RSU Withholding Traps: Why You Owe More Than Your Paystub Says

2 days ago

3 min read

An RSU vest feels taxed already: shares land in your account, a chunk is withheld, and the paystub looks complete. It usually is not. Withholding is a payroll rule, not a tax calculation, and the gap between the two is where RSU holders get surprised in April. Here are the traps, with one example run all the way through.

Meet Alex

Alex* is single, lives in California and earns a $220,000 salary. A $150,000 RSU tranche vests. The company withholds, and the vest shows up as a clean, taxed-looking number.

Trap 1: The 22% flat rate is not your rate

Employers generally withhold federal tax on RSUs at a flat 22% supplemental rate, up to $1 million of supplemental wages in a year. That rate has nothing to do with your bracket. On Alex's $150,000 vest, 22% is $33,000.

But the vest sits on top of a $220,000 salary, so it is taxed at the top of Alex’s brackets. Adding the vest raises Alex’s federal income tax (2026 single brackets, standard deduction) from about $41,700 to about $92,600, an increase of $50,930, or roughly 34% of the vest. The shortfall is about $17,930*, due when Alex files.

The error runs the other way for lower earners. If your marginal rate is 12%, 22% over-withholds and you get a refund.

Above $1 million of supplemental wages in a year, 37% withholding is mandatory on the excess, so very large vests are withheld closer to the real rate.

Trap 2: Every withholding line is a different rule

A vest triggers several withholdings at once. They are not equally accurate.

California income tax: 10.23% on stock-based supplemental wages. At high incomes that is often near your marginal rate, but check, especially in the lower California brackets.
Medicare surtax (0.9%): Employers withhold it only on wages over $200,000 from that employer, regardless of filing status. Married couples owe it on combined wages over $250,000, so two earners at $160,000 each can be under-withheld with no flag from either employer.
California SDI (1.3% in 2026, no wage cap): withheld on the whole vest. It is a payroll tax and does not come back as a refund.

Trap 3: Double-counting the income on your return

Your broker reports the sale of shares on Form 1099-B, and the cost basis shown is often $0 or only partly adjusted, even though you already paid ordinary income tax on the shares at vest. If you do not correct the basis on Form 8949 to the fair market value at vest, you pay tax on the same income twice. Check the basis lines for every lot, including shares withheld or sold to cover taxes.

Trap 4: Moving does not erase California

For state tax, RSU income is generally sourced over the period from grant to vest. If you worked in California for part of that period and then moved, California can tax the share attributable to your California workdays, even though your employer now withholds for your new state, or for none. Residency changes deserve a calculation before the vest, not after.

How to fix the gap without penalties

Raise your W-4 withholding on regular pay. Withholding is treated as paid evenly through the year, no matter when it was withheld, so a late-year increase can cure earlier under-payment. Estimated payments are treated by their actual dates.
Estimate before each vest. The shortfall is predictable: your marginal rate minus 22%, times the vest.
Hit a safe harbor. Paying 100% of last year’s tax, or 110% if prior-year AGI exceeded $150,000, avoids underpayment penalties even if you still owe at filing.
Reconcile 1099-B basis every year before you file.

The shortfall is not a penalty or an error. It is simply tax that was never withheld. Plan for it before the vest and it is a cash-flow item. Discover it in April and it can feel like a bill nobody warned you about.

*Illustration: single filer, $220,000 salary, $150,000 vest, 2026 federal brackets and standard deduction; no other income or deductions. California tax on the vest not computed. General information, not tax advice for your situation.