What Does “Sell to Cover” Mean for Your RSUs?

When your RSUs vest, you don’t get to keep every share. A portion gets sold automatically to pay the taxes you owe. Here’s how that actually works, and what to check so it doesn’t catch you off guard.

If you’ve had RSUs vest, you’ve probably noticed you didn’t receive the full number of shares your grant promised. A chunk of them disappeared before the shares ever hit your account. That’s “sell to cover,” and it’s the most common way companies handle the tax bill that comes due the moment your RSUs vest.

It’s not a mistake and it’s not optional in most cases. But it’s worth understanding exactly what’s happening, because the default settings aren’t always the right settings for your situation.

What “Sell to Cover” Actually Means

When your RSUs vest, the value of those shares counts as ordinary income, the same as a paycheck. Your employer has to withhold taxes on that income right away, just like they withhold from your salary.

Since RSUs pay out in shares, not cash, there’s no paycheck to withhold from. So instead, your company’s equity plan automatically sells a portion of the newly vested shares on your behalf, uses that cash to cover the withholding, and deposits the remaining shares into your brokerage account.

That’s the whole mechanism. You vest 100 shares, the plan sells enough of them to cover taxes, and you’re left holding whatever’s left.

Why Companies Default to This Method

Sell to cover is common at most companies because it’s automatic, though net settlement, where shares are withheld directly rather than sold on the open market, is increasingly common at larger tech employers. Either way, you don’t have to write a check, transfer cash, or do anything at all. The system handles it the moment your shares vest.

Some companies offer alternatives, like paying the withholding out of pocket so you keep every share. But sell to cover (or its close cousin, net settlement) remains the most common because it requires zero action from you.

The Withholding Rate Is Often Too Low

Here’s the part that catches a lot of people off guard. The default federal withholding rate on supplemental wages, which includes RSU vests, is a flat 22% (37% on any cumulative supplemental wages above $1 million from that employer in the calendar year). It’s not based on your actual tax bracket. It’s just a flat percentage applied to the vest value.

For 2026, the 22% bracket for single filers covers taxable income from $50,400 to $105,700. If your salary alone already puts you above that range, you’re in the 24% bracket or higher before your first RSU dollar even lands, which means the 22% withholding is under-covering you from the very first vest of the year, not just once you cross some higher threshold later on.

That means the shares sold to cover taxes may not cover enough. Sell to cover can leave you with an underpayment that shows up as a tax bill the following April, sometimes a large one.

Sell to cover also handles your payroll taxes on the vest, Social Security (6.2% up to the 2026 wage base of $184,500) and Medicare (1.45%, plus an Additional Medicare Tax of 0.9% once your wages pass $200,000 single or $250,000 married filing jointly). If a vest happens early in the year, before your salary has used up the Social Security wage base, this can meaningfully increase the number of shares sold. That’s on top of the income tax withholding above, not instead of it.

This is separate from the cost basis issue we cover in our post on RSU cost basis and 1099-B reporting. That one’s about how the sale itself gets taxed. This one is about whether enough was withheld at vest in the first place. Both can go wrong at the same time.

What Happens to the Shares That Get Sold

The shares sold to cover taxes are a real transaction. They get reported on a 1099-B just like any other stock sale. Because they’re usually sold right at vest, the sale price and the cost basis (the vest-date value) are close to each other, so the gain or loss is typically small.

But small doesn’t mean nothing. It still needs to show up on your tax return, and it’s easy to overlook because it can feel like part of the vesting event rather than a separate sale. If you want the full breakdown of how cost basis works for RSU shares, we cover that in detail in RSU Cost Basis and 1099-B Explained.

Do You Have Any Choice in the Matter?

Sometimes. It depends on your company’s equity plan. A few things worth checking with your equity administrator or HR:

• Whether “sell to cover” is the only option, or whether you can elect to pay cash instead and keep all your shares
• Whether your plan allows you to adjust your withholding elections beyond the default rate
• Whether the shares are sold immediately at vest or on a slight delay, which can matter if the stock is volatile

Most people don’t have much flexibility here, and that’s fine. The goal isn’t necessarily to change the mechanism, it’s to know what’s happening so the withholding gap doesn’t become a surprise. For the bigger picture on how RSU income gets taxed overall, our post on the RSU tax bill nobody warns you about walks through the full sequence.

Common Questions

Does sell to cover mean I’m losing money on my RSUs?
No. The shares sold cover a tax obligation you’d owe regardless of how you paid it. You’re not losing value, you’re paying taxes with shares instead of cash.

Can I choose not to sell shares to cover taxes?
Depends on your company’s plan. Some allow you to pay the tax bill in cash and keep all your shares. Check with your equity administrator to see what your specific plan allows.

Why did more shares get sold than I expected?
A few things stack on top of each other here. First, most people mentally estimate “22% of my shares” and forget that Social Security (6.2%) and Medicare (1.45%, or 2.35% above the Additional Medicare Tax threshold) are withheld at vest too. If your salary hasn’t yet hit the Social Security wage base for the year, total withholding is often 30% or more, not just 22%. Second, whether you see rounding at all depends on your equity plan administrator. Traditionally, most plans (Fidelity, E*TRADE/Morgan Stanley, Schwab Stock Plan Services) calculated the dollar amount owed and rounded up to the nearest whole share, since not all plan accounts supported fractional share transactions. That’s changing, and more plans now execute sell-to-cover to the exact dollar amount without rounding. Check with your equity administrator to see which method your plan uses. Third, if you live in a state with income tax, that gets added to the calculation as well. California, for example, withholds 10.23% on RSU vests on top of the federal amount, which can push total withholding past 30-35% before a single share reaches your account.

Note this is a separate issue from the bracket mismatch discussed above. If your bracket is higher than 22%, that actually causes fewer shares to be sold than you’ll ultimately owe, not more, since the plan withholds at 22% regardless of your real rate. That’s the gap that shows up as a tax bill in April, not extra shares sold at vest.

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