How RSUs can leave you owing more tax than expected

Key takeaways

• Your employer withholds 22% on RSU vests by default. If you're in the 32% or 35% federal bracket, that's 10 to 13 percentage points short of what you owe.
• On a $150K vest at a 35% marginal rate, the federal gap is roughly $19,500. State tax and underpayment penalty land on top.
• The taxable amount is the share value on the vest date, not the grant date. A grant that doubles between award and vest doubles the tax bill.
• Two methods close the gap: bump up Form W-4 Step 4(c) for additional per-paycheck withholding, or send a quarterly estimated payment under the IRS safe harbor (110% of prior year tax if AGI exceeded $150K).
• The behavioral shortcut: vest date doubles as the estimated-payment date.

When your RSUs vest, your employer withholds 22% federal tax on the share value. If you're in the 32% or 35% bracket, that 22% is 10 to 13 percentage points short of what you owe. On a $150K vest, the gap is about $19,500. The IRS expects that money in April.

A single-filer engineer client I worked with had a strong year. Salary around $250K, plus a $150K RSU tranche that vested in the fall. Total comp landed near $400K. By April, he figured the bill was mostly handled. It turned out he owed the IRS another $19,500 plus an underpayment penalty.

Nothing went wrong with his payroll. Nobody made a mistake. The numbers just didn't add up, and almost every W-2 employee with a meaningful RSU vest runs into the same gap.

How RSU withholding works

When your RSUs vest, the share value goes onto your W-2 as ordinary income that pay period. Your employer has to withhold federal tax on it, the same way they would on any other paycheck. The rate they use is set by IRS rules, not based on your actual situation.

Under IRS rules, your employer can pick between two methods. Most large payrolls use the optional flat rate: 22% on supplemental wages up to $1M in a calendar year. Above $1M, the rate jumps to a mandatory 37% on the excess.

That 22% is a flat IRS rule. It applies to bonuses, commissions, and RSU vests the same way, regardless of what you actually make. Someone making $80K total gets 22% withheld on their vest. Someone making $600K gets the same 22%. The actual tax owed at year-end is wildly different. The withholding looks identical.

Most payroll teams use the 22% method because the regulation lets them, and the alternative (a true-up across the year) is operationally complex. The 22% is a placeholder. Your real rate is whatever your marginal bracket is when all your income stacks up.

The math on a $150K vest

A $150K RSU vest, withheld at the 22% supplemental rate:

• Withheld at vest: $33,000
• Net shares: $117,000 worth of stock

That feels like the taxes are settled, but the marginal rate keeps climbing as income stacks up. With $250K of salary already on the books, the next dollars are taxed at the 32% federal bracket, and part of the $150K vest pushes into the 35%. For 2026, the 32% bracket starts at $201,775 single and $403,550 MFJ. The 35% starts at $256,225 single and $512,450 MFJ. These thresholds are indexed annually, so check the current year before applying to your own situation.

Using a blended marginal rate of 35% for simplicity, the actual federal tax on $150K of vest income is $52,500. The shortfall is $19,500 federal alone. Add state tax (Arizona's flat 2.5% adds another $3,750). Add the underpayment penalty, and the total owed by mid-April climbs further.

This is a cash flow problem with a tax disguise. The tax was always going to be owed. The cash to pay it just left the brokerage account the moment the shares landed, and nothing else got set aside for it.

RSU vests and the NIIT layer

RSU vest income shows up as W-2 wages. The vest itself does not trigger the 3.8% Net Investment Income Tax (NIIT). What it does is push your modified AGI higher. Once your MAGI crosses the NIIT threshold ($200K single, $250K MFJ, frozen since 2013), any dividends, interest, or capital gains in your taxable accounts now get the 3.8% surtax layered on top.

So a $150K vest doesn't get hit with NIIT directly. But if you have $50K of dividends and capital gains in a taxable brokerage, those now owe $1,900 of NIIT they wouldn't have owed without the vest. The bigger your taxable account, the more this matters.

Vest-date value, not grant-date value

The taxable amount on a vest is the share value on the vest date. The grant-date value doesn't matter for tax purposes. If a grant doubles in value between when you got it and when it vests, the taxable income doubles too. The 22% withholding scales up with the share price, but so does your actual rate, and the gap between them grows in absolute dollars.

Say a grant was worth $80K at award, and it vests at $160K. That generates $160K of W-2 income that year. At a 35% marginal rate, the actual federal tax owed is $56,000. Withholding covers $35,200. The gap is $20,800.

You don't know your RSU tax bill until the morning of vest day, because the tax is on whatever the shares are worth that day.

The cost of selling shares in April

A common move is to sell enough shares in April to cover the balance due. That works, but the sale itself can trigger a short-term or long-term capital gain or loss depending on how long the shares have been held since vest. Selling to pay last year's tax in the same week you're filing is usually fine, since the shares have barely moved.

Shares that have drifted up over six or twelve months create another taxable event on top of the one you're already settling. A $20K gain at a 35% bracket is another $7,000 owed, plus the 3.8% NIIT if you're over the threshold. Holding cash in advance avoids that second taxable event entirely.

A four-step calculation

Four steps to size the gap:

1. Estimate your total wages for the year (salary plus bonus plus RSU fair market value at vest).
2. Find your actual federal marginal bracket at that income level. For most high earners with significant RSUs, this is 32%, 35%, or 37%.
3. Subtract 22% from your actual marginal rate. The remainder is the under-withholding percentage on every dollar of RSU income.
4. Multiply that gap by the dollar value of your expected RSU vests for the year.

For the engineer above: 35% minus 22% is 13 percentage points. 13% of $150K is $19,500. That's the federal number missing from his withholding.

If multiple tranches vest in the same calendar year and total supplemental wages cross $1M, your employer is required to withhold at 37% on the excess (mandatory, not optional). For most clients this isn't a concern, but for IPO years or accelerated vesting it is.

Two ways to close the gap

Option 1: bump up federal withholding on your W-2 paychecks.

Form W-4 Step 4(c) lets you add a fixed dollar amount of additional withholding per pay period. The math: your annual gap divided by your remaining pay periods. So if you expect a $20K gap and have 20 pay periods left, that's an extra $1,000 per check. Step 4(c) is per paycheck, not per year. The most common error is entering the annual number.

The advantage of withholding over estimated payments: withholding is treated as if paid evenly across the year for safe harbor purposes, which removes the underpayment penalty even when the gap is identified late in the year.

Option 2: send a quarterly estimated payment to the IRS directly.

Estimated payments are credited in the quarter they're made. So a Q4 estimate doesn't retroactively fix Q1 or Q2 under-withholding. If the vest happens early in the year, this works cleanly. If late, withholding is the better tool.

The estimated tax safe harbor for high earners (prior year AGI over $150K, a threshold not indexed for inflation since 1997) requires paying either 110% of prior year tax or 90% of current year tax. In practice, the 110% prior-year figure is the one you can actually calculate, since current-year tax isn't knowable mid-year. Either way, the safe harbor requires paying on the quarterly schedule. A December lump sum doesn't retroactively cure Q1 or Q2 underdeposit. Below the safe harbor, the underpayment penalty applies: the federal short-term rate plus 3 percentage points, compounded daily, on the shortfall. For Q2 2026 the rate is 6%. The rate resets each quarter, so the penalty functions as a variable cost of late planning.

The Roth catch-up wrinkle if you're 50 or older

If you're 50 or older and your Social Security wages (W-2 Box 3, which includes RSU vest values up to the wage base) exceeded $150,000 in 2025, SECURE 2.0 says all your 401(k) catch-up contributions in 2026 have to be made as Roth, not pre-tax. A meaningful RSU vest in 2025 likely pushed you over that threshold. The $150,000 threshold is COLA-adjusted in $5,000 increments, so check the current-year figure if you're reading this in a future year. Your catch-up is no longer a tax deduction. It's an after-tax contribution. This applies to anyone whose 2026 retirement strategy assumed pre-tax catch-up.

What to do this year

The 22% on an RSU vest is a down payment. The full federal tax settles in April, with state and potentially NIIT on top. Two methods close the gap: bump up W-4 Step 4(c) for additional per-paycheck withholding, or send a quarterly estimated payment. The behavioral shortcut: vest date doubles as the estimated-payment date.

The engineer in the example now runs this calculation in January every year, sets an additional $1,000 per pay period via Step 4(c), and parks any remaining gap in a high-yield savings account earmarked for April. He hasn't been surprised since.

This post is general information, not personalized advice. Talk to a fee-only fiduciary about your specific situation.