How RSU withholding works
When RSUs vest, the value is added to your W-2 as supplemental wages. Federal tax is typically withheld at the flat 22% supplemental rate — often by your employer selling a portion of the shares to cover it ("sell to cover"). Social Security, Medicare, and state tax are withheld on top. The problem is that 22% is a default, not a calculation of your actual rate.
Why 22% is often too low
If your marginal federal bracket is 32%, 35% or 37%, withholding only 22% leaves a gap of 10-15 percentage points on the vested value. On a $100,000 vest, a 32% earner is under-withheld by roughly $10,000 — money that is due when you file. Employers are allowed to use the flat 22% up to $1 million of supplemental wages per year; only above $1 million does a mandatory 37% rate kick in.
The $1 million rule
Supplemental wages above $1 million in a year are withheld at a mandatory 37%. Below that threshold, the 22% flat rate applies by default regardless of your real bracket. So the people most exposed to the gap are high earners whose total comp is large but whose supplemental wages stay under $1 million — exactly the RSU-heavy tech and finance employees who are surprised each spring.
How to cover the gap
Three practical fixes. First, make a quarterly estimated tax payment in the quarter you vest to cover the shortfall. Second, increase withholding on your regular paycheck via Form W-4 (extra withholding line) to spread the cost. Third, simply set aside cash equal to the gap so April is funded. Estimate the gap as (your marginal rate − 22%) times the vested value; our calculator shows it directly.
Watch the underpayment penalty
If you significantly under-withhold, the IRS can charge an underpayment penalty, even if you pay in full by the deadline. You generally avoid it by paying at least 90% of the current year's tax or 100-110% of last year's through withholding and timely estimates. A large RSU vest can push you over the safe-harbor line, so plan the estimated payment rather than waiting for the bill.
A quick example
$100,000 of RSUs vest and your marginal rate is 35%. Your employer withholds 22% ($22,000), but you actually owe about $35,000 in federal income tax on that income — a $13,000 gap, before FICA and state. Making a $13,000 estimated payment in that quarter, or setting the cash aside, turns an April shock into a non-event.