RSU Vesting: Why Default Tax Withholding Almost Never Covers the Bill

Employers withhold federal tax on RSU income at a flat 22% supplemental rate, but if you are in the 35% or 37% bracket, you owe far more than that, and the difference is due in April. On $300,000 of vests at a 35% marginal rate, the gap is roughly $39,000 of federal tax your payroll system never collected, before state tax adds to it. Fixing it before April is entirely within your control.

Why the Withholding Rate Is Set Too Low

The IRS requires employers to withhold on supplemental wages, which includes RSU income at vesting, at a flat rate. For 2025, that rate is 22% on the first $1 million of supplemental wages paid in a calendar year; above $1 million year-to-date, it jumps to 37%.

For someone in the 22% or 24% bracket, that withholding is roughly right. For a high earner, it is not close: on the $300,000 example above, you owe roughly $105,000 in federal tax while your employer remits $66,000, and state income tax in California, New York, or Massachusetts can add another 10% to 13% on top.

The supplemental rate is a default, not a final calculation; the problem is that most employees treat it like one until April.

The Rules, the Traps, and the Safe Harbor

Two ways exist to avoid an underpayment penalty even when withholding falls short: total withholding and estimated payments of at least 100% of last year's tax liability (110% if prior-year adjusted gross income exceeded $150,000), or at least 90% of your current-year liability. Practically, the 110% prior-year safe harbor is the one to focus on, because it gives you a fixed, calculable target instead of a forecast.

The trap is assuming payroll will sort this out. It won't. Payroll works from your W-4, your salary, and the supplemental rate, with no visibility into your investment income, your spouse's income, or how many tranches vest across the year.

I had a client, a senior engineer at a public tech company, with four vesting dates in one calendar year totaling just over $280,000, all withheld at 22%. By December he had a $36,000 shortfall and no estimated payments made; we caught it in time for a Q4 payment inside the safe harbor, but the near-miss was predictable in January.

When This Applies, and When It Doesn't

This page is specifically about RSU income at vesting: the fair market value on the vest date is ordinary income, and that event triggers the withholding gap. ISOs and NSOs work differently (AMT at exercise, tax at exercise rather than vest); those mechanics are covered in the parent pillar, Equity Compensation: A Practical Guide to RSUs, ISOs, and NSOs.

The gap is most consequential if you are in the 35% or 37% bracket, have multiple tranches vesting in one year, live in a high-tax state, or have other income pushing your effective rate higher. In the 24% bracket in a no-income-tax state, the 22% default may come close enough; at higher brackets, it rarely does.

How This Connects to the Soil Layer of Your Plan

The RSU withholding gap sits squarely in what we call the Soil layer of the Sporos Doctrine, the part of the plan that defines your tax architecture. Fixing the gap is not exotic; it is just not leaving money on the table.

Frequently Asked Questions

Can I ask my employer to withhold at a higher rate?

Some payroll systems support a supplemental withholding election or additional flat-dollar withholding per pay period or vest event, though not all do. Ask HR or payroll specifically whether the system supports "additional withholding on supplemental wages."

When are estimated tax payments due?

For 2025, the four quarterly deadlines are April 15, June 16, September 15, and January 15, 2026. If a large vest occurs late in the year, the Q3 or Q4 payment is often the one that catches the gap.

What if I sell the shares immediately at vesting? Does that change the tax?

No. The ordinary income is recognized at vest regardless; a same-day sale typically adds only a very small capital gain or loss from price movement between vest and sale.

Is state withholding also underfunded?

Often, yes. California, for example, uses a 10.23% supplemental rate for 2025 while the top marginal rate is 13.3%, so significant vests can leave a state gap on top of the federal one.

What to Do Next

1. Pull your most recent pay stub and identify every RSU vest scheduled for the rest of this calendar year. Calculate the projected income and the expected withholding at 22%.
2. Compare that withholding to your actual marginal rate (federal plus state). Quantify the gap.
3. Check whether your employer's payroll system allows a supplemental withholding election. If it does, submit the request before the next vest date.
4. Calculate your prior-year tax liability and determine your safe harbor target. If withholding alone won't hit it, schedule an estimated tax payment before the next quarterly deadline.

The information provided is for educational purposes only and does not constitute investment, legal, or tax advice. Tax law changes frequently — verify current rules before acting. Consult with qualified professionals for guidance specific to your situation.