RSU Tax Withholding: Why the 22% Federal Rate Isn't Enough (And What to Do About It)

When your RSUs vest, your employer automatically withholds taxes before depositing shares into your brokerage account. But here's the problem: the default 22% federal withholding rate is rarely enough to cover your actual tax liability.

If you're in the 24%, 32%, or higher tax brackets, you could owe thousands of dollars when you file your tax return. This guide explains exactly how RSU tax withholding works, why the gap exists, and what you can do to avoid an unpleasant surprise.

How RSU Tax Withholding Actually Works

When RSUs vest, the IRS treats them as ordinary income - just like your regular salary. The value of the vested shares is added to your W-2 as wages, which means it's subject to:

• Federal income tax (withheld at the supplemental wage rate)
• State income tax (if applicable)
• FICA taxes (Social Security and Medicare)

Here's the typical withholding process:

1. Vesting day arrives: Your RSUs convert to actual shares
2. Fair market value (FMV) is calculated: Based on the stock's closing price on the vesting date
3. Taxes are withheld: Your employer sells a portion of your shares to cover taxes
4. Net shares deposited: The remaining shares hit your brokerage account

Example: $50,000 RSU Vesting

Let's say 500 RSUs vest when your company stock is trading at $100 per share:

• Gross value: 500 shares × $100 = $50,000
• Federal withholding (22%): $11,000
• State withholding (5% assumed): $2,500
• FICA taxes (7.65%): $3,825
• Total withholding: $17,325
• Shares sold to cover taxes: ~173 shares
• Net shares you receive: ~327 shares

This is why your $100K RSU grant might only be worth $60K after all taxes are paid.

Why Employers Withhold 22% Federal Tax

The 22% withholding rate isn't arbitrary - it's the IRS supplemental wage withholding rate for amounts under $1 million.

What Are Supplemental Wages?

Supplemental wages are compensation payments outside your regular salary, including:

• Bonuses
• Commissions
• RSU vesting
• Stock option exercises
• Severance pay

The IRS provides two methods for withholding on supplemental wages:

1. Flat rate method (most common): 22% for amounts up to $1 million, 37% for amounts over $1 million
2. Aggregate method: Combine supplemental wages with regular wages and calculate withholding based on W-4

Most employers use the flat rate method because it's simpler. They withhold 22% federal tax on your RSU value regardless of your actual tax bracket.

The Withholding Gap: Why You'll Likely Owe More

Here's where it gets tricky. The 22% withholding rate assumes you're in the 22% tax bracket. But when RSU income gets added to your salary, you might be pushed into a higher bracket.

2026 Federal Tax Brackets (Single Filer)

Real Example: The Gap in Action

Scenario: You're a single filer earning $140,000 in salary, and $60,000 worth of RSUs vest this year.

Your actual tax situation:

• Combined income: $200,000
• Your marginal rate: 32% (you're in the 32% bracket)
• Taxes withheld on RSUs: 22% × $60,000 = $13,200
• Taxes actually owed on RSUs: 32% × $60,000 = $19,200
• Shortfall: $6,000 underpaid

When you file your tax return, you'll owe an additional $6,000 (plus any state shortfall) because the 22% withholding didn't cover your actual 32% marginal rate.

This is where our RSU Tax Calculator becomes essential - it shows you exactly how much you'll owe based on your total income.

State Tax Withholding Considerations

State tax withholding varies significantly:

No State Income Tax (0% withholding)

• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

High Tax States (watch for larger gaps)

• California: 9.3% - 13.3% depending on income
• New York: 4% - 10.9%
• New Jersey: 1.4% - 10.75%
• Massachusetts: 5% flat rate
• Oregon: 4.75% - 9.9%

Many employers withhold state taxes at a flat rate (often 5-6%), which may not match your actual state marginal rate. California residents in the 9.3%+ bracket often face significant state tax shortfalls.

Check your paystub after RSU vesting to see what state withholding rate your employer used. If it's below your marginal rate, plan accordingly.

FICA Taxes on RSUs: The 7.65% You Can't Avoid

RSU vesting triggers FICA taxes just like regular wages:

• Social Security tax: 6.2% on income up to $176,100 (2026 limit)
• Medicare tax: 1.45% on all income
• Additional Medicare tax: 0.9% on income over $200,000 (single) or $250,000 (married filing jointly)

FICA Complications

If you've already maxed out Social Security for the year, RSU vesting won't incur the 6.2% Social Security tax - only the 1.45% Medicare tax applies.

If your RSUs push you over the Social Security wage base, only the portion under the limit gets the 6.2% tax.

Example: You've earned $170,000 in salary, then $30,000 in RSUs vest.

• Social Security tax applies to: $6,100 (the amount needed to reach the $176,100 cap)
• Social Security tax: $6,100 × 6.2% = $378.20
• Medicare tax: $30,000 × 1.45% = $435
• Additional Medicare tax: $0 (under $200,000 total)
• Total FICA on RSUs: $813.20 (not the full 7.65%)

Most payroll systems handle this automatically, but it's worth understanding the mechanics.

Calculating Net Shares Received

When RSUs vest, you don't receive all the shares. Your employer uses sell-to-cover withholding, selling shares to pay taxes.

Formula

Net Shares = Gross Shares - (Tax Withholding ÷ Share Price)

Example Calculation

Inputs:

• 1,000 RSUs vesting
• Stock price: $200/share
• Gross value: $200,000
• Federal withholding: 22%
• State withholding: 6%
• FICA: 7.65%
• Total withholding: 35.65%

Calculation:

• Tax amount: $200,000 × 35.65% = $71,300
• Shares sold: $71,300 ÷ $200 = 356.5 shares
• Net shares received: 1,000 - 356.5 = 643.5 shares (rounded to 643)

You can verify this math with our RSU Tax Calculator.

How to Adjust Your W-4 to Avoid Owing at Tax Time

The best way to prevent a tax bill is to increase withholding from your regular paychecks. Here's how:

Step 1: Calculate Your Expected Shortfall

Use our RSU Tax Calculator to estimate how much additional tax you'll owe based on:

• Your salary
• Expected RSU vesting for the year
• Your marginal tax rate

Step 2: Submit a New W-4

On your W-4, use Step 4(c): Extra withholding to request additional tax be withheld from each paycheck.

Example: You expect to owe an extra $8,000 this year due to RSU vesting, and you have 20 paychecks remaining.

• Extra withholding per paycheck: $8,000 ÷ 20 = $400

Enter $400 in Step 4(c) of your W-4. Your employer will withhold an additional $400 from each paycheck.

Step 3: Adjust Throughout the Year

If you have multiple vesting dates or your income changes, submit updated W-4 forms as needed. You can change your W-4 as often as you want.

Alternative: Request Higher RSU Withholding

Some employers allow you to specify a higher withholding rate on RSU vesting (e.g., 35% instead of 22%). Check with your payroll department. This is often simpler than adjusting your W-4 multiple times.

Quarterly Estimated Payments as an Alternative

If you don't want to adjust your W-4, you can make quarterly estimated tax payments directly to the IRS.

When This Makes Sense

• Large one-time vesting: You have a big RSU vesting event that won't repeat
• Variable income: Your RSU vesting schedule is unpredictable
• Multiple income sources: You have side income or investment income that also creates tax liability

Quarterly Payment Deadlines (2026)

• Q1: April 15, 2026
• Q2: June 16, 2026
• Q3: September 15, 2026
• Q4: January 15, 2027

How Much to Pay

Calculate your expected shortfall and divide by the number of remaining quarters. You can make payments online at IRS Direct Pay.

Note: If you underpay your taxes by more than $1,000 and don't meet safe harbor rules, you may face underpayment penalties. The safe harbor is generally:

• 90% of current year tax liability, OR
• 100% of prior year tax liability (110% if AGI > $150,000)

Increasing W-4 withholding is often safer because withholding is treated as paid evenly throughout the year, even if it actually happens later.

Real Examples: Different Tax Scenarios

Example 1: Tech Worker in California (High Income)

Profile:

• Salary: $180,000
• RSU vesting: $120,000
• Filing status: Single
• State: California

Tax breakdown on RSUs:

• Federal marginal rate: 32%
• California marginal rate: 9.3%
• FICA: 2.35% (Medicare only, already maxed Social Security)
• Total actual rate: 43.65%

Withholding vs. Reality:

• Withheld: 22% + 9.3% + 2.35% = 33.65%
• Actually owe: 43.65%
• Gap: 10% = $12,000 shortfall

Action: Request additional $12,000 in withholding via W-4 or estimated payments.

Example 2: Mid-Career Professional (Moderate Income)

Profile:

• Salary: $95,000
• RSU vesting: $30,000
• Filing status: Married filing jointly
• State: Texas (no state tax)

Tax breakdown on RSUs:

• Combined income: $125,000
• Federal marginal rate: 22%
• FICA: 7.65%
• Total actual rate: 29.65%

Withholding vs. Reality:

• Withheld: 22% + 0% + 7.65% = 29.65%
• Actually owe: 29.65%
• Gap: $0 - perfectly withheld!

Action: No adjustment needed. The 22% supplemental rate happens to match their marginal rate.

Example 3: Senior Engineer (Very High Income)

Profile:

• Salary: $250,000
• RSU vesting: $200,000
• Filing status: Single
• State: Washington (no state tax)

Tax breakdown on RSUs:

• Combined income: $450,000
• Federal marginal rate: 35%
• Additional Medicare tax: 0.9%
• Medicare: 1.45%
• Total actual rate: 37.35%

Withholding vs. Reality:

• Withheld: 22% + 0% + 2.35% = 24.35%
• Actually owe: 37.35%
• Gap: 13% = $26,000 shortfall

Action: Major adjustment needed. Consider both W-4 increases and quarterly estimated payments.

Common RSU Tax Withholding Mistakes

Mistake 1: Assuming 22% Is Enough

The problem: You don't adjust withholding, assuming the default rate covers everything.

The fix: Use the RSU Tax Calculator to calculate your actual liability based on total income.

Mistake 2: Forgetting State Taxes

The problem: You account for the federal gap but ignore state withholding shortfalls.

The fix: Check your paystub to see your state withholding rate and compare it to your state's marginal rate. High-income earners in California often face 4-6% state shortfalls.

Mistake 3: Not Planning for Multiple Vesting Dates

The problem: You adjust your W-4 for one vesting event, then forget about three more vesting dates later in the year.

The fix: Calculate your total expected RSU income for the entire year and adjust withholding accordingly. Set calendar reminders for each vesting date.

Mistake 4: Selling Vested Shares at a Loss (Wash Sale Risk)

The problem: You sell RSU shares at a loss, then your company issues more RSUs within 30 days, triggering a wash sale.

The fix: Understand how RSU vesting can trigger wash sales and plan your sales carefully. Use our Wash Sale Calculator to check.

Mistake 5: Missing the Additional Medicare Tax

The problem: You forget about the 0.9% Additional Medicare Tax that kicks in at $200,000 (single) or $250,000 (married filing jointly).

The fix: If your combined income exceeds these thresholds, add 0.9% to your expected tax rate on RSU income.

Mistake 6: Not Adjusting After RSU Price Changes

The problem: Your company's stock price doubled, so your RSU vesting creates much larger tax liability than expected.

The fix: Review and adjust withholding quarterly, especially if your company stock is volatile.

How to Check Your Current Withholding

Review your most recent paystub and look for:

1. Federal income tax withheld: Is it proportional to your income and vesting schedule?
2. State income tax withheld: Does the rate match your marginal bracket?
3. FICA taxes: Should be 7.65% up to the Social Security wage base

If you've had RSUs vest recently, check the paystub from that pay period specifically. It should show:

• Increased taxable wages
• Significantly higher federal/state withholding
• FICA taxes on the RSU value

Compare the withholding rate to your expected marginal rate. If there's a gap, take action now rather than waiting until tax time.

Key Takeaways

1. 22% is just a starting point: The IRS supplemental wage rate rarely matches your actual marginal rate if you're a mid-to-high earner.

2. Calculate your true liability: Use the RSU Tax Calculator to see exactly what you'll owe based on salary + RSU income.

3. Don't forget state taxes: State withholding gaps can add thousands to your tax bill, especially in high-tax states like California, New York, and New Jersey.

4. FICA applies too: Budget for 7.65% FICA on top of income taxes (though Social Security tax caps out).

5. Adjust proactively: Submit a new W-4 with extra withholding or make quarterly estimated payments to avoid underpayment penalties.

6. Plan for the entire year: Add up all your expected RSU vesting for the year and adjust withholding accordingly.

7. Review after each vesting: Check your paystub to ensure withholding happened as expected.

Next Steps

Ready to take control of your RSU tax withholding? Here's what to do:

1. Calculate your true liability: Use our RSU Tax Calculator to see your expected tax bill

2. Review other RSU considerations:

   • When to Sell RSUs: Complete Decision Guide
   • RSU vs Stock Options vs ESPP: Complete Guide

3. Understand wash sale rules: Learn how RSU vesting can trigger wash sales

4. Learn about tax brackets: Read our guide on how federal income tax actually works

5. Explore all tax calculators: Visit our Tax Calculators page for federal and state tax planning tools

Understanding RSU tax withholding is one of the most important things you can do to avoid a massive tax bill. Take 15 minutes today to calculate your withholding gap - your future self will thank you.