as 25% per year over four years or smaller tranches each quarter. Graded vesting is more common because it keeps the retention incentive alive over a longer period.
Leave before a vesting date and you forfeit the unvested portion. Once the date arrives, the restriction lifts, shares land in your brokerage account, and you own them outright. The value you receive equals the stock price on that vesting date multiplied by the number of units vesting. Assuming you stay employed, RSUs are about as close to a guaranteed future payment as equity compensation gets.
How PSUs Vest
PSUs also promise future shares, but the number you actually receive depends on whether the company hits predetermined performance metrics during a measurement period, typically three years. Staying employed through that period is necessary but not sufficient. If the targets aren’t met, you can work the entire period and walk away with nothing.
Common metrics include Total Shareholder Return measured against a peer group, revenue growth, earnings per share, or operating cash flow. The grant agreement specifies a target number of shares and a payout range, usually between 0% and 200% of that target. Fall below the minimum threshold and the payout is zero. Exceed the maximum and you could receive double the targeted share count. The board or compensation committee certifies the results before any payout occurs.
Companies use PSUs primarily for executives and senior leaders whose decisions directly influence the metrics being measured. If you can move the needle on revenue growth or shareholder returns, your compensation reflects whether you actually did.
Risk, Payout, and Who Gets Which
The fundamental difference is certainty. With RSUs, the math is simple: stay employed, get your shares. With PSUs, staying employed is just the entry ticket. The payout depends on factors that may be partially or entirely outside your control, like whether the stock outperforms competitors or whether the company hits an earnings target during a period that might include a recession.
That risk gap shows up in the numbers. An RSU grant converts one-for-one into shares: 1,000 RSUs deliver 1,000 shares before withholding on the vesting date. A PSU grant of 1,000 target units might deliver anywhere from zero to 2,000 shares. PSUs can be worth far more than RSUs in a strong period and worth nothing in a weak one.
The instruments do different jobs. RSUs work as a retention tool across broad employee populations. PSUs work as an incentive mechanism, tying executive pay to outcomes shareholders care about. Many senior compensation packages include both: RSUs as a predictable floor, PSUs as upside tied to results.
Tax Treatment at Grant and Vesting
Neither RSUs nor PSUs create a taxable event when the grant is made. At that point you hold an unfunded promise from your employer, not actual property. No shares exist in your name, so there is nothing to tax.
The tax hit arrives at vesting, when shares are delivered. The full fair market value of the shares on the vesting date counts as ordinary income and is reported on your W-2 alongside your salary. This income is subject to federal income tax, state income tax where applicable, Social Security tax on earnings up to the $184,500 wage base for 2026, and Medicare tax.1Internal Revenue Service. Filing Taxes for Your Restricted Stock, Restricted Stock Units, or Performance Awards2Social Security Administration. Contribution and Benefit Base
Your employer must withhold taxes before delivering the net shares. Most companies use a sell-to-cover method, immediately selling enough of your vested shares to cover the withholding. For federal income tax, the default withholding rate on supplemental wages, which includes equity compensation, is a flat 22%. If your total supplemental wages from that employer exceed $1 million during the calendar year, the rate on the excess jumps to 37%.3Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
The 22% is a withholding estimate, not your actual tax rate. If your marginal bracket is higher, you’ll owe additional tax when you file. A large vesting event can push your income into a higher bracket for the year, and the gap between what was withheld and what you actually owe can create a surprise in April. Setting aside extra cash from each vesting event, or making estimated tax payments, prevents that shortfall.
Why the 83(b) Election Does Not Apply
You may have heard that an 83(b) election lets you pay tax on equity compensation at grant rather than at vesting, locking in a lower value if the stock appreciates. That election exists under the tax code for property transferred in connection with services and must be filed within 30 days of the transfer.4Office of the Law Revision Counsel. 26 U.S. Code 83 – Property Transferred in Connection With Performance of Services5Internal Revenue Service. Form 15620 – Section 83(b) Election
Standard RSUs and PSUs don’t qualify. The election requires an actual transfer of property, and RSUs and PSUs are unfunded promises to deliver stock in the future. No property changes hands at grant, so there’s nothing to make the election on. Filing an 83(b) on a standard RSU or PSU grant is invalid. You’ll pay ordinary income tax at vesting. The election is relevant for restricted stock awards, where actual shares are transferred at grant subject to forfeiture, which is a different instrument.
After Vesting: Cost Basis and Capital Gains
Once shares vest and withholding is handled, you own actual stock. Your cost basis in those shares equals the fair market value on the vesting date, which is the same amount already reported as ordinary income on your W-2. This prevents you from being taxed twice on the same dollars.6Internal Revenue Service. Topic No. 409 – Capital Gains and Losses
From that point on, any change in price produces a capital gain or loss when you sell. Sell within one year of vesting and any profit is a short-term capital gain, taxed at your ordinary income rate. Hold longer than one year and the profit qualifies as a long-term capital gain at preferential rates of 0%, 15%, or 20% depending on your total taxable income.6Internal Revenue Service. Topic No. 409 – Capital Gains and Losses
The Cost Basis Correction on Form 1099-B
Brokerages frequently report RSU and PSU sales on Form 1099-B with a cost basis of zero, or with only the amount you paid for the shares, which is nothing. This ignores the fact that you already paid ordinary income tax on the fair market value at vesting. File using the 1099-B numbers without adjustment and you’ll be double-taxed on income you already reported through your W-2. To fix this, use adjustment code B on Form 8949 to report the correct cost basis.7Internal Revenue Service. 2025 Instructions for Form 8949 It’s one of the most common and most expensive filing errors with equity compensation.
The Wash Sale Trap
If you sell company shares at a loss and another RSU or PSU tranche vests within 30 days before or after the sale, the IRS treats the vesting as acquiring substantially identical stock. That triggers the wash sale rule and disallows the loss for that tax year.8Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities The disallowed loss is added to the cost basis of the newly vested shares, so it isn’t permanently gone, but you can’t use it when you need it. Quarterly vesting schedules make this trap easy to spring, because there’s almost always a vesting event within 30 days of any sale you might make.
What Happens If You Leave
The default for both RSUs and PSUs is straightforward: leave before the vesting date and you lose the unvested portion. Voluntary resignation, termination for cause, or a layoff during a restructuring all typically wipe out unvested units. This forfeiture risk is what allows the tax deferral from grant to vesting in the first place.
Many plans carve out exceptions for retirement, death, or disability, and these provisions vary widely between companies. Some accelerate vesting in full. Others provide pro-rata vesting based on the fraction of the vesting period completed. Retirement provisions sometimes let unvested RSUs continue vesting on the original schedule, or PSUs remain outstanding and pay out based on actual performance at the end of the measurement period. The only way to know your specific treatment is to read your grant agreement and the equity plan document.
PSUs add a wrinkle. If you depart before the performance period ends, even a pro-rata vesting still leaves the question of how many shares to deliver, because performance hasn’t been measured yet. Some plans pay out at the target level. Others wait until the performance period concludes and apply actual results to your pro-rata share.
What Happens in a Merger or Acquisition
A merger or acquisition can scramble your equity compensation in ways that are hard to predict. The acquiring company and the merger agreement dictate what happens, not your original grant terms alone. Common outcomes include accelerated vesting at closing, rollover into the acquirer’s equity, a cash buyout of unvested grants, or outright cancellation.
If unvested RSUs or PSUs are cashed out, the proceeds count as ordinary income, just like a normal vesting event. For PSUs, a cash-out before the performance period ends often pays at the target level rather than waiting for actual results, though the merger agreement controls this. Cancellation without replacement is the worst outcome and is legally permissible in many plans.
Some grant agreements include double-trigger acceleration. The first trigger is the change-of-control event. The second is a qualifying termination, typically being laid off without cause or constructively forced out within a set window, often 9 to 18 months, after the deal closes. Both must occur for your unvested equity to accelerate. Double-trigger provisions only help if your unvested equity survives the transaction. If the buyer cashes out or cancels the grants at closing, the original award no longer exists and there’s nothing left to accelerate.