Why your RSU withholding is wrong: the 22% trap

2026 tax year · 5-minute read

When your RSUs vest, your employer is required to withhold federal income tax. For most people, they withhold a flat 22% — no matter what tax bracket you're actually in.

That 22% is a withholding convenience, not your tax rate. Your real rate is your marginal rate: the rate on your last dollar of income. For a single filer in 2026, the 22% bracket ends at $105,700 of taxable income and the 24% bracket runs to $201,775 — so anyone earning much above ~$120k in total compensation is under-withheld on every vest.

A worked example

Take a single filer with a $150,000 salary and an $80,000 RSU vest in 2026:

• Withheld at vest: 22% × $80,000 = $17,600
• True federal tax on that vest: total wages are $230,000; the marginal federal tax on the extra $80,000 is $20,170 (it spans the 24% and 32% brackets)
• The gap: $2,570 — owed at tax time, on top of everything else

And that's just federal. State tax, which employers often withhold at whatever supplemental rate your state sets, adds its own gap. Try your own numbers in the RSU withholding-gap calculator.

Why doesn't my employer just withhold the right amount?

IRS rules allow — and payroll systems default to — the flat 22% on "supplemental wages" (bonuses, RSU vests, commissions) up to $1 million in a single payment. It's simple for payroll and roughly right for average earners. If your total income puts you in the 24%, 32%, or 35% bracket, "roughly right" costs you thousands.

How to fix it

You have three levers, and you can combine them:

1. Extra withholding on Form W-4. Line 4(c) lets you specify an additional dollar amount to withhold from each paycheck. Divide your expected annual gap by your remaining pay periods. This is the simplest fix and it counts as withholding (which is treated as paid evenly through the year — useful for penalty rules).
2. Quarterly estimated payments. Pay the gap in four installments (April 15, June 15, September 15, January 15). Use the estimated-payment planner to size them.
3. Sell-to-cover plus a reserve. Most plans sell some shares at vest to cover the 22%. Mentally treat the true tax as ~10 percentage points higher and set the difference aside in a high-yield savings account the day shares land.

The penalty angle

Owing a few thousand at filing isn't just annoying — if your total withholding and estimated payments fall below the safe harbor (100% of last year's tax, or 110% if your AGI topped $150,000), the IRS adds an underpayment penalty on top. Fixing withholding early in the year is the cheapest insurance. See quarterly estimated payments and safe harbor rules.