How RSUs Are Taxed at Vesting: Why 22% Withholding Isn't Enough

Restricted stock units are taxed as ordinary income on the date they vest, not when you sell them. The IRS treats the full fair market value of the shares on the vest date as W-2 wages, and your employer withholds federal tax at a flat 22% supplemental rate. Anyone in the 32% bracket or higher gets under-withheld at that flat rate, which is why so many equity-comp employees get an unpleasant surprise every April.

How RSU Vesting Triggers a Taxable Event

A vesting schedule is the timeline that converts a restricted stock unit grant into shares you own, and the vest date is what the IRS cares about, not the grant date. On the day a tranche vests, the number of shares released multiplied by the stock's fair market value becomes ordinary income, added to your W-2 alongside your salary and bonus. There is no favorable long-term capital gains rate at this stage, no matter how long the grant sat on your vesting schedule before this moment.

Stock options work differently. An option holder chooses when to exercise and can time that decision around income and tax planning. An RSU holder has no such choice. Vesting happens automatically according to the schedule, often with a one-year cliff followed by monthly or quarterly releases, and the tax bill arrives on that same automatic schedule whether or not you want the income that year.

Once shares vest, your cost basis resets to the fair market value on the vest date. If you hold the shares afterward and the price moves, only that subsequent gain or loss gets capital gains treatment. The value at vesting itself is compensation income, full stop, and it shows up on your pay stub the same way a cash bonus would.

Why the 22% Withholding Rate Falls Short

The default federal withholding rate on RSU income is a flat 22%, and that flat rate is where most of the trouble starts. The IRS classifies RSU vesting income as a form of supplemental wage, the same category as bonuses and commissions, and employers are permitted to withhold supplemental wages at a flat statutory rate rather than running the income through your actual W-4 elections. For most employees that rate is 22%. Above $1,000,000 of supplemental wages in a calendar year, the rate jumps to 37%, the top marginal bracket, but everything below that threshold gets the flat 22% regardless of your real tax situation.

The problem is that 22% only matches your actual liability if your total taxable income lands you in the 22% bracket. Plenty of people receiving meaningful RSU grants are well above that. Someone whose base salary already pushes them into the 32% bracket, and whose RSU vest adds another six figures of income on top, owes tax on that vested stock at 32%, sometimes 35%, not 22%. The withholding covers roughly two-thirds of what's due, and the shortfall doesn't show up until the following spring. A flat 22% withholding on a six-figure vest works like a credit card minimum payment: it satisfies the statutory floor, not the actual balance owed, so the difference sits there until the bill arrives in April.

Consider Priya, a staff engineer at Vantia Robotics, a pre-IPO climate-tech company that went public last year. Her base salary is $190,000, already inside the 32% federal bracket on its own. In March, 3,000 shares vest at a fair market value of $60 per share, adding $180,000 of ordinary income for the year. Her employer withholds 22%, or $39,600, and deposits the rest as shares or cash per her election.

This is an estimate only. Consult a qualified tax or financial advisor for personalized advice.

Because that $180,000 stacks on top of her salary, nearly all of it lands in the 32% bracket, so her real federal liability on the vest is closer to $57,600. The gap between what was withheld and what's owed comes to roughly $18,000, a bill she won't feel until she files her return the following spring, by which point the cash may already be spent or the stock may have dropped in value.

This gap compounds for employees with multiple vesting events across the year, or for anyone whose company has gone through a concentration risk-heavy IPO where several years of accumulated grants vest in a compressed window. Each individual vest gets withheld at 22%, but the cumulative income for the year can push the marginal rate well past that on the last dollars earned.

Sell-to-Cover vs Cash: Choosing How You Pay

Sell-to-cover is the default mechanism most plans use to satisfy withholding, automatically selling enough vested shares to cover the tax obligation and depositing the rest into your account. It is simple and requires no action on your part, which is exactly why it's the default. But simple does not mean sufficient. Sell-to-cover only sells enough shares to cover the 22% (or 37% above the million-dollar threshold) that your employer is required to withhold. It does not know your salary, your spouse's income, your other RSU grants, or anything else that determines your real marginal rate, so it cannot solve the underwithholding problem described above.

Paying with cash instead of selling additional shares is worth considering if you want to keep a larger position and believe in the company's long-term prospects, but it does nothing to close the withholding gap on its own; it only changes how much stock you retain versus liquidate at vest. The tax owed is the same regardless of which asset pays it.

For a deeper look at how concentrated equity positions build up over repeated vests and what to do about it, see our piece on managing concentration risk from a single stock. If your company hasn't gone public yet, the mechanics above assume time-based vesting alone. Private companies commonly layer on a liquidity condition as well, which our guide to double-trigger RSUs covers in detail.

Fixing the Gap: Estimated Taxes and Withholding Adjustments

The most reliable fix for RSU underwithholding is paying quarterly estimated taxes rather than relying on paycheck withholding to catch up. Once you can estimate your full-year income, including salary, bonus, and expected RSU vests, you can calculate the actual marginal rate that income falls into and send the IRS the difference directly through Form 1040-ES, rather than waiting for an April surprise. This also protects against the IRS underpayment penalty, which applies when withholding and estimated payments together fall short of either 90% of the current year's tax or 100% (110% for higher earners) of the prior year's tax.

A second lever is adjusting your W-4 withholding on your regular salary. Because your employer cannot change the flat rate applied to RSU supplemental income, you can instead ask your employer to withhold additional flat-dollar amounts from your regular paychecks specifically to offset the RSU shortfall. This spreads the extra payment across the year instead of one large estimated tax check, and some employees find it easier to budget around.

A third option, available at some employers, is electing additional voluntary withholding above the statutory minimum at the time of vest, though not every plan administrator supports this. Ask your equity plan administrator or HR benefits team whether your plan allows an elective top-up rate.

The goal is not to avoid the tax. It's to know the real number well before the filing deadline, so the vest date is a planning event rather than a financial shock. Employees who model out their expected vests against their full tax picture each January rarely get caught by the 22% gap; the ones who assume the withholding line on their paycheck is the final answer are the ones who do.

Common questions

For the full picture of how restricted stock units fit into a broader equity compensation strategy, including grant structures, vesting variations, and planning around concentrated positions, visit our RSU pillar guide.

Last updated: July 2026. Tax figures reflect current federal law as of publication and are subject to change. This is an estimate only. Consult a qualified tax or financial advisor for personalized advice.