RSU Tax Withholding Rate
RSU Tax Withholding Rate: Is 22% Enough to Cover What You Owe?
The standard RSU withholding rate is 22%, but for most tech professionals, it isn't enough. Here's where the gap comes from, and what to do about it before the IRS finds it for you.
Between quarterly vesting schedules, standard withholding quirks, and the honest possibility that you also hold ISOs that trigger AMT, it's easy to end up under-withheld without ever doing anything wrong. Your actual tax rate on RSU income is whatever your marginal bracket is — not the flat rate your employer withholds. Let's break down where the gap actually comes from, and what to do about it.
How Are RSUs Taxed at Vesting?
RSUs are taxed as ordinary income at vesting, based on the fair market value of the shares on that date. If your company is public and trades on the NYSE or NASDAQ, that's the closing share price on the vesting date. If your company is still private, it's typically the most recent 409A valuation or tender offer price.
This income is added to your W-2 alongside your salary, and it's subject to the same payroll taxes as the rest of your paycheck, including Social Security and Medicare. The confusing part is the withholding rate versus the tax rate. Your actual tax rate on RSU income is whatever your marginal bracket is, but the amount your employer withholds up front follows the IRS's flat supplemental wage withholding rate: 22% below $1 million in supplemental income, 37% above it.
The GapWhy Does the 22% RSU Withholding Rate Fall Short?
The 22% rate falls short because it doesn't account for your total household income, filing status, state taxes, or other equity vesting in the same calendar year. It's a one-size-fits-all number, and most people reading this do not have a one-size-fits-all financial life. If your combined income pushes you into the 32%, 35%, or 37% federal bracket, the 22% withheld on your RSUs covers only part of what you actually owe. The rest doesn't disappear — it just shows up later, with your name on it.
- Multiple vesting events in one year (quarterly or monthly RSU schedules)
- A spouse or partner who also earns W-2 income
- A large bonus or promotion in the same year as a vesting event
- AMT exposure from Incentive Stock Options (ISOs) held concurrently
How Is RSU Withholding Different from Regular Paycheck Withholding?
RSU withholding is calculated using the flat supplemental wage rate, while your regular paycheck withholding is calculated using the graduated federal brackets and the elections on your Form W-4. This is why two dollars of income — one from salary, one from RSU vesting — can be withheld at completely different rates in the same pay period, even though both are ultimately taxed at your marginal rate when you file.
Selling SharesHow Are RSUs Taxed When You Sell the Shares?
Once RSUs vest and you own the shares outright, any future sale is subject to capital gains tax, separate from the ordinary income tax already paid at vesting. Your cost basis is the fair market value on the vesting date, and your holding period starts on that same date.
Taxed as short-term capital gains, at your ordinary income rate.
Taxed as long-term capital gains, typically at a lower rate.
Many employees use a 10b5-1 trading plan to automate sales on a predetermined schedule, which helps avoid insider trading concerns under SEC Rule 10b5-1 and removes the temptation to time the market around vesting dates.
Watch Out ForHow Do AMT and ISOs Affect RSU Tax Planning?
Alternative Minimum Tax (AMT) doesn't apply directly to RSUs, but it becomes a factor when you also hold Incentive Stock Options (ISOs) from the same employer. Exercising ISOs can trigger AMT in the year of exercise, and if that overlaps with a large RSU vesting event, your total tax liability for the year can be significantly higher than either component would suggest on its own.
Two forms of equity comp, each behaving reasonably on their own, can team up to create a tax bill nobody budgeted for. If you hold both RSUs and ISOs, model them together, not separately.
What Happens to Unvested RSUs If You Leave?
Unvested RSUs are typically forfeited if you leave before they vest, regardless of the vesting schedule your company uses. Most companies use one of two structures:
No shares vest until a set date (often one year), then a chunk vests all at once.
Shares vest incrementally — for example, 25% per year over a four-year schedule.
If you leave two years into a standard four-year graded schedule, you generally keep the 50% that has already vested and forfeit the remaining 50%. Vested shares are yours regardless of employment status; unvested shares return to the company's equity pool.
Do the MathHow Do You Estimate Your Actual RSU Tax Liability?
To estimate your real RSU tax bill, start with the fair market value of the vested shares multiplied by the number of shares vesting — that's your taxable income for the event. Multiply that by your actual marginal tax rate, not the 22% withholding rate, to estimate what you'll really owe.
| Step | Formula |
|---|---|
| Taxable income | Fair Market Value × Number of Shares Vesting |
| Estimated federal tax | Taxable Income × Marginal Tax Rate |
| Add | Social Security + Medicare (up to annual wage base cap) |
| Add | State and local income tax, if applicable |
| Total estimated liability | Sum of the above |
This is a planning estimate, not a substitute for a tax return, but it's usually enough to flag whether you're under-withheld before the IRS tells you in April.
Staying OrganizedHow Do You Track and Manage RSU Vesting?
Most employees track and manage RSU vesting through their employer's equity administration platform, commonly Fidelity Stock Plan Services, E*Trade, Schwab Equity Award Center, Carta, or Morgan Stanley at Work. These platforms show upcoming vesting dates, shares withheld for taxes, and current cost basis, but they don't calculate whether your withholding actually covers your total tax liability. That gap is where a fee-only fiduciary advisor who specializes in equity compensation adds the most value.
FAQFrequently Asked Questions
Not sure if your RSU withholding actually covers what you'll owe?
Between vesting schedules, AMT exposure from ISOs, and multiple income sources, RSU tax planning gets complicated fast, and "the payroll department handled it" is not a tax strategy. Our fee-only fiduciary advisors specialize in equity compensation for tech professionals and can model your actual liability before tax season does it for you.
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