Shares vest. The equity portal shows that a chunk was sold to cover tax. The remaining shares land in the brokerage account. Everything looks handled.
Then April arrives with a five figure bill, and the obvious question follows: tax was withheld, so how is more owed?
The answer is a single mismatch. Withholding on a vest runs at a flat rate set by regulation. The income itself is taxed at your marginal rate. For most people receiving meaningful equity, those two numbers are a long way apart, and nobody in the process is responsible for noticing.
Quick answer
RSU income is classified as supplemental wages, the same bucket as bonuses. Employers withhold federal income tax at a flat 22% until your cumulative supplemental wages for the calendar year pass $1 million, then a mandatory 37% on the excess.
If your marginal rate is above 22%, and it very likely is, the withholding under-collects by the difference. The shortfall is predictable, which also makes it fixable.
Why the vest is taxable at all
The fair market value of the shares on the vest date becomes ordinary wage income. It goes in Box 1 of your W-2 alongside your salary, and it is treated exactly like a cash bonus that happens to be paid in stock.
Nothing happens at grant. The vest, or settlement, is the trigger. If you vest quarterly, you have four separate taxable events a year, each valued at the price on that specific day.
One thing worth knowing if you have read about equity elsewhere: an 83(b) election is not available for RSUs. That election applies to transferred property, and an unvested RSU is a promise rather than property you hold. People occasionally go looking for it and find nothing.
The gap, in numbers
A single filer for 2026 with a $180,000 salary and $100,000 of RSUs vesting, taking the standard deduction, no other income.
| Amount | |
|---|---|
| Federal income tax on $180,000 alone | About $31,934 |
| Federal income tax on $280,000 | About $61,134 |
| Tax caused by the vest | About $29,200, or 29.2% |
| Withheld at the 22% supplemental rate | $22,000 |
| Shortfall | About $7,200 |
The vest income sits on top of the salary, so it is taxed in the 32% and 35% bands rather than at some average rate. That is why the effective cost of the vest is 29.2% while the withholding is 22%.
Scale it up and the gap scales with it. The same 7.2 point difference on $300,000 of vesting is over $21,000. This is the reason equity-heavy employees get April surprises with a consistency that suggests something is broken, when in fact the rules are working exactly as written. The underlying mechanic is the same one described in Why Your Bonus Paycheck Looks Overtaxed, except that with bonuses the flat rate often over-collects, and with equity it usually under-collects.
Sell to cover does not change the tax
Most plans sell a portion of the vesting shares automatically and remit the proceeds as withholding. This is convenient and it is often mistaken for the tax being settled.
It is not settling anything. It is simply how the flat 22% gets paid. If 22% is the wrong rate for you, selling shares to fund it does not make it the right rate. Some employers allow a higher election, and if yours does, that is the cleanest fix available.
The cost basis error that taxes you twice
This one costs more than the withholding gap and is entirely avoidable.
Your cost basis in vested shares is the fair market value on the vest date, because you already paid ordinary income tax on that amount. If you sell immediately at the same price, your capital gain is essentially zero.
The trap is that brokers often report a cost basis of zero, or leave it blank, on Form 1099-B for shares acquired through equity compensation. Enter that figure without adjusting it and you declare the entire sale proceeds as a capital gain, paying tax a second time on income already taxed as wages.
Check every 1099-B covering equity shares against your vest confirmations. If the basis is missing or zero, it needs correcting on your return. This is the single most expensive RSU mistake, and it is a data entry problem rather than a tax problem.
What else the vest sets off
A large vest interacts with several thresholds at once.
- Social Security tax applies to vest income until your combined wages reach the 2026 wage base of $184,500, then stops. A vest early in the year is treated differently from the same vest in December.
- Medicare applies to all of it with no cap.
- The Additional Medicare Tax of 0.9% applies above $200,000, and employers are required to start withholding it once your wages with them pass that figure.
- Credit and deduction phase-outs can be crossed in a single vest year, which raises the true marginal cost above the bracket rate. That effect is covered in Marginal or Effective.
- State tax follows its own rules, and multi-state workers can face allocation across states where the shares were earned rather than where they vested.
Closing the gap
In rough order of how easy they are.
- Ask whether your plan allows a higher withholding election. Some do. It is the least effort for the most effect.
- Add extra withholding on your W-4 at Step 4(c). Spread across remaining pay periods, this covers the gap without a separate payment, and withheld amounts are treated as paid evenly across the year.
- Make a quarterly estimated payment after a large vest. Covered in Estimated Taxes 2026.
- Aim for a safe harbour rather than exact accuracy, which protects against penalties even if a balance remains.
- Model each vest before it happens, since a predictable event deserves a plan rather than a discovery.
Keep the vest confirmations showing date, share count and price, your pay stubs, the W-2, and every 1099-B. The reconciliation is straightforward with those and unpleasant without them.
Sources and notes
Supplemental wage withholding at a flat 22%, with a mandatory 37% on cumulative supplemental wages above $1 million in a calendar year, follows IRS Publication 15 and Publication 15-T. Vest-date inclusion at fair market value follows IRC section 83(a) and IRS Publication 525. Bracket thresholds and the standard deduction come from Revenue Procedure 2025-32 for 2026. The Social Security wage base of $184,500 comes from the Social Security Administration, and the Additional Medicare Tax rate and thresholds from IRS guidance.
The example is a simplified illustration excluding state tax, pre-tax deductions, and other income, all of which change the result. Plan terms differ, and whether a higher withholding election is available depends on your employer. This article covers time-vested RSUs only; stock options, ESPPs, and performance awards follow different rules. Nothing here is advice about whether to hold or sell shares, and a large vest is one of the situations where a qualified professional generally earns their fee.
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