Why Your 22% RSU Withholding Is Almost Certainly Not Enough

Four times a year, your company's payroll system withholds 22 percent federal tax from the restricted stock unit (RSU) shares vesting into your account. The notification arrives alongside your new equity grant, and life moves forward. But that 22 percent withholding is almost certainly not enough - a gap that catches many tech professionals and high-income earners with an unwelcome tax bill in April. Understanding why this gap exists, how large it is for your specific income level, and how to fix it before year end is critical to avoiding a six-figure surprise.

How the 22% Withholding Works

The IRS Publication 15-T (Supplemental Wage Payments) provides the withholding rule for supplemental income - income paid outside the regular payroll cycle, including RSU vest events. For supplemental wages up to $1 million in a single calendar year, the employer withholds at a flat 22 percent federal rate.

For example, you work at a tech company earning $200,000 in base salary plus an annual RSU grant of $100,000. When that grant vests (typically quarterly or annually), your employer withholds 22 percent - $22,000 - and the remaining $78,000 is deposited into your account. From the IRS perspective, federal withholding of $22,000 on $100,000 seems reasonable. But it is not.

The 22 percent flat rate was designed as an approximation of average withholding across the population. For someone earning $50,000 annually, 22 percent might be roughly correct. For someone earning $300,000 annually, it is dramatically insufficient.

The Marginal Rate Problem

The core issue is the difference between average and marginal tax rates. Average tax rate is your total tax liability divided by total income. Marginal rate is the tax rate on your next dollar of income. When you earn substantial base salary plus RSU bonuses, your RSU income is taxed at your marginal rate, not some low average rate.

In 2026, the federal income tax brackets are:

• 32% on income from $191,950 to $243,725 (single)
• 35% on income from $243,725 to $609,350 (single)
• 37% on income over $609,350 (single)
• 32% on income from $383,900 to $487,450 (married filing jointly)
• 35% on income from $487,450 to $731,200 (married filing jointly)
• 37% on income over $731,200 (married filing jointly)

If you are single, earning $250,000 annually from base salary, and you receive a $100,000 RSU grant, every dollar of that $100,000 is taxed at your marginal federal rate: 32 percent. The employer withholds only 22 percent, leaving a federal shortfall of 10 percentage points on the entire $100,000 grant - roughly $10,000 underpaid in federal tax.

If your income was higher - say $350,000 - your marginal federal rate would be 35 percent. A $100,000 RSU grant withheld at 22 percent now carries a federal shortfall of $13,000.

The Complete Picture: Federal Plus State Plus Medicare

The 22 percent withholding typically applies only to federal income tax. But high earners also owe state income tax and Medicare-related taxes. For a single earner in California or New York, state income tax can add 9 to 13 percent. In Arizona, 2.5 percent. Medicare taxes add 1.45 percent employee withholding, plus a 0.9 percent additional Medicare tax on wages exceeding $200,000 (single) or $250,000 (married).

A single professional earning $250,000 with a $100,000 RSU grant actually owes:

• Federal income tax: 32% = $32,000
• Arizona state income tax: 2.5% = $2,500 (or California 9.3% = $9,300)
• Medicare tax: 2.35% = $2,350
• Total tax owed: 36.85% in Arizona, 43.65% in California

The employer withholds 22 percent - $22,000. The shortfall is either $14,850 (Arizona) or $21,650 (California) for a single $100,000 RSU grant. For an employee receiving four quarterly grants of $25,000 each, the annual shortfall can exceed $30,000 to $40,000.

Real Example: Engineer Earning $250K with $80K RSU Vesting

Let us work through a concrete scenario to illustrate the gap.

Scenario: A 35-year-old software engineer in Arizona earning $250,000 base salary plus $80,000 in annual RSU vesting.

What the employer withholds (quarterly vesting):

• Four quarterly RSU vests of $20,000 each
• 22% federal withholding per vest: $4,400
• Annual federal withholding: $17,600
• Regular payroll withholds federal from $250K base

What the engineer actually owes on the $80K RSU:

• Federal income tax at 32% marginal rate: $25,600
• Arizona state income tax at 2.5%: $2,000
• Medicare tax (2.35% on all wages, 0.9% additional on wages over $200K, totaling 2.35%): $1,880
• Total tax owed on RSU: $29,480

The Shortfall: $29,480 owed minus $17,600 withheld = $11,880 underpaid on annual RSU vesting.

This engineer will owe approximately $12,000 when filing their 2026 tax return in April 2027 - unless they proactively fix the withholding before year end. You can model your own withholding gap against your full salary picture in a few seconds.

Solution 1: Adjust Your W-4 to Increase Withholding

The simplest fix is to increase withholding on your regular payroll. The IRS Form W-4 allows you to claim a dollar amount in "extra withholding per paycheck" on Line 4(c). Each paycheck can direct additional withholding to your federal tax account.

In the engineer example above, the annual shortfall is $11,880. Divide this by the number of paychecks per year (26 for biweekly) to get the per-paycheck withholding increase: $11,880 / 26 = approximately $457 per paycheck.

The engineer would request an additional $457 in federal withholding on each biweekly paycheck. This extra withholding accumulates throughout the year and covers the underpayment on the quarterly RSU vests. By December 31, the IRS holds sufficient funds, and April brings a refund or a minimal balance due - not an unexpected bill.

How to do this: Download Form W-4 from the IRS website (www.irs.gov), complete it with your personal information, specify the additional withholding on Line 4(c), and submit it to your payroll department. You can do this any time and it takes effect within one or two pay cycles.

Solution 2: Quarterly Estimated Tax Payments (Form 1040-ES)

An alternative is to make quarterly estimated tax payments directly to the IRS using Form 1040-ES. Estimated payments are typically required if you expect to owe more than $1,000 in tax when filing your return.

For the engineer above, the annual shortfall is $11,880. Divide by four quarters = $2,970 per quarter. On April 15, June 15, September 15, and January 15 of the following year, the engineer would send a check (or pay electronically via the IRS EFTPS system or at www.irs.gov) for $2,970. This ensures the IRS holds the full tax amount, and April filing brings a refund or break-even.

The advantage of estimated payments is precision: you pay exactly what you owe, in the quarters when the income arrives. The disadvantage is the need to remember deadlines and initiate payments yourself. Many professionals forget the January 15 payment and miss the deadline, triggering IRS penalties.

For most people, adjusting the W-4 is simpler than managing quarterly payments.

Solution 3: Prior Year Safe Harbor

If your adjusted gross income (AGI) exceeds $150,000, you can use the prior year safe harbor for estimated taxes. This rule states that if you pay 110 percent of your prior year tax liability in quarterly estimated payments (or withholding), you avoid IRS penalties even if your current year tax is significantly higher.

Example: You filed taxes in April 2026 and paid $60,000 in federal tax for 2025. For 2026, you calculate that you owe $80,000 (due to the $80,000 RSU grant). Instead of calculating and paying 110 percent of what you owe ($88,000), you can simply pay 110 percent of your 2025 liability: $60,000 * 1.10 = $66,000. As long as you have paid or withheld at least $66,000 by December 31, 2026 (or by the quarterly payment deadline), the IRS will not assess an underpayment penalty when you file your 2026 return in April 2027 - even though you will owe an additional $14,000 at filing.

The prior year safe harbor buys you time. It does not eliminate the tax owed, but it does avoid penalties. This is useful if adjusting the W-4 is too late in the year or if the exact amount owed is difficult to predict.

When to Act: Don't Wait Until April

Many RSU recipients discover the withholding gap in April when preparing their tax return. By then, it is too late to adjust anything for the current year. The fix must happen before December 31.

Here is the timeline:

• January to October: Adjust your W-4 to increase withholding on your regular paycheck. This is the best time and gives the withholding multiple pay cycles to accumulate.
• September to December: If W-4 adjustment is missed, initiate quarterly estimated tax payments immediately. The January 15 payment is the last quarterly deadline for the calendar year, so you need to act by September to make meaningful progress.
• Late December: As a last resort, if neither W-4 nor estimated payments are made, rely on the prior year safe harbor to avoid penalties (though you will still owe the tax in April).

The best approach is to calculate your RSU income and marginal tax rate early in the year - ideally when you receive your grant schedule - and adjust your W-4 or budget for quarterly payments immediately.

Married Couples and Dual RSU Income

If you are married and both spouses receive RSU income, the withholding gap compounds. The 2026 federal bracket for 32 percent starts at $383,900 of combined income for married couples filing jointly. If both spouses earn $150,000 base plus $50,000 RSUs, your combined income is $400,000 - placing all income in the 32 percent to 35 percent bracket range.

Each spouse's $50,000 RSU vest is withheld at 22 percent ($11,000) but actually owes 35 percent federal plus state plus Medicare - potentially 40 percent or more depending on state. The combined household withholding gap can easily exceed $30,000 to $40,000 annually.

Married couples with dual RSU income should absolutely adjust their W-4 or make estimated payments. The gap is too large to ignore.

Why Companies Do Not Increase the Withholding Rate

You might wonder why employers do not simply withhold at a higher rate - say, 35 percent instead of 22 percent - to protect employees. The answer lies in IRS guidance. IRS Publication 15-T explicitly prescribes the 22 percent rate for supplemental wages under $1 million. Employers are not permitted to withhold at a higher rate on supplemental income unless the employee specifically requests it.

Some companies do allow employees to request supplemental withholding rates higher than 22 percent on RSU vesting. If your company offers this, it is worth using. But most do not mention this option, and employees must proactively ask.

The burden falls on you to recognize the gap and adjust it yourself - either through W-4 modifications or estimated payments.