Your RSUs Don't Just Add Income. They Reshape Your Tax Picture.
She is a senior director of product at a publicly traded tech company. Seven years in. Her RSUs have quietly stacked into about $2.4 million of one stock. Every quarter, another $150,000 or so vests.
She knows the withholding is too low. She has read the posts about the 22% gap. She has her 10b5-1 plan set up, selling a modest number of shares each quarter to start diversifying. She feels reasonably on top of it.
What she does not see is how those quarterly vesting events do not just add income. They quietly reshape every other line of her tax return. Not the RSU line — the lines that look like they ought to have nothing to do with equity at all.
The Bracket Question
Start with the one that seems simplest. Her base salary is $250,000. Her annual bonus is about $80,000. That puts her in the 32% federal bracket before she touches a single RSU.
Now add the four quarterly vesting events at $150,000 each. The first $75,000 or so of RSU income fills the rest of the 32% bracket. After that, every additional dollar of ordinary income — all of her remaining RSU income — lands in the 35% bracket. Then, once her total ordinary income passes the threshold, the next dollar is taxed at 37%.
The arithmetic: on paper, she pays 22% withholding on each vest. In reality, those RSU dollars are being taxed at 32%, then 35%, then 37%. The gap between what the company withholds and what she actually owes (we wrote about it more fully in a post on the withholding gap) shows up in April.
But that gap is the part she expects. The parts below are the ones that surprise her.
The 3.8% Tax Nobody Mentions
The net investment income tax — NIIT — applies when modified adjusted gross income exceeds $200,000 for a single filer or $250,000 for married filing jointly. Above that threshold, an additional 3.8% tax hits the lesser of your net investment income or the amount by which your MAGI exceeds the threshold.
Here is the part that trips up most tech executives: when she sells shares through her 10b5-1 plan to diversify, the gain on those shares is net investment income. And because her RSU wages push her AGI well past $250,000, that 3.8% applies to every dollar of gain from the sale.
So her effective federal rate on those RSU sales is not 37%. It is 37% plus 3.8%, or 40.8%. On a $100,000 gain from selling diversified shares, that is $3,800 she did not budget for.
The NIIT is not new. But most preparers treat it as a footnote on the return, not a figure worth planning around. For someone selling $200,000 to $400,000 in RSU shares over a year, the NIIT alone can add $8,000 to $15,000 to the tax bill.
The QBI Deduction That Fades
A lot of senior tech executives also have something on the side. A consulting practice. A small ownership stake in a real estate partnership. A short-term rental they bought a few years back that they treat as a business.
If she runs a consulting practice structured as an S corp or sole proprietorship, she may qualify for the qualified business income deduction — 20% of her qualified business income, subject to limitations. For 2026, the phaseout range for specified service businesses starts at $232,500 (single) or $465,000 (married filing jointly). Above those thresholds, the deduction phases out completely.
Her RSU wages push her total income well past those phaseout thresholds. The consulting income she would otherwise deduct 20% of disappears as a deduction. On $80,000 of consulting profit, that is a $16,000 deduction that never happens — worth roughly $5,900 in extra tax at her marginal rate.
This is not a mistake. It is physics. RSU income fills the tax brackets from the bottom up, and every deduction that depends on staying under a threshold gets crowded out. As we covered in a recent post on how tax strategies stack, these effects compound — they do not cancel.
California's 13.3% Layer
California RSU tax treatment is its own topic, and for a senior tech executive living in San Diego, it is the layer that changes the math most dramatically. California treats RSUs as wages sourced to the state, taxed at the state's top marginal rate. For a high earner in California, that rate is 13.3% (including the 1% mental health services surtax on income over $1 million).
The state does not care about the federal 22% withholding rate. It does not care about the NIIT. It applies its own rate to the full value of the RSUs at vest, and it collects through state wage withholding and estimated tax payments.
When her RSU income pushes her over $1 million in total California-source income, the rate on every additional dollar becomes 13.3% plus the federal rate. On the same $100,000 gain from diversifying, she is now looking at roughly 37% federal, plus 3.8% NIIT, plus 13.3% California.
A $100,000 gain nets about $46,000 after all three layers.
What a Strategist Does Differently
A preparer running the return in March or April catches all of these numbers after they have already landed. The brackets are what they are. The NIIT applies. The QBI deduction is gone. The California tax is calculated.
A strategist works before those numbers land. Here is what that looks like:
Estimated tax coordination. Instead of relying on the company's 22% withholding plus a guesstimated quarterly payment, the strategist models the full picture midyear: the bracket, the NIIT, the QBI phaseout, and California. The Q3 estimated payment is adjusted to cover all four layers, not just federal income tax.
RSU sale timing. When possible, spreading share sales across two tax years rather than concentrating them in one keeps some gains below NIIT thresholds or in a lower bracket. This is where the 10b5-1 plan matters — it needs to be set up with year boundaries in mind, not just compliance windows.
Entity considerations. If she has side business income, the entity structure and the compensation strategy within that entity affect how the QBI deduction interacts with her W-2 RSU income. A strategist connects those two conversations that most firms never put in the same room.
State planning. For California residents planning a move, the timing of the departure relative to RSU vesting dates determines how much the FTB can claim. That is a multi-year conversation, not a packing-weeks decision.
None of this requires predicting the future. It requires looking at the full picture before December, not after April.
If you carry a concentrated RSU position and earn $300,000 or more, call Roadmap Tax for a free 15-minute discovery call at (619) 280-2700 or email info@RoadmapTax.com. The paid strategy session is where you get a real deliverable with specific insights, so think of the free call as the first step, not the whole thing.
FAQ
What is the NIIT on RSUs?
The net investment income tax is a 3.8% surtax on the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). When you sell RSU shares, the gain is investment income, and your RSU wages push your income over the threshold.
How does California tax RSUs?
California treats RSUs as wages sourced to the state, taxed at the state's top marginal rate of up to 13.3%. The state collects through wage withholding and estimated tax payments, and it does not reduce its rate based on the federal 22% withholding.
What is the QBI phaseout for high earners?
The qualified business income deduction allows eligible business owners to deduct 20% of their qualified business income. For specified service businesses like consulting, the deduction phases out between $232,500 and $282,500 (single) or $465,000 and $565,000 (married filing jointly) for 2026. RSU wages push most tech executives past these thresholds.
How can I reduce the tax impact of RSU vesting?
Coordination of estimated tax payments to cover all layers of tax, spreading RSU sales across two tax years through a 10b5-1 plan, reviewing entity structure for side business income, and planning any state relocation well before vesting dates are the most effective strategies.
What is bracket creep from RSUs?
Bracket creep occurs when RSU income pushes your ordinary income into higher federal tax brackets than your base salary alone would suggest. A senior director earning $250,000 in salary can see RSU income taxed at 37% while the company withholds at 22%, creating a gap that compounds with state tax and the NIIT.
Do I need a strategist or a preparer?
A preparer files your return after the year closes. A strategist designs the outcome before it closes — mapping brackets, the NIIT, QBI, and state taxes together, then coordinating estimated payments, RSU sales, and entity decisions to avoid the pileup. Roadmap Tax is a strategy firm and enrolled agent practice, not a preparation service.
