Why 22% withholding on an RSU vest often is not enough

What happens on a vest day

Three things happen on the vest date. It helps to keep them separate.

1. The shares become yours. Their fair market value that day is ordinary income, reported on your W-2 with the rest of your wages.
2. Something is withheld. Usually shares are sold, or held back, to fund the withholding. That funds an estimate of the tax, not the tax.
3. Your basis is set. The vest-day value becomes your cost basis for any later sale, and the holding period starts that day.

The second step is where the shortfall comes from. The employer is following a permitted withholding method, correctly. The method does not know your spouse's income, your other wages, or which bracket your last dollar falls in.

Federal supplemental withholding rates: IRS Publication 15 (2026), What's New and section 7. Verified first-hand September 2026.

Worked through on a labeled sample

Take a married couple filing jointly with $361,500 of income before the vest, living in California, receiving a $90,000 vest. Every figure below is computed by the same engine behind the calculator on this site.

The effective rate on the vest is 25.4%, not 22%. The vest isn't taxed at one rate. It's added on top of income that already filled the lower brackets, so parts of it are taxed at different rates. The average of those rates is the number to watch. The top of this vest reaches the 32% bracket.

The California surplus does not reduce the federal shortfall. They are two returns. An overpayment to California comes back from California, and the federal balance is still $3,060. The combined figure of $3,060 floors each jurisdiction at zero before adding them, which is why it equals the federal number here rather than $3,060 reduced by $837.

Where the shortfall comes from

• Each jurisdiction is floored at zero on its own before they are summed, because a California surplus does not pay a federal bill.
• For a married couple with a vest this size, California only begins to under-withhold above roughly $775,000 of household income.
• California publishes a lower flat rate for supplemental wages that are not bonuses or stock options. At that rate the state side is short instead.
• Computed on the standard deduction. A household of this income in California usually itemizes, which lowers the federal figure to $2,404.

People often assume state tax causes the shortfall. On these figures the state side is the part that was covered, and the shortfall is entirely federal. California withholds 10.23% on bonuses and stock options while its own schedule charges less than that on this layer, so it over-collects until income is considerably higher.

California's supplemental withholding percentages: California Employment Development Department, DE 231PS, Personal Income Tax Withholding: Supplemental Wage Payments, which sets a separate flat rate for stock options and bonuses, and DE 44, California Employer's Guide, Rev. 52 (4-26), page 18. Schedule figures from the Franchise Tax Board, 2026. Checked October 11, 2026, and the category scope re-read September 13, 2026.

What makes the gap bigger or smaller

The same vest can leave very different shortfalls, depending on the rest of your income. All four rows below use the same $90,000 vest in California.

The last column is not the difference between the two before it. It is the federal shortfall plus the California shortfall, each floored at zero on its own and then added. In the first row California over-withheld by $837, and that surplus comes back from California rather than paying down a federal balance, so it does not reduce the figure.

Filing status matters as much as income. The single filer above has $250,000 of salary, well below the married couple's $361,500, and a larger shortfall, because the single brackets are narrower.

At the top row, $928, the flat rate nearly covered it. At the bottom row the federal shortfall is $13,500 and California has finally moved too, adding $1,245. For a married couple with a vest this size, California only begins to under-withhold above roughly $775,000 of household income, or $380,000 for a single filer.

The standard deduction assumption

Every figure above assumes the household takes the standard deduction, which for a married couple in 2026 is $32,200. The deduction decides which brackets the vest reaches, and this vest crosses a bracket boundary, so changing the deduction changes the answer.

It also will not be true for many readers in a state with an income tax. The federal deduction for state and local taxes is capped at $40,400 for 2026, reduced above $505,000 of modified adjusted gross income, and a California household with this much income reaches that cap on state income tax alone. A household that reaches it deducts more than the standard amount, so it itemizes.

Withholding stays the same because it's a flat percentage that ignores deductions. Only the tax owed changes. The calculator on this site computes on the standard deduction, so a reader who itemizes should read its figure as the higher end of their range rather than as their number.

State and local tax deduction limit and its phase-down: IRS, Correction to state and local income tax deduction amount in the 2026 Form 1040-ES, read September 13, 2026. Standard deduction from the same 2026 configuration the calculator uses.

What else comes out of a vest

Federal income tax is one line on the vest notice. Social Security, Medicare and state withholding reduce the shares or cash you receive as well, and none of them changes the income tax figure above.

• Social Security applies to wages up to the annual wage base, after which it stops for the year.
• Medicare applies to all wages with no ceiling, and an additional Medicare tax applies above statutory thresholds.
• State income tax, where the state has one, follows its own supplemental rule.

A vest notice with several taxes withheld can look complete, but the income tax shortfall above is still there.

Wage base and rate mechanics: IRS Publication 15 (2026). The figures on this page are computed by the calculator's own engine, so the two do not drift apart.

What people do about it

Here are the common options, described so you can recognize them. Which one fits your household is a question for whoever prepares your return.

Know which safe harbor test you meet

Underpayment penalties turn on paying in enough during the year, measured against either the current year's tax or the prior year's. In a year with a large vest, the prior-year test often matters most, and it is easy to overlook.

Additional withholding from salary

Form W-4 has a line for extra withholding per pay period. Some households raise it ahead of a known vest so the shortfall is funded through payroll rather than in one payment.

Estimated payments

Where payroll cannot catch up cleanly, quarterly estimated payments cover the difference on the IRS calendar.

Setting cash aside from the vest itself

Some people sell beyond what was sold to cover and hold the proceeds against the difference. On the sample, $3,060 of the $90,000 vest would go to cover the difference.

Each of these works better if you plan ahead than if you find out when you file. That's why I built the calculator.

Questions people ask

Is the 22% supplemental withholding rate still current?

Yes for 2026. IRS Publication 15 states the withholding rate on supplemental wages remains 22%. Where supplemental wages from one employer exceed $1 million in the calendar year, 37% applies to the portion above $1 million, not to the whole payment. The figures on this page are computed for 2026 and the rate is read from the same configuration the calculator uses.

Is 22% the tax I owe on my RSUs?

Not usually. It is a withholding rate. On the sample above the vest is taxed at an effective 25.4% federally, because it is added on top of income that has already used the lower brackets. The top of the vest reaches the 32% bracket.

My company sold shares to cover the taxes. Why is there still a shortfall?

Selling to cover funds the withholding. If the withholding used a flat 22% and the vest is taxed at 25.4%, the difference remains. On the sample that is $3,060.

Does living in California make it worse?

On these figures, no. California withholds 10.23% on bonuses and stock options, the category an employer commonly applies to a vest, which is $9,207 on this vest, against $8,370 of California tax on the same layer. That is $837 more than the state charges. It does not reduce the federal balance, because they are separate returns.

Does having two incomes in the household change it?

Yes, often by a lot. Household income determines which brackets the vest is taxed in, while each employer withholds using its own method. Compare the $200,000 row at $928 with the $950,000 row at $14,745: identical vest, very different result.

Are RSUs taxed again when I sell them?

The vest value is taxed as ordinary income. A later sale is measured against that vest-day basis, so only the change in price since vesting is a capital gain or loss. Broker statements sometimes report a basis of zero, which taxes the same amount twice unless it is corrected on the return.

Can I make an 83(b) election on RSUs?

Typical restricted stock units are not taxed at grant and are not the same instrument as a restricted stock award that may permit that election. Read your grant documents and ask your tax professional rather than assuming it applies.

What if my employer does not use the flat rate?

Some employers aggregate supplemental wages with regular wages instead, which produces a different withholding figure. Your pay stub and vest notice record what actually happened. The comparison on this page still works: what was withheld on the vest, against what the vest adds in tax.