Equity comp
What is Amazon's RSU vesting schedule, and how are Amazon RSUs taxed?
Amazon's RSU vesting schedule is the single most distinctive thing about its compensation package, and it produces a tax outcome that catches new hires off guard almost every year. The mechanics are not complicated; they are just deliberately back-loaded in a way that other tech employers' grants are not.
The 5/15/40/40 vesting schedule
For most US corporate hires above a certain level, Amazon's standard new-hire RSU grant vests on a four-year back-loaded schedule:
| Year | Percent of grant vesting | Cumulative |
|---|---|---|
| Year 1 | 5% | 5% |
| Year 2 | 15% | 20% |
| Year 3 | 40% (split semi-annually) | 60% |
| Year 4 | 40% (split semi-annually) | 100% |
This contrasts with the more common four-year, equal-quarterly vest used by most other large tech employers, where 25% vests each year on a quarterly schedule. The Amazon schedule explicitly assumes that you stay long enough to reach Year 3 for the equity comp to begin doing meaningful work.
Amazon historically pairs the back-loaded equity vest with elevated cash compensation (signing bonuses) in Years 1 and 2 to bridge the gap. The total compensation curve over four years is, in theory, smoother than the equity-only view suggests — but only if you actually receive both years of the cash sign-on as scheduled and if the share price holds up.
Why Year 3 is the cliff
The transition from 15% in Year 2 to 40% in Year 3 is, for many employees, the single largest jump in W-2 income they have ever experienced. If your grant is significant, you can move multiple federal tax brackets in a single calendar year between Year 2 and Year 3. The tax planning implications are concrete:
- Marginal rate jumps from middle brackets into 32%, 35%, or 37% federal.
- Net Investment Income Tax (an additional 3.8% on investment income above thresholds) often kicks in for the first time.
- State tax obligations increase proportionally, and some local taxes have their own thresholds.
- Phaseouts on various deductions and credits begin to bite.
- Required estimated tax payments may become necessary if W-2 withholding falls short.
The most common surprise is the gap between what was withheld and what is owed at filing the following April. We address that in detail below.
How Amazon RSUs are taxed at vest
The day shares vest, the fair market value of those shares becomes ordinary W-2 income on that day's paycheck. Amazon's payroll reports the vested value to the IRS, and Social Security, Medicare, federal income tax, and state income tax are all calculated on it. Federal income tax withholding on RSU income, like all supplemental wages, defaults to 22% under IRS rules.
To cover that withholding, Amazon (through its plan administrator, typically Morgan Stanley at Work / E*TRADE) sells a portion of the vesting shares automatically. The net shares — what's left after the sell-to-cover — land in your brokerage account.
Importantly, the cost basis of the net shares is the fair-market price on the vest date. Any subsequent appreciation or decline is a capital gain or loss starting from that point.
The withholding gap and what to do about it
The 22% federal supplemental rate is set by the IRS, not by Amazon. For an employee in the 32% bracket, that's a 10-point gap; in the 37% bracket, 15 points. Add a high-tax state and the gap widens further.
Concretely: an employee with $400,000 of RSU income vesting in a year, in the 35% federal bracket and a 9% state, has roughly $176,000 of true tax liability on the RSU portion alone. If Amazon withheld 22% federal + 9% state = 31%, that's $124,000 — leaving a $52,000 shortfall to be paid at filing.
The fixes
- Increase 401(k) deferrals to reduce taxable income (and pull more dollars under the Roth or pre-tax wrapper at the same time).
- Add a flat additional withholding on the W-4 (the "additional amount" line) — paid each pay period, this catches up the gap before April.
- Make quarterly estimated tax payments using IRS Form 1040-ES.
- Set the gap aside in a high-yield savings account at every vest, untouched, to be paid at filing. Less efficient than withholding (because you risk under-payment penalties) but simpler to implement.
Use the IRS Tax Withholding Estimator early in any year you expect a large vest — preferably in January, again after each large vest, and again in October. Catching the gap early in the year is far cheaper than catching it in April.
Taxation when you sell
Once shares are vested and sitting in your brokerage account, any subsequent gain or loss is a capital event. The basis is the vest-day value (already taxed as W-2 income). The holding period for long-term capital gains treatment starts the day after vest — sell within a year and any gain is short-term (taxed at ordinary rates); sell after a year and any gain is long-term (preferential rates).
One thing that frequently confuses people: the W-2 income reported on vest day is sometimes not reported by the brokerage as the basis on Form 1099-B. The 1099-B may show a basis of zero or the original RSU grant value, neither of which is correct. You must adjust on your tax return so that the basis equals the vest-day fair market value, otherwise you will be taxed twice on the same income — once as W-2, once as capital gain. Check the supplemental statement from the plan administrator and reconcile the 1099-B against it carefully.
Should you hold past vest?
The default answer for most readers is no, and the reasoning is concentration. As an Amazon employee you already have:
- Salary tied to Amazon's continued ability to pay it.
- Cash bonuses tied to Amazon's performance.
- Unvested RSUs whose value is entirely dependent on Amazon's share price and your continued employment.
- (For some employees) ESPP shares.
- Career capital — the next promotion, the next reference — tied to Amazon's existence.
Holding vested RSUs adds further exposure on top of all of that. The cleanest default is to sell at vest, treat the proceeds as cash, and then deliberately decide what fraction of that cash you want in Amazon stock for non-employment reasons. Most advisors who have looked at this carefully suggest capping employer-stock exposure at 10–20% of liquid net worth, depending on circumstances.
That said, plenty of Amazon employees have held shares through tenure and done well. The point is that holding should be a deliberate decision made with full awareness of the risk, not the result of doing nothing.
Refresh grants and the overlapping years
Amazon issues refresh grants in subsequent years, with their own four-year back-loaded vesting on the same 5/15/40/40 schedule. By Year 3 of employment, you may have:
- Year 3 (40%) of the original new-hire grant vesting.
- Year 2 (15%) of the Year 1 refresh vesting.
- Year 1 (5%) of the Year 2 refresh vesting.
The total can be larger than any single grant statement implies. For tax planning, project the full year's vest income each January and adjust withholding accordingly.
Common mistakes
- Treating the headline grant value as Year 1 income. It isn't. The 5%/15%/40%/40% schedule means most of the value vests in Years 3 and 4.
- Under-withholding through Year 3 vests. The 22% supplemental rate is far below the actual marginal rate for most readers in their Year 3 vest year.
- Holding shares past vest by default. A choice should be made deliberately, not by inaction.
- Not reconciling the 1099-B basis. The brokerage statement may understate the cost basis, leading to double taxation if not corrected on the return.
- Ignoring the refresh grants in tax planning. By Year 3, multiple overlapping grants compound the income — and the withholding gap.
Amazon's program terms are reviewed periodically. Verify your specific grant's vesting schedule and the current plan terms in the Morgan Stanley at Work portal and your offer paperwork before acting.