How Are RSUs Taxed When They Vest and What You Owe

If you have recently received a grant of restricted stock units from your employer, you are probably wondering: how are RSUs taxed when they vest? The answer catches many employees off guard, especially those in high-earning tech roles where a single vesting event can push taxable income well into six figures. Unlike stock options, RSUs are taxed as ordinary income the moment they vest, and the default withholding your employer applies is almost certainly not enough to cover your actual tax bill. In this article, we will walk through a real dollar example of a $50,000 RSU vest, break down every layer of federal, state, and FICA withholding, and show you exactly how to calculate an estimated tax payment so you do not face a nasty surprise in April.

How Are RSUs Taxed When They Vest: The Fundamental Rule

Restricted stock units are a form of equity compensation where your employer promises to deliver shares of company stock to you on a future date, provided you meet certain conditions, typically continued employment through a vesting schedule. The critical tax event occurs on the vesting date, not the grant date and not the date you eventually sell the shares.

On the day your RSUs vest, the fair market value of the shares is treated as ordinary income. It appears on your W-2 just like salary or bonus income. This means it is subject to federal income tax, state income tax (in most states), Social Security tax, and Medicare tax. If you earn above certain thresholds, you may also owe the Additional Medicare Tax of 0.9 percent and the Net Investment Income Tax of 3.8 percent on subsequent capital gains when you sell.

Many employees mistakenly believe RSUs are taxed only when they sell the shares. That is incorrect. The IRS considers the vesting event a taxable compensation event. Any gain or loss after vesting is then treated as a capital gain or loss, with the vesting-day price serving as your cost basis.

A Real Dollar Example: $50,000 RSU Vest and the Withholding Gap

Let us walk through a concrete scenario. Suppose you are a software engineer living in California with a base salary of $180,000. On March 15, a tranche of your RSUs vests with a fair market value of $50,000. Here is what happens at the payroll level and what you actually owe.

What Your Employer Withholds (Default Supplemental Rates)

Most employers use the flat RSU supplemental income tax rate for withholding on equity compensation. For 2024 and 2025, the IRS supplemental withholding rate is 22 percent for amounts up to $1 million. Your employer also withholds FICA taxes and applicable state taxes. Here is the typical breakdown on a $50,000 vest:

• Federal income tax (supplemental rate): 22% x $50,000 = $11,000
• Social Security tax: 6.2% x $50,000 = $3,100 (assuming you have not yet hit the $168,600 wage base for 2024)
• Medicare tax: 1.45% x $50,000 = $725
• Additional Medicare Tax: 0.9% x $50,000 = $450 (applies because your total wages exceed $200,000 with the RSU vest added to your salary)
• California state income tax (supplemental rate): 10.23% x $50,000 = $5,115

Total withheld: $20,390

That leaves you with shares or cash worth approximately $29,610 after withholding. Seems reasonable, right? Now let us look at what you actually owe.

What You Actually Owe

With a base salary of $180,000 plus the $50,000 RSU vest, your total W-2 income is $230,000. As a single filer, your marginal federal tax bracket is 32 percent (the 32% bracket in 2024 covers taxable income from $191,950 to $243,725). That means the $50,000 RSU vest is being taxed at the margin at 32 percent, not 22 percent.

Here is the more accurate tax picture on that $50,000 vest:

• Federal income tax (actual marginal rate): 32% x $50,000 = $16,000
• Social Security tax: 6.2% x $50,000 = $3,100
• Medicare tax: 1.45% x $50,000 = $725
• Additional Medicare Tax: 0.9% x $50,000 = $450
• California state income tax (actual marginal rate): 9.3% x $50,000 = $4,650 (the effective marginal rate for this income level; the 10.23% supplemental withholding rate actually slightly over-withholds here)

Approximate actual tax liability: $24,925

The Gap

Your employer withheld $20,390, but your actual tax on that $50,000 vest is closer to $24,925. That is a shortfall of approximately $4,535. This gap exists almost entirely because the federal supplemental withholding rate of 22 percent is 10 percentage points below your actual 32 percent marginal rate. Multiply this across multiple vesting events per year, and you could easily face a five-figure underpayment when you file your return.

"The 22 percent supplemental withholding rate was designed as a convenient flat rate, not as an accurate reflection of what most high-earning employees actually owe. For anyone in the 32, 35, or 37 percent federal bracket, this rate systematically under-withholds, and it is the single biggest reason tech workers get hit with unexpected tax bills in April." — Financial planning insight commonly shared by CFPs specializing in equity compensation

Why the 22 Percent RSU Supplemental Income Tax Rate Under-Withholds for Most Tech Workers

The phenomenon of restricted stock unit tax withholding not enough to cover actual liability is not a bug in the system. It is a structural mismatch between how supplemental income withholding works and how progressive tax brackets operate.

Here is why this problem disproportionately affects technology industry employees:

1. High base salaries push RSU income into elevated brackets. A base salary of $150,000 to $250,000 is common at major tech companies. By the time RSUs vest, the additional income lands squarely in the 32 percent or even 35 percent bracket.
2. Large and frequent vesting events compound the problem. Many tech companies use four-year vesting schedules with quarterly or monthly vesting. An employee with a $400,000 RSU grant vesting over four years could see $100,000 or more in RSU income annually, all under-withheld at the 22 percent rate.
3. State taxes add another layer. In states like California (top marginal rate of 13.3 percent), New York (top rate of 10.9 percent), and Oregon (top rate of 9.9 percent), the combined federal and state shortfall can be significant. While some states have supplemental withholding rates that are closer to the actual marginal rate, others do not.
4. Bonuses and RSU vests stack. If you receive an annual bonus in Q1 and your RSUs vest throughout the year, all of that supplemental income is withheld at the flat 22 percent rate, even though your cumulative income pushes you higher and higher in the progressive bracket structure.
5. The $1 million threshold rarely helps. The IRS requires 37 percent withholding on supplemental income exceeding $1 million in a calendar year. While this is more accurate for extremely high earners, it does not help the vast majority of tech workers whose RSU income falls between $50,000 and $500,000 annually.

RSU Tax Rate at Vesting: A Comparison Table by Income Level

To illustrate how the withholding gap grows as income rises, consider the following comparison for a single filer in California. The table shows the difference between what is withheld at the default supplemental rate and the approximate actual combined tax rate on a $50,000 RSU vest at different base salary levels.

As you can see, the RSU tax rate at vesting is effectively your marginal income tax rate, which can be significantly higher than the 22 percent supplemental withholding. The gap only widens as total income increases. For employees with multiple large vesting events per year, the cumulative under-withholding can easily reach $15,000 to $30,000 or more.

How to Calculate Your Estimated Tax Payment and Avoid an April Surprise

Now that you understand the problem, here is how to solve it. You have three primary strategies to close the withholding gap on your RSU income.

Strategy 1: Make Quarterly Estimated Tax Payments

This is the most common approach for employees who recognize the under-withholding issue. The IRS expects you to pay taxes throughout the year, and if you owe more than $1,000 at filing time, you may face an underpayment penalty. Here is how to calculate your estimated payment after each RSU vesting event:

1. Determine your marginal federal tax rate. Add your RSU income to your base salary and any other income sources. Identify the tax bracket where the RSU income falls. For 2024, the brackets for single filers are: 10% (up to $11,600), 12% ($11,601 - $47,150), 22% ($47,151 - $100,525), 24% ($100,526 - $191,950), 32% ($191,951 - $243,725), 35% ($243,726 - $609,350), and 37% (above $609,350).
2. Calculate the federal tax shortfall. Subtract 22% (the amount withheld) from your actual marginal rate. Multiply the difference by the RSU vest amount. For our $50,000 example at a 32% marginal rate: (32% - 22%) x $50,000 = $5,000.
3. Calculate the state tax shortfall (if applicable). Compare your state supplemental withholding rate to your actual state marginal rate. In many cases, this may be a small amount or even a slight overpayment, depending on your state.
4. Add the Additional Medicare Tax shortfall if applicable. If your total wages exceed $200,000 (single) or $250,000 (married filing jointly), verify that the 0.9% Additional Medicare Tax is being properly withheld. Some payroll systems handle this automatically once the threshold is crossed mid-year, but timing can create gaps.
5. Submit Form 1040-ES with your payment. Estimated tax payments are due quarterly: April 15, June 15, September 15, and January 15 of the following year. You should make the payment for the quarter in which your RSUs vested.

Using our example, you would submit an estimated tax payment of approximately $4,500 to $5,000 for the quarter in which the $50,000 vest occurred.

Strategy 2: Adjust Your W-4 Withholding

An alternative approach is to increase the federal income tax withholding on your regular paychecks to compensate for the RSU under-withholding. You can do this by filing a new Form W-4 with your employer and entering an additional dollar amount to withhold per pay period on Line 4(c).

For example, if you expect $100,000 in RSU vesting for the year and your withholding gap is 10 percentage points, you need an additional $10,000 withheld annually. If you are paid biweekly (26 pay periods), you would request an additional $385 per paycheck in federal withholding.

The advantage of this method is that W-4 withholding is treated as if it were paid evenly throughout the year, regardless of when the actual withholding occurs. This means you can avoid underpayment penalties even if you increase your withholding late in the year, which is not the case with estimated tax payments, which must be made in the quarter income is received.

Strategy 3: Request Supplemental Withholding at a Higher Rate

Some employers allow you to elect a higher withholding rate on your RSU vesting events. Rather than accepting the default 22 percent, you may be able to request that your employer withhold at your actual marginal rate, such as 32 or 35 percent. Check with your company's stock plan administrator or HR department to see if this option is available. Companies that use platforms like