Equity Compensation · 19 min read

RSU Tax Withholding: Why 22% Falls Short and How to Close the Gap

The Financial Sciences Company Published Sep 26, 2026

The short answer

When RSUs vest, the value of the shares is taxed as wages, and payroll usually withholds the optional flat federal rate of 22% (37% only on supplemental wages above $1,000,000 in a year). For 2026 the brackets reach 35% at $512,450 and 37% at $768,700 of joint taxable income, so a household in those brackets is short 13 to 15 cents on every vested dollar; California’s 10.23% rate leaves up to three more points at the top. The gap is closed with extra W-4 withholding, an estimated payment timed to the vest, or a sale at vest beyond the plan’s sell-to-cover, sized against the §6654 safe harbors: 90% of this year’s tax or 110% of last year’s.

The tax on a restricted stock unit is settled by a rule that was never designed for the household paying it. Payroll withholds a flat 22% on the value of the shares, and for anyone above the 22% bracket that is less than the tax the vest actually creates. The difference is not an error; it is a gap the IRS expects the household to close on its own, and the question is whether to close it during the year or to meet it the following April with a penalty attached. Below: how RSUs are taxed, why the withholding falls short federally and in California, what sell-to-cover and net settlement do to the W-2 and the 1099-B, how the safe harbors work, and a worked 37%-bracket household in federal, California and Texas versions. Figures are 2026 federal and 2025 California amounts; confirm your own numbers with a CPA or tax counsel.

How are RSUs taxed when they vest?

As wages, on the value of the shares the day they are delivered. A restricted stock unit is an unfunded promise of stock, so nothing is taxed at grant and no 83(b) election is possible; the taxable event is the transfer of the shares, and the value transferred is includible in income (IRS Publication 5992, section G.3, Restricted Stock Units). That value appears in Box 1 of the W-2 with the rest of the year’s pay, and it is subject to income tax withholding, Social Security tax up to the wage base and Medicare tax without limit (IRS Publication 15 (2026), sections 7 and 9). Our explainer on the 83(b) election covers why restricted stock can elect early taxation and RSUs cannot.

The amount included in wages becomes the household’s cost basis in the shares (Treas. Reg. §1.61-2(d)(2)(i)). Every later movement in the price is a capital gain or loss measured from the vest-date value (26 U.S.C. §1001(a)). That has two consequences that run through the rest of this guide: the vesting year’s tax is fixed by the price on the vesting date whether the shares are kept or sold, and a sale on or near the vest date produces almost no additional gain.

Why does the withholding fall short?

Because the flat rate is set by regulation, not by the household’s bracket. Income from a vest is a supplemental wage, alongside bonuses and commissions, and the regulations name “wage income recognized on the lapse of a restriction on restricted property” as an example (Treas. Reg. §31.3402(g)-1(a)(1)). When supplemental wages are paid separately from regular pay and the employer has withheld from regular wages this year or last, it may withhold at an optional flat 22%, applied without regard to the employee’s Form W-4; the alternative is to add the vest to a regular paycheck and run the withholding tables on the total (Treas. Reg. §31.3402(g)-1(a)(6) and (a)(7)). Once supplemental wages from one employer pass $1,000,000 in a calendar year, the excess is withheld at a mandatory 37%, again regardless of the W-4 (IRS Publication 15 (2026), section 7). Most stock plans use the 22% flat rate because it is simple to administer.

Against that flat 22%, the 2026 brackets run to 37%. A married couple filing jointly leaves the 22% bracket at $211,400 of taxable income and reaches 24%, then 32% above $403,550, 35% above $512,450 and 37% above $768,700; for a single filer the 32% bracket begins at $201,775, 35% at $256,225 and 37% at $640,600 (IRS, tax year 2026 inflation adjustments (Rev. Proc. 2025-32)). Every vested dollar lands on top of the household’s other income, so a couple whose salaries already sit in the 35% bracket pays 35 cents or more on each vested dollar and has 22 cents withheld. The shortfall is 13 to 15 cents on the dollar, and it grows with the size of the vest.

Federal income-tax shortfall per $100,000 of vested RSU value, by the household’s marginal bracket on those dollars, when payroll withholds at the optional flat rate. 2026 brackets from Rev. Proc. 2025-32; withholding rules from IRS Publication 15 (2026). Arithmetic only; state tax and payroll tax are separate.
Marginal bracket on the vested dollars	Federal tax on $100,000	Withheld at 22%	Shortfall
22%	$22,000	$22,000	$0
24%	$24,000	$22,000	$2,000
32%	$32,000	$22,000	$10,000
35%	$35,000	$22,000	$13,000
37%	$37,000	$22,000	$15,000

Social Security and Medicare

Payroll taxes are usually withheld correctly, with one exception. Social Security tax of 6.2% applies until the employee’s wages for the year reach $184,500 in 2026, and Medicare tax of 1.45% applies to all wages; an employer must also withhold the 0.9% Additional Medicare Tax on wages above $200,000 from that employer, without regard to filing status (IRS Publication 15 (2026), section 9). The exception is the household whose combined wages exceed the $250,000 joint threshold while neither spouse individually passes $200,000 at one employer, or where one spouse’s wages sit below the line: the tax is owed on the return, on Form 8959, but no employer withheld it, and the IRS notes that the remedy is extra income-tax withholding on the W-4 or an estimated payment (IRS, Questions and Answers for the Additional Medicare Tax). It is a small gap next to the income-tax gap, but it appears in the same April bill.

California

California withholds on bonuses and stock options at a flat 10.23%, and on other supplemental wages at 6.6%, when the vest is paid separately from regular wages; the alternative, as at the federal level, is to run the state tables on the combined payment (EDD, California Employer’s Guide DE 44 (2026), supplemental wages). The state’s marginal rates on 2025 returns rise to 9.3% at $145,448 of joint taxable income, 10.3% above $742,958, 11.3% above $891,542 and 12.3% above $1,485,906 (FTB, 2025 California tax rate schedules, Schedule Y), plus an additional 1% on taxable income above $1,000,000 (Cal. Rev. & Tax. Code §17043), for a top marginal rate of 13.3%. The 10.23% rate is a fair match for a household in the 9.3% and 10.3% bands and short by up to three points at the top: about $15,000 per $500,000 vested for a household already above $1,485,906. State Disability Insurance is a separate 1.3% in 2026 with no wage ceiling, so it applies to every vested dollar and is withheld in full (EDD, 2026 rates and withholding). California also taxes RSU wages earned by someone who has since moved, to the extent the work between grant and vest was performed in California (FTB Publication 1004, restricted stock units); our guide on moving from California to Texas before a liquidity event covers that sourcing rule.

Texas has no individual income tax, and its constitution bars the legislature from enacting one (Tex. Const. art. 8, §24-a). For a Texas household the gap is the federal gap alone, which is why the worked example below runs in both states.

Sell-to-cover, net settlement or cash: what changes?

Only the mechanics of paying the withholding, not the tax. The plan documents decide which of three methods applies, and each leaves a different paper trail.

Sell-to-cover. The plan broker sells enough of the newly vested shares on the open market to raise the withholding, remits the cash to the employer, and delivers the rest. Because the sale happens at or near the vest price, the gain or loss is usually a few dollars, but it is a sale, so the broker issues a Form 1099-B for those shares. This is the method most public companies use for employees, and the common form of IPO lockup agreement carves it out as a permitted transaction while other shares stay locked.
Net settlement. The employer keeps back enough shares to cover the withholding and delivers the balance; no shares are sold, so there is no 1099-B at vest, and the company funds the remittance from its own cash. Newly public companies often use it for the RSUs that settle at the IPO: Cerebras, for example, disclosed that it would withhold an estimated 2,249,088 shares at settlement and use about $416.1 million of its offering proceeds to pay the associated withholding (Cerebras Form 424(b)(4) prospectus, Use of Proceeds).
Cash. The employee pays the withholding to the employer in cash and keeps every share. Some plans allow it on request, and a household that intends to hold the shares may prefer it; it also concentrates the most money in one stock.

Whichever method applies, the withholding is at the flat rate unless the employer uses the aggregate method, and under the flat-rate method an employee’s request to withhold more has no effect: the IRS has said the employer “must withhold at the optional flat rate and cannot take into account requests by the employee that the rate be increased or lowered” (IRS Information Letter 2012-0063). Some stock plans offer their own election to withhold a higher percentage; where it exists it is a plan feature, not a W-4 right. The lever every employee controls is the one on the regular paycheck, covered below.

The 1099-B trap

When RSU shares are sold, whether at vest under sell-to-cover or years later, the broker’s Form 1099-B often shows a basis far below what the shares were worth at vest, or none at all. Since 2014 brokers have not been permitted to increase the reported basis for income recognized on the vesting of equity compensation (Instructions for Form 1099-B, Box 1e), so the figure on the form omits the wages already taxed on the W-2. A return that copies it taxes the same dollars twice. The correction is made on Form 8949: if the broker reported the basis to the IRS, enter the reported figure in column (e), code B in column (f) and the adjustment in column (g) so the basis matches the W-2 value; if the basis was not reported, enter the correct basis in column (e) (Instructions for Form 8949, columns (e), (f) and (g)). Publication 550 states the rule the adjustment enforces: the basis of stock received for services includes the amount included in income as compensation (IRS Publication 550, basis of property received for services). Keep the plan administrator’s vest confirmation, which shows the share count and the vest-date value; it is the record that supports the adjustment.

How do you close the gap without a penalty?

Federal income tax is pay-as-you-go. If withholding and timely estimated payments fall short of a required annual payment, the return carries an addition to tax, in practice an underpayment penalty, computed at the rate set each quarter under section 6621 (26 U.S.C. §6654(a)). The required annual payment is the lesser of 90% of the current year’s tax or 100% of the prior year’s tax, and the prior-year figure rises to 110% when the prior year’s adjusted gross income exceeded $150,000; there is no penalty at all if the balance due after withholding is under $1,000 (26 U.S.C. §6654(d)(1) and (e)(1)). The four installments fall due April 15, June 15, September 15 and January 15 (26 U.S.C. §6654(c)). Three levers close a gap.

1. Extra withholding on the regular paycheck

Form W-4 Step 4(c) is a single line for “any additional tax you want withheld each pay period” (Form W-4 (2026), Step 4(c)). It reaches the regular paycheck, not the vest, and it has one advantage the other levers lack: withheld tax is treated as paid in equal parts on each installment date, whatever day it was actually withheld (26 U.S.C. §6654(g)). A large extra withholding in November and December repairs the first three quarters retroactively. The constraint is cash flow: a $70,000 gap spread over the paychecks that remain after a spring vest can be most of each one.

2. Estimated payments, timed to the vest

An estimated payment counts on the date it is made, so a payment sized to the gap in the quarter the shares vest is the most direct route. The complication is that the four installments are presumed equal. If a vest lands in December, the default computation treats a quarter of the year’s required payment as due the previous April. Schedule AI of Form 2210, the annualized income installment method, replaces that presumption with the income actually received by each installment date; the IRS instructions describe it as the method for a taxpayer whose income “varied during the year” and note that it can “lower or eliminate the amount of one or more required installments” (Instructions for Form 2210, Schedule AI). It has to be used for every installment once it is used for one, and it is attached to the return.

3. A share sale at vest sized to the real bracket

Because basis equals the vest-date value, selling additional shares on or near the vest date and setting the proceeds aside for the gap produces little or no further gain. It doubles as the first step of the concentration decision, which is the subject of our guide on diversifying concentrated stock after an IPO. A current employee’s trading window and, at a newly public company, the lockup may decide whether that sale is possible on the day; a Rule 10b5-1 plan can schedule it in advance.

A worked example: a $500,000 vest in a 37% household

The household below is hypothetical and the numbers are rounded. A married couple files jointly. One spouse earns $300,000 in salary and holds RSUs; the other earns $250,000. They take the standard deduction of $32,200 for 2026 and have no other income, so taxable income before any vest is $517,800, already inside the 35% bracket (Rev. Proc. 2025-32, sections 4.01 and 4.14). In one year, $500,000 of RSUs vest and are delivered at the vest-date price, for instance a year in which double-trigger units accumulated over several years settle at once. Supplemental wages from the employer stay under $1,000,000, so the optional 22% rate applies to the whole vest.

Hypothetical married couple, 2026 federal figures (Rev. Proc. 2025-32, Table 1; IRS Publication 15; Additional Medicare Tax rules). Illustrative only, as of September 2026.
Federal	Amount
Taxable income before the vest	$517,800
Value of shares at vest, reported as wages	$500,000
Taxable income after the vest	$1,017,800
Tax on the first $250,900 of the vest, which fills the 35% bracket to $768,700	$87,815
Tax on the remaining $249,100 at 37%	$92,167
Federal income tax created by the vest	$179,982
Withheld at the flat 22%	$110,000
Federal income-tax gap	$69,982
Medicare (1.45%) and Additional Medicare Tax (0.9%) on the vest, withheld in full because the spouse’s salary already exceeds $200,000; no Social Security, since salary already exceeds $184,500	$11,750, no gap
Additional Medicare Tax owed on the household’s wages above $250,000 but not withheld by either employer	$1,350

Fourteen cents of every vested dollar is still owed. The other spouse’s employer withheld Additional Medicare Tax only on wages above $200,000, and the RSU holder’s employer only on that employer’s wages, so the household’s $250,000 joint threshold leaves $1,350 unwithheld; it is a rounding error next to the $69,982, and it lands on the same return.

The California version

Suppose the same household lives and works in California, with state taxable income of about the same amount as federal for simplicity. On the 2025 rate schedule the vest is taxed at 9.3% until $742,958, 10.3% until $891,542 and 11.3% above that, plus the 1% surcharge on the $17,800 above $1,000,000 (FTB, 2025 California tax rate schedules).

Same hypothetical household, California 2025 rate schedule Y (FTB), Rev. & Tax. Code §17043, EDD DE 44 (2026) withholding rate and 2026 SDI rate. Illustrative only.
California	Amount
9.3% on $225,158 (from $517,800 to $742,958)	$20,940
10.3% on $148,584 (to $891,542)	$15,304
11.3% on $126,258 (to $1,017,800)	$14,267
1% on the $17,800 above $1,000,000	$178
California income tax created by the vest	$50,689
Withheld at the flat 10.23%	$51,150
California income-tax gap	None; about $460 over-withheld
State Disability Insurance at 1.3%, no wage ceiling, withheld	$6,500

For this household the state rate roughly fits, and the total shortfall is the federal $69,982 plus the $1,350 of Additional Medicare Tax. A household already above $1,485,906 of California taxable income would be short about $15,000 on the same vest, because 13.3% against 10.23% leaves three points uncovered. California runs its own estimated-tax system with installments of 30%, 40%, 0% and 30% rather than four equal quarters, the same 90%, 100% and 110% tests, and one rule with no federal counterpart: a household whose California adjusted gross income for the year is $1,000,000 or more must pay 90% of the current year’s tax, with no prior-year safe harbor at all (FTB, estimated tax payments: high-income estimated tax). This household’s $1,050,000 of wages crosses that line, so the vest year that is protected federally by the prior-year test is not protected in California; its state withholding still covers the vest because the 10.23% rate fits, but a household short at the state level would need estimated payments that year.

The Texas version

Move the same household to Texas for the whole year and the state table disappears. The gap is $69,982 of federal income tax plus $1,350 of Additional Medicare Tax, about $71,300 in all, and roughly $57,000 more stays in the household than in the California version, from state income tax and SDI that were never owed. Whether the move actually ends California’s claim on a particular vest depends on where the work between grant and vest was done, the subject of the California-to-Texas guide.

The safe-harbor payment that avoids the penalty

Assume payroll withheld about $118,800 on the couple’s salaries, roughly the tax on those salaries alone, so total withholding for the year is $228,800 including the $110,000 on the vest, against total federal income tax of $298,751. Assume their 2025 tax was $120,000 and their 2025 adjusted gross income exceeded $150,000.

Hypothetical household, 26 U.S.C. §6654(d) safe harbors. Year 2 assumes a second $500,000 vest and, for illustration only, the same brackets and salaries as year 1.
Test	Year 1 (first large vest)	Year 2 (second large vest)
110% of prior-year tax	$132,000	$328,626
90% of current-year tax	$268,875	$268,875
Required annual payment (the lesser)	$132,000	$268,875
Withholding for the year	$228,800	$228,800
Result	Safe harbor met. No penalty; the $69,982 is due April 15 with the return.	Short by $40,075. Estimated payments of at least that amount, timed to the installment dates, avoid the penalty.

The first large vest year is often protected by the prior-year test, because last year’s tax was modest. The second is not: the prior year now includes the first vest, the 110% figure jumps, and 90% of the current year becomes the binding test. In year 2 the default computation would treat $67,219 as due each quarter against $57,200 of withholding deemed paid per quarter, so the penalty accrues from April even if the shares vested in December, unless Schedule AI annualizes the income to the quarter it arrived. In that year the household chooses between a $40,075 estimated payment in the vest quarter with Schedule AI, extra withholding on the remaining paychecks, or a sale at vest to fund either one.

The IPO-year trap and double-trigger RSUs

At a private company, RSUs are commonly granted with two vesting conditions: a service condition that accrues quarter by quarter, and a liquidity condition satisfied only when the company goes public or is sold. Cerebras’s prospectus describes units “subject to service-based and liquidity-based vesting conditions” whose liquidity condition was met by the effectiveness of the IPO registration statement (Cerebras Form 424(b)(4) prospectus, Prospectus Summary). Until both conditions are met no shares are transferred, so nothing is taxed (IRS Publication 5992, section G.3); when the second trigger fires, every unit whose service condition was already met settles at once, valued at the IPO-era price rather than at the 409A value or tender price that applied when it was granted. Several years of accrued units become one year’s wages, at a price that may be a multiple of what the household had been mentally valuing them at, and the household lands in the 37% bracket for that year even if it has never been there before.

Three features of that year deserve attention. First, supplemental wages from the employer may pass $1,000,000, in which case the excess is withheld at 37% and the gap on that excess closes; the shortfall is concentrated on the first $1,000,000, at up to 15 cents on the dollar. Second, the settled shares are usually still under the lockup, so the household owes tax on shares it cannot sell for months; sell-to-cover and net settlement are permitted under the common form of lockup agreement, but a further sale to fund the April balance is not, as our IPO lockup expiration guide explains, and a release date is not the same as an open trading window. Third, the prior-year safe harbor usually protects that first year, which makes it the moment to plan the second: the release year, when lockup sales and further vests stack on a prior-year tax that now includes the IPO settlement. A tender offer before the IPO, or an option exercise the same year, adds to the same year’s wages and can move the household into the mandatory 37% band sooner; an ISO exercise does not, but it carries its own AMT calculation.

The second decision: keep or sell after vest

Once the value is taxed as wages, holding the shares carries no tax advantage; the income has been recognized and the basis set. What remains is an investment decision about how much of the household’s net worth and income should depend on the company that already pays its salary, and the vest date is the one day that review costs nothing extra in tax. Shares held more than a year from vest become long-term, which matters for charitable gifts and for the capital-gains rates covered in planning after a large gain.

How we approach the withholding gap in a plan

We project the vest year before the first vest: the bracket the vested dollars will land in, the federal and state shortfall, the payroll-tax lines, and which safe harbor the household is relying on this year and next. The gap is then assigned a funding source, extra withholding, an estimated payment on a dated calendar or a sale at vest, and the plan administrator’s vest confirmations are filed against the eventual 1099-B. That work sits inside our equity compensation and concentrated stock practice and our tax planning process, alongside the household’s CPA, whose return is the one that counts. Executives with additional trading restrictions can start with our page for executives and equity compensation.

Questions worth answering before the vest

What is our taxable income before the vest, and which bracket will the vested dollars land in?
Does the plan use sell-to-cover, net settlement or cash, and does it allow a higher withholding election?
Will supplemental wages from this employer pass $1,000,000 this year?
Which safe harbor protects this year: 110% of last year’s tax, or 90% of this year’s? Which one will protect next year?
If we use estimated payments, will Schedule AI be needed to match the vest quarter?
Is the vest California-source in whole or in part, and is the 10.23% rate enough at our income?
Where is the vest confirmation that supports the Form 8949 basis adjustment when the shares are sold?
After the tax is settled, what share of our net worth will sit in the employer’s stock?

What this does not mean

Nothing here recommends selling, holding or buying any company’s shares, and the three levers are options, not instructions. For a household inside the 22% bracket the flat rate withholds about the right amount, and a household that meets the prior-year safe harbor can carry the balance to April without penalty and may reasonably choose to. The worked example uses stated assumptions and round numbers; a different income, filing status, deduction profile, state or second equity event changes every line. The federal figures are 2026 amounts from the IRS and the Internal Revenue Code, and the California figures are for 2025 returns. The calculation that governs is the one your CPA or tax counsel prepares from your own facts.

Frequently asked questions

What is the RSU withholding rate in 2026?

Federal payroll may withhold at an optional flat 22% on supplemental wages, which include RSU income, up to $1,000,000 of supplemental wages from one employer in the calendar year; the excess above $1,000,000 must be withheld at 37%. Social Security (6.2% to $184,500), Medicare (1.45%) and, above $200,000 of wages, the 0.9% Additional Medicare Tax also apply. California withholds 10.23% on stock-related supplemental wages, plus 1.3% SDI.

Why do I owe tax on my RSUs in April when tax was already withheld?

Because 22% was withheld and your marginal rate on the vested dollars was higher, up to 37% for 2026. The difference between the tax the vest created and the amount withheld is due with the return, and it can carry an underpayment penalty if your withholding and estimated payments did not reach the safe harbor for the year.

Can I ask payroll to withhold more than 22% on the vest?

Not under the flat-rate method. The IRS has stated that an employer using the optional flat rate cannot honor requests to raise or lower it. Some stock plans offer a higher withholding election of their own, and the aggregate method takes the W-4 into account, but the lever every employee controls is extra withholding on the regular paycheck through Form W-4 Step 4(c).

What is sell-to-cover?

The plan broker sells enough of the newly vested shares at or near the vest price to fund the withholding, remits the cash to the employer, and delivers the remaining shares. It generates a Form 1099-B for the shares sold, often with a basis of zero or none shown, which has to be corrected on Form 8949 so the wages already on the W-2 are not taxed again. Net settlement withholds shares instead, with no sale and no 1099-B at vest.

What are the safe harbors for estimated tax?

No penalty applies if withholding and timely estimated payments reach the lesser of 90% of the current year’s tax or 100% of the prior year’s tax, 110% if prior-year adjusted gross income exceeded $150,000, or if the balance due after withholding is under $1,000. The prior-year test usually protects the first large vest year; the second large year is the one to plan, because the prior-year figure then includes the first vest.

Are double-trigger RSUs taxed at grant, at vest or at the IPO?

When both conditions are met and the shares are delivered, which for a double-trigger award is the liquidity event. The value that day, not the grant-date value, is wages, and several years of service-vested units can settle in one year at the IPO-era price. The shares are usually still under the lockup when the tax is due.

Sources and further reading

Next steps

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