RSU Tax Withholding: Why 22% Is Never Enough (and What to Do About It)

RSU tax withholding happens at the flat 22% federal supplemental rate (37% above $1 million), but most tech employees fall in the 32-37% bracket, so the true rate is closer to 40-55%. Close the gap with W-4 changes, estimated payments, or a higher sell-to-cover percentage. This gap is the first of the quiet leaks that show how much you're losing on equity comp.

Picture a typical case: a senior engineer has 2,000 RSUs vest worth $200,000. The broker sells shares to "cover taxes," the net deposit looks about right, and life moves on — until tax time eight months later brings a surprise five-figure bill that ten minutes of planning would have caught. That flat 22% line on the pay stub is one of the biggest sources of April surprises for equity-heavy employees.

This is the RSU withholding gap, and it catches even experienced engineers off guard.

The RSU Tax Withholding Math

RSUs are classified as supplemental income by the IRS under IRC Section 3402(g). Your employer withholds at the flat supplemental rate (IRS Publication 15):

• 22% on the first $1 million of supplemental income
• 37% on supplemental income above $1 million

Why 22%? The IRS chose this rate as a rough middle-ground across all income levels. It matches the 22% tax bracket ($48,475-$103,350 for single filers in 2025) — but most tech employees earning RSUs are in the 32% or 35% bracket, making 22% woefully insufficient.

Your actual marginal tax rate — the rate applied to your last dollar of income — is almost certainly higher than 22%.

The chart below visualizes how the flat withholding rate compares to your true effective rate as RSU income climbs.

If your total income is $250,000+, your federal marginal rate is 32-37%. Add state tax and Medicare, and your true RSU tax rate is 40-55%.

How Sell-to-Cover Works

When RSUs vest, most employers use "sell-to-cover" — see our deep-dive on RSU sell to cover mechanics for the full broker-side walkthrough:

1. All shares vest into your account
2. Broker immediately sells enough shares to cover withholding
3. Remaining shares stay in your account

Example 1: $100K RSU vest at $250K salary (California)

500 RSUs vest at $200/share ($100,000 value):

But your actual tax liability on this $100K at a $250K salary is closer to $47,000 — a $12,420 shortfall you'll owe when filing.

Example 2: $50K RSU vest at $150K salary

A more modest scenario, but the gap still bites. 250 RSUs vest at $200/share ($50,000 value):

Even at $50K in RSUs, there's a $4,535 shortfall — driven almost entirely by the federal under-withholding. Notice that California's supplemental rate (10.23%) actually exceeds the marginal rate (9.3%) at this income level, providing a small state-level buffer.

Complete Worked Example: $200K Salary + $100K RSU (California)

Here's the full tax walkthrough that shows exactly where the shortfall comes from:

This withheld total is what lands in Box 2 of your W-2 — see how to read your RSU W-2 to reconcile it against your vests.

Federal bracket walk-through (2025 rates, Single filer):

• Total W-2 income: $300,000
• Standard deduction: $15,750
• Taxable income: $284,250

RSU-attributable federal tax (incremental method):

• Tax on $300K total income: $69,035
• Tax on $200K salary alone: $37,067
• RSU-attributable federal tax: $31,968
• Federal withheld on RSU (22%): $22,000
• Federal shortfall: $9,968

State (CA) + Medicare:

• CA tax on RSU (incremental): ~$9,300
• CA withheld on RSU (10.23%): $10,230
• CA surplus: ~$930 (over-withheld)
• Medicare + Additional Medicare: $2,350 (withheld correctly)

Net shortfall: ~$9,968 - $930 = ~$9,038

The State Tax Surprise

State supplemental withholding rates often differ from actual marginal rates:

The comparison below shows how the gap between withholding and what you actually owe varies from state to state. The size of that gap depends heavily on where you live — see our state-by-state breakdowns for California RSU vesting and withholding tax and the North Carolina RSU vesting tax rules for two very different examples.

NIIT alert: If your adjusted gross income exceeds $200,000 (single) or $250,000 (married), you may also owe the 3.8% Net Investment Income Tax on investment income. While NIIT doesn't directly apply to RSU vesting (that's earned income), the extra W-2 income from RSUs can push your AGI above the NIIT threshold, making other investment income subject to the 3.8% surtax.

3 Ways to Close the RSU Tax Withholding Gap

Before you pick a fix, it helps to see the shortfall in dollars. Our free RSU withholding shortfall calculator does it in seconds — enter your shares, salary, filing status, and state to see the exact gap between the flat 22% your employer withholds and your real marginal-bracket liability (plus the possible underpayment penalty). For a wider survey, see the best RSU tax calculators in 2026 for tools that surface the withholding gap (and where each one falls short).

1. Adjust Your W-4 Withholding

The simplest approach: increase withholding on your regular paychecks to cover the RSU shortfall.

How: On Form W-4, Step 4(c), enter the additional dollar amount you want withheld per paycheck. Divide your expected annual shortfall by the number of remaining pay periods.

Specific example: You estimate a $12,000 annual shortfall. You have 24 semi-monthly pay periods remaining.

• W-4 Line 4(c): Enter $500
• That's $500 extra withheld per paycheck × 24 = $12,000 in additional withholding

The advantage of W-4 over estimated payments: paycheck withholding is treated by the IRS as if it were paid evenly throughout the year — even if you increase it in October. This means no underpayment penalty for earlier quarters.

2. Make Quarterly Estimated Payments

If your vesting events are large or irregular, quarterly estimated tax payments (Form 1040-ES) give you more control:

State estimated payments are separate: CA uses Form 540-ES (pay via CA Web Pay), NY uses Form IT-2105 (pay via NY Online Services). Other states have their own forms and rules — for example, our guide to RSU vesting and withholding tax in Virginia walks through that state's flat-rate quirks.

For a complete walkthrough of when and how to make estimated payments on RSU income, see our estimated tax guide for RSU income and the quarterly estimated tax guide for equity compensation.

3. Increase Your Sell-to-Cover Percentage

Some brokers (Schwab, E*Trade, Morgan Stanley) let you specify a higher sell-to-cover percentage. Instead of the default, set it to your actual marginal rate:

This eliminates the shortfall entirely — you just keep fewer shares. If you live in a no-income-tax state, your recommended sell-to-cover percentage is lower because there's no state withholding to account for — see how this plays out for RSU vesting and withholding in Washington and the parallel rules for RSU vesting tax in Florida.

Underpayment Penalty

If your shortfall exceeds $1,000 and you don't meet either IRS safe harbor (90% of current-year tax or 110% of prior-year tax), you'll owe an underpayment penalty (Form 2210). The penalty rate equals the federal short-term rate + 3 percentage points, adjusted quarterly (IRC Section 6654). In 2026, this rate is approximately 7-8%.

Example: $12,000 underpayment for the full year at 8% = ~$960 in penalties — on top of the $12,000 you already owe. The penalty is calculated per quarter, so paying late in Q4 doesn't fix the Q1-Q3 shortfall.

For a deeper dive on safe harbor rules and penalty calculations, see our estimated tax guide for RSU income.

If You Also Hold ISOs

Many tech employees hold both RSUs and ISOs. If that's you, RSU vesting events change your AMT-free exercise limit for ISOs — the extra W-2 income from RSUs shifts your tax brackets upward.

Planning RSU sales and ISO exercises together can save significantly more than optimizing each in isolation. For a complete understanding of how RSUs are taxed across both events (vesting and sale), see our guide on how RSUs are taxed. For the bracket math behind all these calculations, reference the 2026 federal tax brackets.

Frequently Asked Questions

Is RSU income subject to FICA? Yes. RSU vesting income is subject to Social Security tax (6.2% up to the $176,100 wage base in 2025), Medicare tax (1.45%), and Additional Medicare Tax (0.9% on income over $200,000). Your employer withholds these as part of sell-to-cover. If your salary alone exceeds the Social Security wage base, no additional Social Security tax applies to the RSU portion.

Can I change my sell-to-cover percentage? It depends on your broker and employer plan. Schwab, E*Trade, and Morgan Stanley typically allow you to set a custom withholding rate through their equity compensation portals. Contact your company's stock plan administrator to check. Changes usually must be made before the vesting date.

Do I need to make estimated tax payments on RSU income? If your withholding shortfall will cause you to owe more than $1,000 at tax time, and you don't meet either safe harbor rule, then yes. The simplest alternative is increasing your W-4 withholding, which avoids quarterly deadlines entirely.

How is RSU income reported on my W-2? RSU vesting income is included in Box 1 (Wages) of your W-2 — combined with your salary, and treated as ordinary compensation income (IRS Publication 525). Most employers also show the RSU amount separately in Box 14 for reference, but this is informational only. The taxes withheld appear in Boxes 2 (federal), 4 (Social Security), 5 (Medicare), and 17 (state).

What if I don't pay the shortfall? The shortfall doesn't go away — it becomes tax owed when you file your return. If you owe more than $1,000 beyond your withholding, the IRS charges an underpayment penalty (approximately 7-8% annually) calculated per quarter. You'll owe the tax plus penalty plus interest when you file.