When Your RSUs Vest, the Withholding Probably Isn't Enough

Here's a number that matters more than most tech executives realize: 22%. That's the flat rate the IRS applies to supplemental wages, and RSUs are supplemental wages. It's the default withholding rate your company uses when your RSUs vest. And if your marginal tax bracket is higher than 22% (which it almost certainly is if you're a senior director or VP at a large tech company), the gap between what gets withheld and what you actually owe can run to five figures before you ever see a bill.

The difference between a withholding rate and a tax rate is the difference between an estimate and the final number. The 22% rate is an estimate. Your actual rate depends on your total income, your filing status, your state, and every other piece of your tax picture. For most high earners, the estimate falls short.

The 22% Rule (and Why It Exists)

The IRS treats RSUs as supplemental wages, separate from your regular salary. Supplemental wages have their own withholding rules, and the most common method is a flat 22% federal rate. For amounts over $1 million in a calendar year, the rate jumps to a higher bracket, but for most senior directors and VPs, each individual vesting event stays under that threshold.

Your company uses the 22% rate because it's simple. The payroll system applies the flat percentage at vesting, and that's what gets sent to the IRS. It's not technically wrong. It's just incomplete for someone whose actual rate is higher.

This is the key distinction: the 22% rate is a withholding default, not a tax calculation. What you owe in April depends on your total income, your filing status, and every other piece of your tax picture. The withholding is an estimate, and for high earners, it's usually a low one.

The Gap: What 22% vs. Your Actual Rate Looks Like

Let's walk through a representative scenario. A senior director of engineering in the Bay Area earns $450,000 in salary and bonus. She receives RSU grants that vest quarterly. This year, her vested RSUs total $200,000 across all four quarters.

Her company withholds 22% on each vesting event: $44,000 sent to the IRS over the year.

She's in a top federal bracket. She also owes the 3.8% Net Investment Income Tax on the gain from any RSU shares she sells. And she pays California's top rate.

Federal tax on her RSU income at her marginal rate: roughly $74,000. Federal withheld: $44,000. Gap: about $30,000 just at the federal level.

California adds another layer. The FTB expects withholding based on the employee's California bracket, but the default payroll setup for many companies still underwithholds for the state too, because the system applies a flat state supplemental rate that's lower than the top bracket.

The total gap between what was withheld and what's actually owed can run to roughly $40,000 or more in a representative year. It shows up as a single check in April.

Why Your CPA Probably Hasn't Raised This

Your CPA files your return every spring. They see what happened last year: your W-2 shows RSU income in box 1, federal withholding in box 2. They prepare the return. You sign it. You write the check for the difference.

But they're looking backward. They see the result of the underwithholding, but they're not in the room when you're deciding how to set up your RSU elections or whether to adjust your W-4. The preparer's job is to report what happened, not to design what should happen before the year closes.

This is the difference between compliance and strategy. A strategist looks at the year ahead: your vesting schedule, your expected bracket, your state situation. The preparer catches up after the fact. We've written before about how a multi-year approach to your RSU position can make a meaningful difference to your overall tax picture, and the same principle applies here: the work happens before the RSUs vest, not after.

Three Ways to Close the Gap Before It Opens

You don't have to wait for April to find out you're short. There are three practical moves, and they work best when you use them together.

Adjust your W-4 for extra withholding

The simplest fix. Your W-4 tells your employer how much extra federal tax to take from each paycheck. If you know your RSUs will vest at $200,000 this year and you're in a bracket above 22%, you can add extra withholding on your salary to cover the gap. It spreads the cost across the whole year instead of landing as a single April surprise.

Make quarterly estimated payments on a vesting schedule

For many executives, the W-4 adjustment doesn't feel precise enough, or their salary structure doesn't leave enough room. The alternative is IRS Form 1040-ES: estimated tax payments tied to your vesting quarters. When 500 RSUs vest in March, you make a payment in April. When the next tranche vests in June, you pay in June. You're matching the tax to the event, which means no lump sum and no underpayment penalty.

Review your sell-to-cover election

When RSUs vest, most companies offer a sell-to-cover option that automatically sells enough shares to cover the withholding. But the default is often set to the minimum statutory rate: 22%. If your company allows it, you can elect a higher withholding rate or sell additional shares to cover your true expected tax. Some brokerages let you specify a custom percentage. Check your equity portal. This setting is often buried in the elections page, but it's worth finding.

The Bottom Line

The 22% rate on RSUs isn't a mistake. It's the default supplemental rate, and defaults are designed for the average case. If you're a senior tech executive with a concentrated position, you're not the average case. The gap between what gets withheld and what you actually owe can run to five figures, and it shows up exactly when you least want it.

You have options before that happens. The question is whether you know about them in time.

If you'd like to walk through your vesting schedule and see where the gap might land this year, we offer a free 15-minute discovery call. No deliverables, no commitment, just a clear look at whether your current withholding is on track for what's coming. Call (619) 280-2700 or email info@RoadmapTax.com.

FAQ

What is the supplemental wage rate for RSUs?

RSUs are classified as supplemental wages by the IRS. The default federal withholding rate is a flat 22% for amounts under $1 million in a calendar year. This rate applies regardless of your actual tax bracket.

Why does the 22% RSU withholding leave me with a tax bill?

If your marginal federal tax rate is higher than 22%, the difference between what was withheld and what you actually owe shows up as a balance due when you file your return. State withholding is often too low as well.

Can I change how much tax is withheld from my RSUs?

Yes. You can adjust your W-4 to add extra withholding from your regular salary, make quarterly estimated payments tied to your vesting schedule, or elect a higher sell-to-cover rate in your equity portal if your company allows it.

Does California also underwithhold on RSUs?

Often yes. Many companies apply a flat California supplemental rate that is lower than the top bracket. The FTB expects withholding based on your California tax bracket, so the state gap can be significant, especially for high earners.

What is the difference between a tax preparer and a tax strategist for RSUs?

A preparer files your return based on what happened last year. A strategist looks at your vesting schedule before the year closes and designs withholding, estimated payments, and equity moves to match your actual tax situation. Both have a role, but they serve different purposes.