RSU Withholding Shortfall: Why 22% Is Not Enough

The mechanics

How RSU withholding actually works

RSUs are taxed as ordinary income on the date they vest. The taxable amount equals the number of shares that vest multiplied by the stock's fair market value on that day. Your employer reports this amount in Box 1 of your W-2, and it is subject to the same payroll taxes as your regular salary.

At the moment of vesting your employer must withhold three layers of tax:

• Federal income tax — withheld at the IRS flat supplemental-wage rate of 22 percent (IRS Publication 15, Section 7).
• Social Security — 6.2 percent of the vest amount, but only until your year-to-date wages reach the annual wage base. Once you cross that ceiling earlier in the year through salary alone, no additional Social Security is withheld on RSU income.
• Medicare — 1.45 percent with no cap, plus 0.9 percent Additional Medicare Tax on wages above $200,000 (single) or $250,000 (married filing jointly).

The critical point: the 22 percent rate is not based on your personal tax situation. It does not consider your filing status, total household income, other equity vesting during the year, or state taxes. It is a one-size-fits-all rate designed for average supplemental-wage payments. For employees whose total compensation places them in the 24 percent bracket or above, this rate structurally under-withholds.

Why the 22% rate creates a shortfall

The federal income tax system is progressive. In 2026, the seven marginal rates are 10, 12, 22, 24, 32, 35, and 37 percent. The 22 percent supplemental rate matches only the third bracket. If your taxable income — salary plus RSU income minus the standard deduction — lands in a higher bracket, every dollar of RSU income in that bracket is taxed at the higher rate, but only 22 cents of each dollar was withheld.

These figures show the federal income-tax gap only. State income tax, if applicable, adds to the total shortfall. Amounts are illustrative and assume the entire vest falls within a single bracket; in practice the vest may span two brackets.

Worked example: $150,000 salary plus $80,000 RSU vest

Consider a single filer earning a $150,000 base salary who also vests $80,000 in RSUs during the year. The following walkthrough shows how the shortfall emerges. All figures use 2026 federal brackets and the standard deduction of $16,100 for single filers (IRS Rev. Proc. 2025-32).

This example is illustrative and simplified — it assumes the entire $80,000 falls within the 32 percent bracket. In practice some portion may straddle the 24/32 boundary, which would reduce the shortfall slightly. Use our RSU tax calculator to model your exact numbers, and see the federal tax bracket calculator for your bracket.

State tax compounds the gap

If you live in a state with income tax, the problem grows. Many employers withhold state supplemental tax at a flat rate that is also lower than your effective state rate. For example, California's supplemental withholding rate for stock compensation income above $1 million is 13.3 percent, but for amounts below that threshold the standard supplemental rate is 6.6 percent — while the top state bracket is 13.3 percent. New York's supplemental rate is lower than its top bracket as well. The gap compounds, leaving employees in high-tax states with five-figure shortfalls across combined federal and state taxes.

The $1 million supplemental-wage threshold

IRS Publication 15 creates a hard break at $1 million in supplemental wages per calendar year. Once your cumulative supplemental wages (RSU vests plus any bonuses, commissions, or other supplemental pay) exceed $1 million in a single year, the mandatory withholding rate on the excess jumps to 37 percent — the top individual rate. If your actual bracket is 37 percent, this eliminates the federal gap on the portion above $1 million. Below that line, however, the 22 percent rate applies regardless of your bracket.

Sell-to-cover does not fix the shortfall

Many employees use sell-to-cover at vest: the broker sells enough shares to cover the withheld taxes and delivers the remaining shares to your account. This process covers the taxes that were withheld — the 22 percent federal plus FICA and any state withholding — but it does nothing about the gap between what was withheld and what you actually owe. Whether you hold all shares, sell all shares, or use sell-to-cover, the amount withheld at vest is the same 22 percent flat rate.

Solutions

Three ways to close the RSU withholding gap

1. Increase withholding on your regular paycheck (Form W-4, line 4c)

The most hands-off approach: file an updated W-4 with your employer requesting additional withholding per pay period. If you know roughly how much RSU income you will vest during the year, divide the expected shortfall by your remaining pay periods and enter that amount on line 4(c). The IRS treats all withholding equally — extra withheld from paychecks offsets tax owed on RSU income dollar for dollar.

2. Make quarterly estimated tax payments (Form 1040-ES)

If you prefer not to reduce your regular paycheck, you can send estimated payments directly to the IRS after each vest. The four quarterly deadlines are April 15, June 15, September 15, and January 15 of the following year. Pay at least enough to avoid the underpayment penalty under IRC 6654 — generally 90 percent of your current-year liability or 100 percent of your prior-year liability (110 percent if prior-year AGI exceeds $150,000). Use our estimated quarterly tax calculator to figure the amount.

3. Elect a higher withholding rate through your equity portal

Some stock-plan administrators (such as E*Trade, Schwab, and Morgan Stanley at Work) allow you to elect a higher federal withholding rate on equity events — for example, 32 percent or 37 percent instead of the default 22 percent. Check your equity portal's tax-withholding settings before your next vest date. Not all employers expose this option, so contact your payroll department if you do not see it.

When the shortfall triggers an underpayment penalty

The IRS charges a penalty if you owe more than $1,000 at filing and your total withholding plus estimated payments do not meet either the 90-percent-of-current-year or 100-percent-of-prior-year safe harbor (110 percent if prior-year AGI exceeds $150,000). The penalty is calculated as interest on the underpaid amount for the period it was underpaid, using the federal short-term rate plus 3 percentage points. It is typically modest in dollar terms but entirely avoidable with proper planning.

RSU shortfall versus bonus shortfall

Bonuses and RSUs are both classified as supplemental wages and face the same 22 percent flat withholding rate. However, the RSU shortfall tends to be larger for two reasons. First, equity vesting events are often concentrated — a large cliff vest or quarterly vest can add tens or hundreds of thousands of dollars to your income in a single pay period. Second, employees with significant RSU compensation tend to have higher base salaries, pushing them into higher marginal brackets where the gap is wider. For the cash-bonus version of this problem, see our bonus withholding shortfall guide. To understand how these amounts appear on your tax documents, see equity compensation on your W-2.