RSU Tax Withholding: Why the Flat 22% Rate Often Leaves You Owing

Most employers withhold tax on vested RSUs at a flat supplemental-wage rate, commonly 22%, not your actual marginal tax rate. If your income puts you above the 22% bracket, that flat rate falls short every time a batch vests, and the gap shows up as a balance due when you file. It isn't a payroll mistake — it's how the default method works.

What Is RSU Withholding and Why Does the Flat Rate Fall Short?

RSU withholding is the tax your employer takes from a vested grant before delivering the remaining shares, the same way it withholds from a paycheck. The difference is the rate: regular wages use your W-4 and the tax tables, but a vest is typically treated as a separate, one-time supplemental payment.

RSU Vesting Is a Taxable Event, Not a Sale

The moment a batch of RSUs vests, the full market value counts as ordinary income, whether or not you sell a share. This is the same mechanic covered in our guide to RSU vesting: vesting, not selling, creates the tax bill. Selling later adds a second, separate capital-gains event on whatever the stock does afterward, which is why RSUs aren't taxed twice on the same dollar even though it can feel that way.

Employers Use One of Two Withholding Methods

The IRS gives employers a choice for supplemental wages like a vest: the aggregate method, which folds the vest into your regular paycheck and withholds using the standard W-4 tables, or the flat percentage method, which withholds a fixed rate with no reference to your bracket at all. Payroll systems almost universally default to the flat method for equity, since it's simpler to automate across thousands of employees, per payroll-compliance explainers from BambooHR and Patriot Software. You don't get to choose which method your employer uses.

How the 22%/37% Supplemental Wage Rule Actually Works

The federal flat rate for supplemental wages, including RSU vests, bonuses, and commissions, is 22% on supplemental income up to $1 million in a calendar year. Above that cumulative mark, the rate jumps to a mandatory 37%, regardless of what's on your W-4.

The Flat 22% Rate on the First $1 Million

For the overwhelming majority of employees, every vest falls well under the $1 million threshold, so 22% is the rate that applies, full stop. It doesn't matter whether you made $60,000 or $600,000 last year; the system withholds the same flat percentage on the vest.

The Mandatory 37% Rate Above $1 Million

Once your supplemental wages for the year cross $1 million, cumulative across bonuses and vests, not a single payout, the excess is withheld at 37%, the top marginal rate, regardless of your W-4. This affects only a small slice of equity-heavy employees, typically executives or very large grants vesting at once. Patriot Software and BambooHR both confirm the $1 million line is cumulative for the year, not per payment.

Why Your Marginal Tax Rate Creates the Gap

The 22% flat rate only covers your real liability if your total taxable income, salary plus vests plus everything else, keeps you in the 22% federal bracket or below. Once your income pushes into the 24%, 32%, 35%, or 37% bracket, every vest is underwithheld by the difference.

When 22% Withholding Is Actually Enough

If you're early in your career or your base salary plus vest income stays modest, the 22% flat rate can land close to what you actually owe, and some employees see no shortfall at all. The gap is a bracket problem, not a universal RSU problem; see Plancorp's discussion of RSU underwithholding for how this plays out across income levels.

When It Isn't: Higher Brackets, State Tax, and Payroll Tax

Most people with meaningful RSU grants work in tech, finance, or other fields where total comp routinely pushes into the 24% bracket or higher, exactly where the flat rate stops covering the bill. On top of the federal gap, the vest is also subject to state income tax (often withheld at its own, separately too-low flat rate) and, up to the annual wage base, Social Security and Medicare. Mezzi's analysis of RSU withholding describes an employee in the 35% federal bracket whose vest was withheld at only 22%, a 13-point gap on the full value of each vest.

Sell-to-Cover and Net Settlement Have the Same Blind Spot

Whether your plan uses sell-to-cover, where your broker sells a slice of the newly vested shares to raise withholding cash, or net settlement, where the company simply holds back shares instead, both methods calculate the same flat percentage. Neither checks your bracket, and switching between them changes nothing about the shortfall. Our comparison of sell-to-cover and net settlement covers the mechanical differences, but on withholding adequacy, they're identical.

Neither Method Checks Your Actual Bracket

Both approaches solve a liquidity problem, raising cash or withholding shares so you're not writing a check the day your RSUs vest, not an accuracy problem. The rate applied is the same flat 22% (or 37% past the threshold) either way.

Cost Basis Confusion Compounds the Problem

A separate trap shows up on Form 1099-B at sale: the reported cost basis sometimes misses the income already taxed at vesting, making it look like you're taxed twice. That's a reporting issue, not a second tax, and worth untangling separately from the withholding shortfall here.

How to Check and Close the Gap Before Tax Season

Close the gap by estimating your real marginal rate before a vest happens, then making up the difference through a W-4 adjustment or an estimated payment, rather than discovering the shortfall when you file.

Estimate the Shortfall Before Your Next Vest

Add your expected full-year income, salary, bonus, and upcoming vest value, and find where that total lands on the current federal bracket table. If the bracket is above 22%, multiply the gap in percentage points by the vest's value to estimate what's still unpaid on that batch.

Adjust Your W-4 or Make an Estimated Payment

Increasing withholding on your regular paycheck through a new W-4 is one fix, since the IRS treats withholding as paid evenly across the year, which can retroactively cover an earlier vest's shortfall. The alternative is a quarterly estimated payment covering the gap directly. Which one fits depends on your full financial picture, so a tax professional familiar with equity compensation is worth the cost here, not a generic rule to apply blind.

Watch for the Underpayment Penalty

The IRS can charge an underpayment penalty if you fall too far behind on taxes owed throughout the year, not just at the April deadline. Equity-heavy employees who skip adjusting for RSU underwithholding get caught by this often, since one large vest late in the year can leave no time to self-correct through paycheck withholding.

Figuring out what equity is actually worth after taxes is hard without tracking withholding against your bracket by hand. Offer XRay breaks an offer's equity section down alongside base pay and bonus, so you see the real after-tax picture before choosing between offers, not after your first vest surprises you.

Frequently Asked Questions

Why did my company only withhold 22% on my RSUs?

Because the IRS permits employers to withhold supplemental wages, including RSU vests, at a flat 22% rate on amounts up to $1 million per year instead of using your actual bracket, and most payroll systems default to this flat method.

Is 22% withholding on RSUs always too low?

No. If your total taxable income keeps you in the 22% federal bracket or below, the flat rate can roughly match what you owe. The shortfall appears once your income pushes into a higher bracket, common for employees with meaningful equity on top of salary.

What happens if my RSU withholding isn't enough?

You'll owe the difference when you file, and if the shortfall is large enough across the year, you may also owe an underpayment penalty. Adjusting your W-4 or making an estimated payment before the shortfall accumulates is the usual fix.

Does sell-to-cover withhold more accurately than net settlement?

No. Both apply the same flat supplemental rate; they only differ in whether shares are sold on the open market or held back by the company. Neither checks your actual marginal rate.

Does state tax withholding have the same problem?

Often, yes. Many states apply their own flat supplemental rate to RSU vests, which can also fall short of your real state liability, on top of any federal gap. Check your specific state's rate rather than assuming it matches your bracket.

Key Takeaways

• RSU vests are typically withheld at a flat 22% federal rate (37% on supplemental wages above $1 million in a year), not your actual marginal tax rate.
• The flat rate only covers your real liability if your total income keeps you at or below the 22% bracket; higher earners are structurally underwithheld on every vest.
• Sell-to-cover and net settlement apply the same flat rate, so neither method fixes the shortfall on its own.
• Estimate the gap before a large vest and close it through a W-4 adjustment or an estimated payment to avoid both a surprise balance and a potential underpayment penalty.

RSU withholding looks automatic, which is why the shortfall catches people off guard. The fix isn't complicated once you know the rate withheld isn't the rate you actually owe. If you're comparing an offer with a large equity component, Offer XRay and our pricing page can help you check the real numbers before you sign, not after your first vest.