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

If you're a high earner with RSUs vesting this year, your employer is almost certainly withholding less tax than you actually owe. The mechanics are simple, the dollar amounts are not, and fixing it before April is entirely within your control.

Why the Withholding Rate Is Set Too Low

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

For someone in the 22% or 24% bracket, 22% withholding is roughly right. For a high earner in the 35% or 37% bracket, it is not even close.

Consider the math. If $300,000 of RSUs vest and your marginal rate is 35%, you owe roughly $105,000 in federal tax on that income. At 22% withholding, your employer remits $66,000. The gap is $39,000. That number does not include state income tax, which in California, New York, or Massachusetts can add another 10% to 13% on top.

This is not a design flaw. The supplemental withholding rate is a default, not a final calculation. The problem is that most employees treat it like a final calculation until April.

The Rules, the Traps, and the Safe Harbor

There are two ways to avoid an underpayment penalty even when withholding falls short.

The first is the safe harbor rule. If your total withholding and estimated tax payments equal at least 100% of last year's tax liability, you owe no underpayment penalty regardless of what you owe in April. For taxpayers whose prior-year adjusted gross income exceeded $150,000, the threshold is 110% of last year's liability.

The second is the 90% rule. If your total payments cover at least 90% of your current-year liability, you also avoid the penalty.

Practically, the 110% prior-year safe harbor is the one to focus on. It gives you a fixed, calculable target rather than one that depends on forecasting your current-year income precisely.

The trap most people fall into is assuming their employer's payroll system will sort this out. It won't. Payroll runs a withholding calculation based on the W-4 you filed, your salary, and the supplemental rate. It has no visibility into your investment income, your spouse's income, or how many RSU tranches will vest across the year.

I had a client, a senior engineer at a public tech company, who had four vesting dates in one calendar year totaling just over $280,000. His employer withheld at 22% on each tranche. When we pulled the numbers together in December, he was sitting on a $36,000 shortfall and hadn't made a single estimated tax payment. We caught it in time to make a Q4 payment and keep him inside the safe harbor. But the near-miss was entirely predictable in January.

When This Applies, and When It Doesn't

This page is specifically about RSU income at vesting. When RSUs vest, the fair market value on the vest date is ordinary income. That is the event that triggers withholding and the gap described above.

This analysis does not apply to ISOs or NSOs in the same way. ISOs have their own AMT considerations at exercise, and NSOs are taxed at exercise rather than at a vesting date. Those mechanics are covered in the parent pillar, Equity Compensation: A Practical Guide to RSUs, ISOs, and NSOs.

This gap is most consequential for employees who:

Are in the 35% or 37% federal bracket
Have multiple RSU tranches vesting in a single calendar year
Live in a high-income-tax state
Also have other income sources (bonus, interest, capital gains) that push the effective rate even higher

If your total income is in the 24% bracket and you live in a no-income-tax state, the 22% default withholding may come close enough that the shortfall is manageable. At higher brackets, it rarely is.

How This Connects to the Soil Layer of Your Plan

The RSU withholding gap is not just a cash-flow nuisance. It sits squarely in what we call the Soil layer of the Sporos Doctrine, the part of the plan that defines your tax architecture. How equity compensation is structured, timed, and withheld determines how much of that income you actually keep. A 35% earner who fixes the withholding gap and avoids underpayment penalties is not doing anything exotic. They are 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 that lets you request a higher rate. Not all do. If yours does, you can submit a revised W-4 or a payroll-specific form asking for additional flat-dollar withholding per pay period or per vest event. Ask your HR or payroll team 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 relevant one to catch the gap.

Does the $1 million threshold apply per employer?

Yes. The 37% rate kicks in when supplemental wages from a single employer exceed $1 million in a calendar year. If you change employers mid-year, each employer starts the counter fresh.

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

No. The ordinary income is recognized at vest regardless of whether you hold or sell. If you sell immediately (a same-day sale), you typically have a very small capital gain or loss from any price movement between vest and sale, but the income event itself is unchanged.

Is state withholding also underfunded?

Often, yes. Most states that have supplemental withholding rates set them below the top marginal rate as well. California, for example, uses a 10.23% supplemental rate for 2025, while the top marginal rate is 13.3%. If you are a California resident with significant RSU vests, you likely have a state withholding gap on top of the federal one.

What to Do Next

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%.
Compare that withholding to your actual marginal rate (federal plus state). Quantify the gap.
Check whether your employer's payroll system allows a supplemental withholding election. If it does, submit the request before the next vest date.
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.