Your RSUs Vested This Quarter. Here's Why the Tax Bill Comes Due in January.

Your RSUs just vested this quarter. Your company withheld 22% for federal taxes, and the shares hit your account like they always do. Everything looks normal. But here's what's quietly happening: the 22% flat rate on supplemental wages covers less than half the actual tax you'll owe on that income, and the April bill nobody warned you about is already building.

The 22% rule is the default IRS withholding rate for RSUs, and it doesn't adjust for your income bracket. If you're a senior tech executive, that flat rate is probably well below your actual marginal rate. The gap is real, and it grows every time RSUs vest. The question is whether you find out about it now or in April.

The 22% rule and why it doesn't fit you

The IRS classifies RSUs as supplemental wages, the same category as bonuses and commissions. The default withholding rate for supplemental wages is a flat 22%, regardless of your income. If you're a senior director or VP earning total comp north of $600,000, your marginal federal rate is 35% or 37%. The 22% withholding covers roughly 60 cents of every dollar of tax you'll actually owe on that RSU income. We covered the mechanics of the 22% rule in more detail in a previous post, but the short version is this: the rate was designed for bonus income, not for the outsized role RSUs play in a tech executive's compensation.

In a representative scenario: a senior director of product at a publicly traded company. Her base salary is $320,000. Her Q3 RSUs vested at 1,800 shares at $185 per share, adding $260,000 to her W-2 income after the sell-to-cover shares were sold. The company withheld 22%, or about $57,000. At her 35% marginal rate, the federal tax on that RSU income is about $91,000. The gap: roughly $34,000 in federal tax alone.

California takes its share too

If you live in California, the state adds another layer. California taxes RSU income as ordinary income at rates up to 13.3%. The state doesn't have a special supplemental wage rule like the IRS does, but the withholding on California state income tax from RSUs is also often set too low for high earners.

In the same scenario, California expects roughly 9.3% to 13.3% of that RSU income, depending on total comp. That's another $24,000 to $35,000 in state tax on the Q3 vest alone. Most employers don't adjust California withholding by default for RSUs, so the state gap is as real as the federal one.

Combined, the shortfall from that single Q3 vesting event is roughly $60,000 between federal and California tax. That's money nobody has set aside, and the IRS and FTB will expect it by April 15.

You have until January 15 to adjust

Here's the good news: you have two remaining estimated tax deadlines to fix this. The Q3 estimated tax payment is due September 15, and the Q4 payment is due January 15. If you run a projection now, you can adjust your estimated tax payments to cover the gap before year-end.

The safe harbor rules give you a simple target: if you pay 110% of your prior year's total tax liability (or 90% of the current year's), you won't owe a penalty regardless of how much additional tax comes due in April. For most executives, the 110% safe harbor is the cleaner number to aim for, because it doesn't require perfectly predicting the current year's income.

The key is running the projection before September 15, while the Q3 payment window is still open. Waiting until January means you lose one of your two remaining adjustment opportunities.

What a mid-year projection looks like

A mid-year tax projection is a straightforward exercise. You gather your grant schedule, your vesting calendar for the rest of the year, your current stock price, your prior year's tax return, and your year-to-date income. A strategist maps the vesting events against the withholding that's already happened and the withholding that's still coming, then calculates the cumulative gap.

The output is a set of quarterly estimated payment amounts that cover the shortfall. You can either increase your W-4 withholding through your employer (which pulls the tax from your salary) or make quarterly estimated payments directly to the IRS and FTB. Many executives do a combination of both.

The difference between doing this now and doing it in January is that a mid-year projection gives you time to adjust the rest of the year's vesting events, coordinate with any planned stock sales, and make decisions about diversification timing. A January projection is a damage assessment. A July projection is a strategy.

The cost of waiting until April

The April surprise is the most common story we hear from new clients. An executive who earned $620,000, had RSUs vesting throughout the year, assumed the 22% withholding was enough, and then wrote a significant check to the IRS in April. The worst part is not the money. It's the realization that the gap was predictable and preventable, and nobody told them.

The difference between a tax preparer who files your return in March and a tax strategist who works with you year-round is that the strategist runs the projection before the vesting happens, not after the tax year closes. The preparer sees the gap in your return. The strategist sees it in July.

If you're a senior tech executive with a concentrated RSU position and you're not sure your withholding covers the full tax, a 15-minute conversation can tell you whether a full projection makes sense. Call (619) 280-2700 or email info@RoadmapTax.com to schedule a free discovery call.

FAQ

What is the RSU supplemental wage withholding rate?

The IRS requires a flat 22% withholding on RSUs treated as supplemental wages, regardless of the employee's actual tax bracket. This is the default rate, and it often falls short for high-income earners in the 35% or 37% marginal brackets.

How do I calculate the gap between my RSU withholding and actual tax?

Compare the 22% already withheld against your marginal tax rate (35% or 37% for most senior executives) multiplied by the RSU income. Add state tax at your applicable rate. The difference is the gap you need to cover through estimated payments or increased withholding.

When are estimated tax payments due for RSU income?

Q3 estimated tax is due September 15, and Q4 is due January 15 of the following year. If you miss these deadlines, you can still pay by April 15, but you may owe an underpayment penalty.

Does California have a special withholding rate for RSUs?

California does not have a separate supplemental wage rate like the federal 22% rule. California taxes RSUs as ordinary income at your marginal state rate, which can be up to 13.3%. The state withholding on RSUs is often set too low for high earners.

What is the safe harbor for estimated taxes?

The safe harbor protects you from underpayment penalties if you pay at least 110% of your prior year's total tax liability or 90% of your current year's liability through withholding and estimated payments combined. For high-income earners, the 110% rule is usually the simpler target.

Can I adjust my W-4 instead of making estimated payments?

Yes, you can increase your W-4 withholding through your employer to cover the RSU tax gap. This pulls the additional tax from your salary throughout the remainder of the year. Many executives combine a W-4 adjustment with direct estimated payments to the IRS and FTB.