RSU Taxes: Why 22% Withholding Isn't Enough

Your employer withheld a flat 22% when those shares vested. For a high-earning household, that isn't your tax rate, and the difference shows up in April as a balance you didn't plan for.

Nobody who played Contra forgot the spread gun.

You'd grab it, clear half a level without breaking a sweat, and start believing you were better at the game than you actually were. Then one bad jump, and it was gone, along with the false confidence that came with it.

RSU vest day has that same energy.

The shares land in your brokerage account. Some were sold automatically to cover taxes. The number that's left looks like a win, and it partly is. But if your household is earning north of $300,000, a meaningful piece of that tax bill was never actually paid, and you won't find out until April, when it arrives as a balance due you didn't plan for.

Here's why that happens, how to size the gap in about ten minutes, and what to do about it while you still have paychecks left in the year.

Your RSUs aren't an investment. They're a paycheck.

Start here, because almost every downstream mistake traces back to this one misunderstanding.

On the day your RSUs vest, the full market value of those shares becomes ordinary income to you. Not capital gains. Not investment income. Wages — reported on your W-2, subject to income tax withholding and payroll taxes, exactly like a bonus. (IRS Publication 525, Taxable and Nontaxable Income.)

Which means your employer has to withhold something. And for this kind of pay, the IRS gives them a shortcut.

Where the 22% comes from

Equity vesting is what the IRS calls supplemental wages — bonuses, commissions, severance, and the like. Employers are permitted to withhold on supplemental wages at a flat rate rather than running them through your regular payroll calculation.

That optional flat rate is 22% for supplemental wages up to $1 million in a calendar year. Above $1 million, withholding at 37% becomes mandatory on the excess. (IRS Publication 15, Employer's Tax Guide, Section 7.)

For a household earning $150,000, that flat rate is roughly correct and nobody notices a thing. For a household earning $400,000, it's off by ten to thirteen percentage points — on every dollar that vested.

Sizing your gap in ten minutes

The arithmetic is simple enough to do on your phone. Take the gross value of what vested. Multiply by your actual marginal federal rate. Subtract what was withheld at 22%. That difference is what you still owe, before state tax.

Now consider that many people have multiple vests a year, and each one carries the same shortfall. The gap doesn't announce itself. It just accumulates quietly until you file.

Has this happened to you? For most people it happens exactly once — and then they never stop checking.

The second gap almost nobody catches

There's a smaller leak that dual-income households run into specifically, and it stacks on top of the first one.

The Additional Medicare Tax of 0.9% applies to wages above $250,000 for married couples filing jointly. But your employer is only required to start withholding it once your individual wages from that employer exceed $200,000. (IRS, Questions and Answers for the Additional Medicare Tax.)

See the problem? Two spouses earning $180,000 each are well past the household threshold and neither employer withholds a cent of it. Add a large RSU vest and the number stops being trivial.

This is the same structural blind spot we covered in the benefits article: two employers, two payroll systems, and no one looking at the household. Your employers aren't being careless. They just can't see your spouse.

Four ways to close the gap

Pick based on how much runway is left in the year.

Adjust your W-4 — usually the best option

Step 4(c) of Form W-4 lets you request an additional flat dollar amount withheld from each remaining paycheck. Here's why this beats writing a check: withholding is generally treated as having been paid evenly throughout the year, no matter when it actually happened. So catching up in Q4 through payroll can cure an earlier shortfall in a way that a late estimated payment often can't. (IRS Publication 505, Tax Withholding and Estimated Tax.)

Make an estimated payment

Form 1040-ES, on the quarterly schedule. Cleaner if you have few paychecks left or your vest was large relative to salary. Just know the timing rules are less forgiving than payroll withholding.

Ask whether your plan allows a higher withholding election

Some employers and equity platforms let you elect a higher rate or sell additional shares at vest. Many don't. Worth one email to payroll or your plan administrator — it takes the problem off your plate permanently rather than annually.

Aim at a safe harbor instead of perfection

You generally avoid an underpayment penalty by paying at least 90% of the current year's tax, or 100% of last year's total tax — 110% if your prior-year AGI exceeded $150,000, which for this audience it usually did. Hitting a safe harbor doesn't mean you won't owe in April. It means you won't owe plus a penalty. (IRS Publication 505.)

The IRS Tax Withholding Estimator will run these numbers with your actual pay stubs. Twenty minutes, and it handles the household math your two employers can't.

While you're in there: two more things worth checking

Decide the hold-or-sell question separately from the tax question

Your cost basis in vested shares is the market value on the vest date — the amount you already paid ordinary income tax on. Sell immediately and there's essentially no additional gain or loss. Hold, and you've made a fresh investment decision: concentrating more of your net worth in the same company that already pays your salary and, quite possibly, your spouse's.

That's not automatically wrong. It's just a decision that deserves to be made on purpose rather than by default.

Check your 1099-B for the cost basis error

This one costs real money and it's alarmingly common. Brokers frequently report the cost basis on vested shares as $0, or omit the compensation element entirely. Left uncorrected, you pay capital gains tax on money you already paid ordinary income tax on — the same dollars, taxed twice.

The fix is usually in the supplemental statement your broker provides alongside the 1099-B. Look for it, and make sure whoever prepares your return uses it.

The checklist

Ten minutes, once per vest:

1. Note the gross vest value — not the net shares that landed in your account.
2. Multiply by your marginal federal rate, then subtract what was withheld at 22%.
3. Add your state's rate to the shortfall.
4. Check whether the 0.9% Additional Medicare Tax is being withheld across both incomes.
5. Close the gap through payroll via W-4 Step 4(c) if paychecks remain, or an estimated payment if not.
6. Confirm you'll clear a safe harbor — 90% of this year, or 100%/110% of last year.
7. Make the hold-or-sell call deliberately, based on concentration, not inertia.
8. Flag the cost basis on next year's 1099-B before your return gets filed.

The part that actually matters

Watching colleagues at large Wall Street firms handle vest day taught me something that took years to unlearn as an assumption: smart, well-paid, financially literate people treated equity comp like a bonus that had already been taxed. The withholding line on the confirmation looked official. Nobody questioned it.

Then April would arrive and there'd be a quiet conversation at somebody's desk about a five-figure balance due. Same conversation, different person, every single year.

Nobody tells you that the withholding on your equity is an estimate made by a payroll system that has no idea what your spouse earns, what your other vests looked like, or which bracket you actually land in. It isn't wrong, exactly. It's just not aimed at you.

Recap: Your RSUs are wages, your employer withheld at a flat 22%, and if you're a high earner that isn't enough. Size the gap, close it through payroll while paychecks remain, aim for a safe harbor, and check the cost basis on your 1099-B before it double-taxes you.

Quick note: Educational disclaimer: This article is for general educational purposes only and is not individualized financial, tax, investment, legal, student-loan, or family financial planning advice. Support for young adults, college costs, student loans, benefits, cash flow, and retirement planning depend on your facts and may change. Please review your situation with qualified professionals before making decisions.