RSU State Sourcing: How the Workday Allocation Formula Works

Part of Nauma's complete guide to RSU Taxes When You Move States.

Most people assume RSU income is taxed by whichever state they happen to live in on the vest date. That assumption is wrong often enough, and expensive enough when it's wrong, that it's worth understanding the actual rule: RSU income is sourced to the state or states where the underlying services were performed between grant and vest — not to the state of residence at the moment the shares become taxable.

The Core Principle: Compensation Follows the Work, Not the Residence

The general rule across most states with an income tax is that compensation is sourced to where the work was performed, regardless of where or when it's actually paid. For most forms of pay — a regular paycheck — this distinction rarely matters, because the work and the payment happen close together in time and place. RSUs break that assumption: a grant made today may not vest for one, two, or four years, and an employee can easily live and work in two, three, or more states across that period.

The Formula

The most common approach, used explicitly by California, New York, Massachusetts, and New Jersey among others, allocates RSU income using a workday ratio:

Income sourced to State X = Total RSU income × (workdays in State X from grant to vest ÷ total workdays from grant to vest)

The relevant period is grant-to-vest for RSUs specifically. This is an important distinction from other equity types: for stock options, the relevant period is generally grant-to-exercise, and for ESPP shares, it's the offering period. Applying the RSU rule to an option grant, or vice versa, is a common and consequential error — each equity type has its own allocation period under most states' guidelines.

What Counts as a Workday

A workday generally means a day the employee actually performed services for the employer, physically present in a given state. Weekends, holidays, and vacation days are typically excluded from both the numerator (days in the state in question) and the denominator (total days) — most states measure allocation against a standard working year of roughly 250–260 days, not 365.

A single day matters more than it might seem: a business trip to a client meeting in another state generally counts as a workday in that state, even for an employee based elsewhere. Working remotely from a home office in a new state counts as a workday in the new state — the general presumption is that the workday belongs wherever the employee physically was, not wherever the employer or its office is located (a significant exception to this general rule exists in states with a "convenience of the employer" rule; see When Double Taxation on Equity Compensation Isn't Actually Fixed by a Credit for how that changes the analysis).

A Worked Example

An employee is granted 4,000 RSUs on a standard four-year schedule while living and working in State A. Eighteen months into the vesting period, the employee relocates to State B and continues working remotely for the same employer through the remainder of the vesting schedule.

Assume the grant-to-vest period for a given tranche spans 1,000 total workdays, of which 450 were worked in State A before the move and 550 were worked in State B after it. State A's allocation ratio is 450 ÷ 1,000 = 45%. If that tranche is worth $200,000 at vest, State A would source $90,000 of that vest as State A-taxable income, with the remaining $110,000 attributed to State B (subject to State B's own rules, which may or may not tax it, depending on whether State B has an income tax at all). These figures are illustrative only and do not reflect any specific taxpayer's situation.

Why This Creates Real Planning Problems

Because employer withholding is typically based only on an employee's current state of residence at the time of vest, the withholding rarely accounts for a prior state's sourced claim on the same income. An employee who moved from a high-tax state partway through a vesting schedule may have nothing withheld for that prior state at all, only to discover a filing obligation — and a real tax bill — well after the fact, sometimes years later when a company IPOs and a large batch of previously unvested double-trigger RSUs settle at once. See RSU in Private Companies for how double-trigger vesting can extend this exposure window considerably.

What This Page Does Not Cover

This page describes the general workday-allocation principle used across multiple states. California's own specific implementation — its legal citation, filing mechanics, and a real case illustrating the formula's limitations — is covered in Nonresident Equity Taxation: California's Rule for Equity You Earned There. What to do once a sourced tax liability is identified — including the resident credit mechanism and its limits — is covered in Resident Credit for Taxes Paid to Another State and When Double Taxation on Equity Compensation Isn't Actually Fixed by a Credit.

California Note

California applies this workday-allocation approach through Franchise Tax Board Publication 1004 (Equity-Based Compensation Guidelines) and California Code of Regulations, Title 18, §17951-5 (implementing California Revenue and Taxation Code §17951), and is one of the most active enforcers of this rule among all states — a reflection of both the size of its tech workforce and the volume of equity compensation granted to California-based employees who later relocate. See Nonresident Equity Taxation for California's specific mechanics, worked examples, and filing requirements.

This article is for educational purposes only and does not constitute investment, tax, or financial advice. State sourcing rules for equity compensation vary and are subject to change, and correctly applying them requires accurate, contemporaneous records of where services were actually performed. Always consult a qualified tax advisor, particularly before or during a move that spans an active vesting schedule.