RSU Tax Withholding Not Enough: What to Do
When your employer withholds 22% on RSU vests but you're in the 32% bracket, you'll owe more at tax time. Here's how to calculate the gap and fix it before penalties hit.
You checked your brokerage after an RSU vest and noticed a chunk of shares disappeared. That was tax withholding — but it probably wasn't enough to cover your full bill.
Employers commonly withhold 22% on supplemental wages like RSU income. If your marginal federal rate is 32%, 35%, or 37%, that gap adds up fast on a six-figure vest. State taxes make it worse in California, New York, and other high-tax states where another 9–13% may apply with little or no RSU-specific withholding.
The fix isn't complicated, but it requires acting before year-end: increase withholding elsewhere, make estimated tax payments, or sell more shares at vest to cover the shortfall.
Why 22% withholding exists
IRS Publication 15-T lets employers use a flat 22% rate for supplemental wages (including RSU vests) when regular salary and supplemental pay are reported separately. Above $1 million in supplemental wages in one year, the flat rate jumps to 37%.
This is a convenience rule for payroll departments, not a estimate of your tax liability. A software engineer earning $180,000 salary plus $120,000 in RSU vests is likely in the 32% federal bracket — meaning roughly 10 cents on every vest dollar wasn't withheld for federal income tax alone.
FICA (Social Security and Medicare) is withheld separately and is usually closer to accurate, though Social Security stops once you hit the wage base ($176,100 in 2025).
Calculating your actual RSU tax bill
Start with the vest FMV — that's ordinary income. Add it to your projected salary, bonus, and other income for the year to find your marginal rate using the current tax brackets.
Multiply vest FMV by your marginal federal rate, then add state tax if applicable. Subtract what payroll already withheld on the vest (check your vest confirmation for federal, state, and FICA amounts). The remainder is what you'll owe unless you take action.
Example: $80,000 vest, 32% federal marginal rate, 22% withheld = $25,600 liability minus $17,600 withheld = $8,000 federal shortfall before state taxes.
Fix it before April
Increase W-4 withholding on your regular paycheck. Even a few months of extra salary withholding can offset RSU gaps. Payroll systems apply the extra amount evenly across remaining pay periods.
Make quarterly estimated tax payments using Form 1040-ES. The due dates are April 15, June 15, September 15, and January 15. Paying by the quarter when the vest happens avoids a large lump sum at filing.
At vest, elect 'sell to cover' or sell additional shares beyond the default withholding if your plan administrator allows it. Some companies let you specify a custom withholding percentage — use your marginal rate plus a buffer for state tax.
Safe harbor and underpayment penalties
The IRS charges underpayment penalties if you owe more than $1,000 at filing and didn't pay enough during the year. Safe harbor rules protect you if you paid at least 90% of current-year tax or 100% of prior-year tax (110% if prior AGI exceeded $150,000).
Heavy RSU years can blow past safe harbor if your prior year was light on equity income. Don't assume last year's refund means you're fine — recalculate when vest sizes change.
State safe harbor rules vary. California uses a nearly identical rule: 90% of current-year tax or 100% of prior-year tax, rising to 110% of prior-year tax if your prior-year California AGI exceeded $150,000 ($75,000 if married filing separately).
When to talk to a CPA
Multiple vests, a job change mid-year, or RSUs plus ISO exercises in the same year make DIY estimates error-prone. AMT from ISOs (see our ISO/AMT guides) can stack on top of RSU ordinary income.
If you're considering net exercising, holding through a blackout period, or donating appreciated RSU shares to charity, the withholding question ties into broader planning.
A one-hour projection in October or November — after Q3 vests are known — usually costs less than the penalty and interest on a five-figure surprise balance due.
Key takeaways
- 22% supplemental withholding is a payroll default, not your tax rate.
- Calculate the gap using your marginal federal and state rates on vest FMV.
- Fix shortfalls via extra W-4 withholding, estimated payments, or selling more at vest.
- Safe harbor rules may not protect you if RSU income jumps year over year.
This guide is for general education only and is not tax, legal, or accounting advice. Rules change, and your facts matter. Talk to a qualified professional before filing or making equity decisions.
Related guides
How Are RSUs Taxed When They Vest?
RSUs are taxed as ordinary income the moment they vest, based on fair market value that day. Here's what shows up on your W-2, how withholding works, and what happens when you sell.
How to Estimate Taxes on Equity Compensation
A practical worksheet for RSU vests, NSO exercises, and ISO AMT. Combine equity income with salary to find your marginal rate and avoid year-end surprises.
AMT from Incentive Stock Options
Exercising ISOs can trigger alternative minimum tax even when you sell no shares. Learn how the spread hits Form 6251, how much AMT you might owe, and how the AMT credit works.