Your RSUs Are Withheld at 22%. You Do Not Pay 22%
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Read Our Vetting ManifestoA client called me in March, two weeks before filing, asking why he owed six thousand dollars he had not budgeted for. He had done nothing wrong. His RSUs vested, his employer withheld exactly what the law requires, and the arithmetic still left him short.
This is not an edge case. It is the default outcome for anyone whose total income crosses out of the 24% bracket, and it happens because the withholding rate on a vest has almost nothing to do with the rate you actually pay. I have audited enough of these to say the number surprises people every single time.
The Gap Between Withheld and Owed
When RSUs vest, the shares are ordinary income. Your employer treats that income as a supplemental wage and withholds at the flat statutory rate — 22%, rising to 37% only on supplemental wages above one million dollars in a calendar year. That is what the IRS instructs employers to do, and payroll is doing its job correctly.
Your marginal rate is a separate question, and nobody at payroll is asked to answer it.
Run the numbers once and you will never forget them
Take a single filer with $180,000 of taxable income and an $80,000 vest. Federal only — set state aside, it makes this worse rather than better.
The vest does not land in one bracket. The first $21,775 of it fills the remainder of the 24% band, which for a single filer in 2026 runs to $201,775. The other $58,225 sits in the 32% band.
$21,775 taxed at 24% ……. $5,226
$58,225 taxed at 32% ……. $18,632
Federal tax owed on the vest ……. $23,858Withheld at the 22% supplemental rate ……. $17,600
Shortfall carried to April ……. roughly $6,300
That is eight percent of the entire grant, owed and unfunded. The effective federal rate on that vest was 30%. Payroll withheld 22%. The eight-point difference is not a mistake anyone made — it is the structure working as designed, and the design does not include telling you.
Then it gets worse in two directions
State income tax rides on top and is withheld under its own supplemental rules, which in most states are also flat and also low relative to the marginal rate. And if the stock fell between the vest date and the day you filed, you are paying full ordinary-income tax on a value you no longer hold. The tax was fixed at vest. The asset was not.
I have watched people sell at a loss in April to fund a tax bill on a gain they never realized. That sequence is entirely legal, entirely foreseeable, and entirely avoidable.
And there is a penalty sitting on top of the shortfall
Owing money in April is one problem. Owing it without having paid enough during the year is a second, separate one, because the IRS charges an underpayment penalty on the gap. Three safe harbors protect you, and satisfying any one of them is enough.
- Ninety percent of this year. Withholding plus estimated payments cover at least 90% of what you end up owing for the current year.
- One hundred percent of last year. Your payments cover the full tax shown on last year’s return, regardless of what this year turns into.
- One hundred ten percent, if you earn more. If last year’s adjusted gross income exceeded $150,000 — $75,000 filing separately — the prior-year test rises to 110%.
The second and third are the useful ones, because you already know last year’s number. Take the tax on your prior return, multiply by 1.1 if your AGI cleared $150,000, and make sure withholding plus estimates reach that figure by year end. You will still owe the balance in April. You simply will not be penalized for it.
The one exception worth knowing: if your total tax due after withholding and credits comes to less than $1,000, no penalty applies. On an $80,000 vest, you are not going to be inside that.
If Someone Told You to File an 83(b) on Your RSUs
They confused two instruments with similar names, and the advice is not merely unhelpful. It is inapplicable.
Restricted stock award — the election applies
A restricted stock award transfers actual shares to you at grant. They are yours, subject to forfeiture if you leave before vesting. Because property changed hands, Section 83(b) lets you elect to be taxed on the value at grant rather than at vest — within 30 days, no extensions, no exceptions. For founders and very early employees holding shares at a near-zero valuation, that election is often the single highest-leverage tax decision of their career.
Restricted stock unit — there is nothing to elect on
An RSU is a promise. No shares transfer at grant. There is no property, so there is no election, so filing one accomplishes nothing except confusing your company’s records and your own.
The distinction is one letter — RSA against RSU — and it separates a decision worth six figures from a filing that does nothing at all. If an advisor blurs the two, that tells you what else they are guessing about.
The Mechanics That Move the Number
Cliff concentrates the damage
A four-year grant vesting monthly after a one-year cliff spreads income across years and brackets. The same grant vesting 25% annually drops a lump into a single tax year and pushes more of it into a higher band. Identical grant value, materially different tax outcome, decided by a schedule nobody negotiates.
Ask for the vesting schedule in writing before you sign, and read it as a tax document rather than a retention document. It is both.
Double-trigger, and the second trigger that never comes
Private companies commonly issue RSUs with two conditions: a time-based schedule and a liquidity event. Both must occur. The logic protects you — without the liquidity condition you would owe ordinary income tax on shares you cannot sell, which is the worst position in equity compensation.
The failure mode is that the second trigger never arrives. You satisfy four years of service, the company does not go public and does not sell, and your grant sits there as neither income nor asset. Units also frequently carry an expiration — often seven years from grant — after which time-vested units can lapse unexercised in value terms if no liquidity event has occurred.
Before you accept a private-company RSU package, ask the two questions that matter: what is the expiration on the units, and what has the board actually said about a liquidity timeline. Vague answers are answers. I audit the structure the same way I audit a preference stack in The Liquidity Illusion — the instrument is different, the discipline is identical.
The Error Nobody Files Under “Error”
Every quarter your vest converts salary into shares of one company. Do nothing and, four years in, a large share of your net worth sits in the same firm that pays your mortgage. Your income and your savings now carry identical risk, correlated perfectly, in a single name.
No competent advisor would build that portfolio deliberately. People arrive at it by not deciding — which is how most portfolios get built.
The fix is procedural rather than analytical. Set a standing instruction to sell on vest, executed automatically, decided once. Selling immediately at vest carries no additional tax consequence, because you were already taxed at ordinary rates on that value — the cost basis resets to the vest price and only movement after that produces gain or loss. The employees who hold are not making a considered bet on their employer. Most of them have simply never opened the account.
What to Establish Before the First Vest
Questions to put to your equity administrator, in writing
Does the plan withhold at the flat supplemental rate, or can I request additional withholding?
Some plans permit a higher election. If yours does, raise it to your actual marginal rate and the April problem disappears. If it does not, you are funding the difference through quarterly estimates or a reserve account, and that is a decision you should make in January rather than discover in March.
Is the default sell-to-cover, or net share settlement?
Both cover the withholding by reducing what you receive. The distinction matters for your records and for how many shares actually land in your account, and it is worth knowing before the first vest rather than reconstructing it afterward.
Are these RSUs or restricted stock awards?
Ask directly and get the answer in writing. It determines whether an 83(b) election exists as an option at all, and if the answer is restricted stock, the 30-day clock is already running.
What is the trading window, and am I subject to a blackout?
A standing sell instruction is useless if you cannot execute during the window when vests land. Insiders and employees in restricted functions often need a pre-arranged trading plan to sell on schedule. Set that up before you need it.
None of this makes equity compensation a bad instrument. RSUs at a liquid public company are the cleanest form of equity an employee can receive — no exercise cost, no expiration risk in the ordinary case, no preference stack sitting above you. They are worth real money and they are worth negotiating for.
They are also taxed as wages, withheld at a rate that has nothing to do with your bracket, and concentrated in one name unless you intervene. That is three decisions, and the default answer to all three is the wrong one. Read the offer the same way you read the posted band it came attached to — I covered that in Why Director Is Not a Salary. Every mandate in our Finance & Legal category lists its cash compensation before publication. The equity is the part you have to audit yourself.
