Why 22% RSU Withholding Leaves You Owing in April, and the Two Fixes That Work Before Then

What actually happens on the vest date

When a tranche of restricted stock units vests, the fair market value of the shares that day is ordinary wage income. It appears in Box 1 of your W-2 alongside salary, it is subject to Social Security and Medicare tax like salary, and your employer must withhold on it like salary. The difference is in how the withholding is computed. RSU income is a supplemental wage payment, and IRS Publication 15 for 2026 gives employers two ways to withhold on supplemental wages paid separately from regular pay. They can use the aggregate method, adding the vest to your regular wages for the period and running the normal tables, or they can withhold a flat 22 percent. Once supplemental wages paid to you in the calendar year exceed $1 million, the flat rate on the excess becomes a mandatory 37 percent. Publication 15 notes that these rates continue because Public Law 119-21 made the Tax Cuts and Jobs Act individual rates permanent.

Nearly every equity plan uses the flat method, for a practical reason: it does not require payroll to know anything about your spouse's income, your deductions, or your other vests. The employer typically sells or withholds enough shares to cover the 22 percent federal tax, the state supplemental rate, and the 7.65 percent of Social Security and Medicare tax, then delivers the remaining shares to your brokerage account. That is the "sell to cover" line on your vest confirmation. Because shares are whole units, the amount withheld is usually a little more than the exact percentages, and the small excess is refunded in cash or shows up as extra withholding.

Two payroll taxes behave differently. The 0.9 percent Additional Medicare Tax is withheld automatically once your wages from that employer pass $200,000 in the year, regardless of your filing status, per IRS Topic 560, so a vest rarely creates a gap there for a single filer, though it can for a married couple whose combined wages cross $250,000 while neither employer withheld. The 3.8 percent Net Investment Income Tax under Topic 559 does not apply to wages at all, so the vest itself never triggers it, although a large vest can push your modified adjusted gross income over the $200,000 or $250,000 threshold and expose your dividends and gains to it.

The gap, computed with 2026 brackets

Most explanations of the RSU withholding problem say "your marginal rate minus 22 percent." That is an upper bound, not the answer. A vest is stacked on top of your salary, and part of it may be taxed in a lower bracket before the rest reaches your top bracket. The table below computes the actual 2026 federal income tax attributable to the vest, which is the tax on salary plus vest minus the tax on salary alone, using the standard deduction and the rate schedules in IRS release IR-2025-103. Single filers use a $16,100 standard deduction and brackets that step to 24 percent above $105,700, 32 percent above $201,775, 35 percent above $256,225, and 37 percent above $640,600 of taxable income. Joint filers use $32,200 and brackets stepping to 24 percent above $211,400, 32 percent above $403,550, 35 percent above $512,450, and 37 percent above $768,700.

Filing status	Salary	RSU vest	Federal tax on the vest	Effective rate	Withheld at 22% / 37%	Shortfall
Single	$120,000	$40,000	$9,564	23.9%	$8,800	$764
Single	$180,000	$120,000	$36,200	30.2%	$26,400	$9,800
Single	$250,000	$150,000	$51,830	34.6%	$33,000	$18,830
Single	$350,000	$250,000	$87,500	35.0%	$55,000	$32,500
Single	$500,000	$600,000	$218,866	36.5%	$132,000	$86,866
Single	$600,000	$1,200,000	$442,866	36.9%	$294,000	$148,866
Married filing jointly	$250,000	$150,000	$36,000	24.0%	$33,000	$3,000
Married filing jointly	$400,000	$400,000	$132,800	33.2%	$88,000	$44,800

Federal income tax only, standard deduction, no other income or credits, no state tax. The last single row shows the $1 million rule: the first $1,000,000 of the vest is withheld at 22 percent and the remaining $200,000 at 37 percent, which is why the shortfall grows more slowly than the vest does above that line.

Three things stand out. First, at moderate incomes the gap is small: a $120,000 earner with a $40,000 vest is short by under $800, which stays under the $1,000 penalty threshold discussed below. Second, the gap grows quickly once salary alone is in the 32 or 35 percent bracket, because then the entire vest is taxed at the top rate and the shortfall really is 10 to 15 points of the vest. Third, the widely repeated single-filer example of a $180,000 salary and a $120,000 vest produces a federal gap of about $9,800, not the $15,600 you get from multiplying the vest by 13 points, because the first $21,775 of that vest is still in the 24 percent bracket and the next $54,450 in the 32 percent bracket. The marginal shortcut overstates the problem by about 60 percent in that case. It is a fine planning number, since it errs toward paying enough, but it is not what you will owe.

When a shortfall becomes a penalty

Owing money in April is not itself penalized. The underpayment penalty under Section 6654 applies when you did not pay enough during the year, and IRS Topic 306 sets out the safe harbors. You avoid the penalty if you owe less than $1,000 after subtracting withholding and refundable credits, or if your withholding and estimated payments were at least 90 percent of this year's tax or 100 percent of last year's tax, whichever is smaller. The Form 2210 instructions add the rule that matters for most RSU recipients: if your prior-year adjusted gross income was more than $150,000, or $75,000 if married filing separately, the prior-year test becomes 110 percent.

The penalty is not a flat percentage of the shortfall. It is interest, computed separately on each of the four required installments from its due date until the date it is paid, at the federal short-term rate plus three points. The IRS quarterly rate table shows 7 percent for the first quarter of 2026, 6 percent for the second, and 7 percent for the third and fourth. Take the $15,600 shortfall from the marginal-rate example above and assume it is spread evenly across the four 2026 installments and paid with the return on April 15, 2027. The four installments are short by $3,900 each and are outstanding for roughly 365, 304, 212, and 90 days. At about 7 percent, the penalty comes to roughly $726. That is real money, but it is closer to a late-payment interest charge than to the "fines" some articles warn about, and it is what the safe-harbor rules exist to prevent.

The timing rule that decides whether your fix counts

This is the part most guides skip, and it changes which fix you should use. The Form 2210 instructions state that withheld federal income tax is treated as paid in four equal amounts on the four installment due dates unless you can show otherwise. Estimated payments, by contrast, count on the date you actually pay them. The consequence is that extra withholding in November is treated as if a quarter of it had been paid in April, June, and September, retroactively curing earlier installments. An estimated payment made in November cures only the September and January installments. Withholding is the more forgiving instrument, and it is also the one an employee can turn on with a single form.

The instructions also describe Schedule AI, the annualized income installment method, which lets a taxpayer whose income arrived unevenly compute each installment on the income actually received through that period. If your only large vest happens in December, Schedule AI can show that your first three installments were not underpaid at all. Rerunning the $15,600 example with all of the extra income in the fourth quarter, only the January 15 installment is short, and the penalty at 7 percent for 90 days falls to about $269. The form is tedious, and tax software handles it, but knowing it exists means a late-year vest is not the emergency it looks like.

Fix one: extra withholding on Form W-4, line 4(c)

Form W-4 has a line, 4(c), for an additional dollar amount to withhold from each paycheck. It applies to your regular salary, not to the vest, which is exactly why it works: it runs through the payroll you already have. Estimate your shortfall for the year using the table above or the calculator, divide by the number of paychecks left, and enter that figure. A $15,600 shortfall discovered in mid-year with 16 biweekly paychecks remaining is $975 per paycheck. Because withholding is deemed paid evenly across the year, catching up this way in the second half of the year still cures the first-half installments. Remember to reset line 4(c) in January, or the extra withholding continues into a year that may not need it.

If your vests are predictable, the cleaner version is to set line 4(c) at the start of the year to cover the expected gap on the whole year's vesting schedule. The trade-off is cash flow: you are prepaying tax on shares you may not sell. Some people prefer to hold the shares and pay the tax in April with cash from a partial sale. That is a legitimate choice as long as the safe harbor is met some other way, for instance through the 110 percent prior-year test in a year when income jumped.

Fix two: estimated payments on Form 1040-ES

Estimated payments are the right tool when a vest is large relative to your salary, when you are between jobs, or when the vest lands late in the year and you would rather pay once than adjust payroll. The 2026 installments fall on April 15, June 15, and September 15, 2026, and January 15, 2027. A payment made through IRS Direct Pay or EFTPS on or before the due date covers that installment. Because estimated payments count when paid rather than being spread, the discipline is to pay in the quarter the vest happens, or to use Schedule AI to show that later installments carried the income. Combining the two fixes is common: a standing line 4(c) amount for the routine quarterly vests and a one-time estimated payment for an unusually large one.

Fix three: ask payroll, with realistic expectations

Under Publication 15, the employer may withhold on supplemental wages using the aggregate method instead of the flat rate, which would come closer to your true rate on the vest. Employees also sometimes see an option in their equity portal to elect a higher withholding percentage at vest. Legally that is additional withholding you have requested, not a change in the statutory flat rate, and whether it is available depends entirely on the employer's plan administration. Many payroll systems only support the flat 22 percent on stock compensation. It costs nothing to ask, but do not plan around it until it is confirmed in writing, and use line 4(c) as the default.

The state layer

States that tax wages have their own supplemental withholding rates, and the same gap can appear there. California is the clearest example because it publishes two flat rates in EDD information sheet DE 231PS: 10.23 percent for stock options and bonuses, and 6.6 percent for other supplemental wages. RSU vests are withheld at the 10.23 percent rate. California's top marginal rates for high earners exceed that figure, so a large vest in California produces a state shortfall on top of the federal one, and California has its own estimated-tax rules and penalty. Other states use a single supplemental rate that may sit above or below your actual marginal state rate. Check your state's rate against your bracket the same way, and note that the RSU calculator on this site uses a marginal state rate you select rather than the supplemental withholding rate, so treat its state figure as the tax due, not the amount withheld.

The second trap: cost basis when you sell the shares

The vest sets your cost basis in the shares at the fair market value that day, the same amount that went into your W-2. When you later sell, only the change from that basis is capital gain or loss. The problem is what the broker reports. The Form 8949 instructions state that for compensatory equity acquired after 2013, the basis reported to you on Form 1099-B will not reflect the amount you included in income, and that you should increase your basis by that amount. In practice the 1099-B often shows a basis of zero or a small figure. If you accept it, you pay capital gains tax on money that was already taxed as wages. The fix is to enter the corrected basis on Form 8949 with adjustment code B, following the column instructions for whether the broker reported basis to the IRS. Keep the vest confirmations; they are the evidence for the corrected basis. The tax-loss harvesting calculator on this site assumes you already have the right basis, so this correction comes first.

Putting it together

1. On each vest confirmation, note the gross value, the shares withheld, and the federal and state amounts. The federal amount will be 22 percent of the gross until you pass $1 million in supplemental wages.
2. Estimate your actual federal tax on the year's vests by stacking them on your salary against the 2026 brackets, or use the calculator. The shortfall is that figure minus 22 percent of the vests.
3. Check the safe harbors. If the shortfall is under $1,000 you are done. Otherwise compare 110 percent of last year's total tax with 90 percent of this year's projected tax and aim for the smaller.
4. Close the gap with W-4 line 4(c) spread over the remaining paychecks, or with an estimated payment in the quarter of the vest, or both.
5. If the gap only appeared late in the year, prepare Schedule AI so the earlier installments are not treated as underpaid.
6. When you sell, correct the 1099-B basis on Form 8949 with code B so the vest income is not taxed twice.

Frequently asked questions

Why does my employer only withhold 22% on RSUs?

RSU income is supplemental wages. IRS Publication 15 allows an employer to withhold a flat 22 percent on supplemental wages paid separately from regular pay, and most payroll systems use that option because it requires no knowledge of your other income. The 22 percent rate is a withholding convenience, not an estimate of your tax. Once your supplemental wages for the year pass $1 million, the employer must withhold 37 percent on the excess.

Is the RSU withholding gap really my marginal rate minus 22%?

Only as an upper bound. The vest is stacked on top of your salary, so part of it may be taxed in a lower bracket before the rest reaches your top bracket. For a single filer with a $180,000 salary and a $120,000 vest in 2026, the actual federal tax on the vest is about 30 percent, not the 35 percent top bracket, and the federal gap is about $9,800 rather than $15,600. The shortfall only equals marginal rate minus 22 percent when your salary alone already fills the bracket.

How do I avoid the underpayment penalty on RSU income?

Meet one of the safe harbors before the year ends: owe less than $1,000 after withholding, or have withholding plus estimated payments cover at least 90 percent of this year's tax, or 100 percent of last year's tax, which becomes 110 percent if last year's adjusted gross income was over $150,000. The simplest route for most employees is extra federal withholding on Form W-4 line 4(c) spread over the remaining paychecks, because withholding is treated as paid evenly through the year.

Is the underpayment penalty a fixed percentage?

No. It is interest on each quarterly shortfall from its due date until it is paid, at the IRS underpayment rate, which was 7 percent in the first, third, and fourth quarters of 2026 and 6 percent in the second. A $15,600 shortfall carried across all four 2026 installments and paid on April 15, 2027 accrues roughly $700, not a percentage of the shortfall.

Why does my broker show a near-zero cost basis when I sell vested RSU shares?

For compensatory stock acquired after 2013, brokers report basis to the IRS without the compensation income you already recognized at vest. If you accept the 1099-B figure, you pay tax on the same dollars twice. The Form 8949 instructions tell you to increase your basis by the amount included in income at vest and report the correction with adjustment code B.

Related on this site: the job offer take-home calculator for how a vesting schedule changes real annual pay, and the ISO paper-wealth case study for the very different tax mechanics of incentive stock options.