You work hard, and your company rewards you with Restricted Stock Units (RSUs).
On vesting day, the company automatically sells some of your shares to cover the taxes (Share Withholding), and deposits the remaining shares into your brokerage account.
You think: "Great! Taxes are paid. This money is all mine."
Wrong.
Come tax season, you are shocked to see a bill for $5,000 or $10,000 from the IRS.
The culprit? The Supplemental Wage Withholding Rate.
Disclaimer: This article expresses financial opinions based on 2026 tax laws. Tax codes are complex. Consult a CPA for your specific situation.
Received RSUs from Your Company? Beware of the 22% Tax Trap.
1. The Problem: The "Flat 22%" Rule
The IRS classifies RSUs as "Supplemental Wages" (like bonuses).
For amounts under $1 million year-to-date, federal law requires employers to withhold tax at a flat rate of 22%.
⚠️ The Math of the Trap
- Your RSU Value: $50,000 vests today.
- Company Withholds: 22% ($11,000).
- Your ACTUAL Tax Bracket: If you earn a high salary (tech/finance), your marginal tax rate is likely 32%, 35%, or 37% in 2026.
The Gap:
You owe 35% but only paid 22%.
Shortfall: 13% of $50,000 = $6,500 owed to the IRS.
2. It Gets Worse: State Taxes
The 22% is just federal.
If you live in a high-tax state, the withholding often falls short of the top brackets there, too.
- California: Employers typically withhold a flat 10.23% for stock compensation. However, top earners can face a marginal rate of up to 14.4% (including the mental health tax).
- New York: Supplemental withholding rates often trail the top city/state combined rates (which can exceed 12%).
This creates a "Double Deficit" on both federal and state fronts.
3. Vesting vs. Selling (Two Tax Events)
Many employees confuse the vesting tax with the selling tax.
There are two distinct timelines:
A. On Vesting Day (Ordinary Income)
The total value of the shares is taxed as Regular Income (Salary).
This is where the 22% withholding issue happens.
The share price on this day becomes your Cost Basis.
B. On Selling Day (Capital Gains)
If you keep the shares and sell them later:
- Price Goes Up: You pay Capital Gains Tax on the profit (Sale Price - Vesting Price).
- Price Goes Down: You have a Capital Loss (which can offset other taxes).
4. How to Avoid the Penalty
If you owe more than $1,000 at tax time, you might also be hit with an "Underpayment Penalty."
Here is how to fix it immediately:
- Pay Quarterly Estimated Taxes: Make a direct payment to the IRS (Form 1040-ES) in the quarter your RSUs vest.
*Pro Tip: High earners (AGI >$150k) must pay 110% of the prior year's tax to qualify for the Safe Harbor rule. - Adjust Your W-4: Ask your payroll department to withhold "Extra Withholding" from your regular paycheck to cover the RSU shortfall.
- Sell Immediately: Some advisors suggest selling all RSUs upon vesting to pay the tax bill and diversify your portfolio.
5. The $1 Million Exception
If your year-to-date supplemental wages (RSUs + Bonuses) exceed $1 million, the mandatory withholding rate jumps to 37%.
In this case, you are usually safe (or might even get a refund). But for most professionals earning between $150k and $900k, the 22% trap is real.
Don't Spend It All
RSUs are a fantastic wealth-building tool.
But treat them like pre-tax money.
Before you buy that new car with your RSU money, set aside an extra 10-15% in a high-yield savings account for Uncle Sam. He will come collecting in April.
Helpful Resources:
IRS Pub 15: Supplemental Wages Tax Rates
Charles Schwab: How Are RSUs Taxed?
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