RSU Taxes + 22% Trap

If part of your pay comes in RSUs, there's a number buried in your paystub that could cost you thousands next April. And it's pretty easy to overlook.

It's the tax withholding rate on your vested shares. Many employers withhold federal income tax on RSU income at the flat 22% rate. Your actual bracket might be 32, 35, even 37%. Nobody reconciles that difference until you file your taxes. By then, you might be facing late fees and interest due.

And stick around, because there's a second trap on your tax forms that can make you pay tax on the same dollars twice. Even good CPAs miss it.

First, let’s cover what RSUs are, which essentially is a promise from your employer. Stay with the company, and on a set schedule we'll deliver shares of company stock. Until they vest, you own nothing and generally owe no taxes. For a typical RSU, grant day is a non-event for taxes.

For RSUs, the vesting date is the taxable event. The market value of the shares become taxable as ordinary income. Same as salary. Same as a cash bonus. It lands in Box 1 of your W-2.

Let’s look at a hypothetical situation: 500 shares vest with the stock at $200/share. That's $100,000 of W-2 income for the year.

Now, your company does withhold taxes at vest, just like a normal paycheck. Many use sell-to-cover: selling a slice of your vesting shares and sending the proceeds toward your taxes. On your statement, it looks handled.

That’s the trap I mentioned earlier.

The IRS classifies RSU income as supplemental wages, the same bucket as bonuses and commissions. For separately identified supplemental wages, employers can use the 22% flat rate on up to $1 million. Supplemental wages above $1 million are subject to mandatory 37% withholding on the excess.

That flat 22% is a one-size-fits-all number. It isn't calibrated to your actual tax bracket.

Let’s go back to our hypothetical example. That $100,000 vest gets $22,000 of federal income tax withheld under the 22% flat-rate method. But if all or most of that additional income falls in the 32% or 35% marginal bracket, the actual federal tax attributable to that vest could run $32,000 to $35,000, depending on your full tax picture.

In this hypothetical, that's a gap of $10,000 or more. On one vest. Nobody sends you a warning. Payroll did its job. The gap just sits there until you file your return.

Depending on the shortfall, an underpayment-of-estimated-tax penalty can also apply.

So what can be done about it? There are a few options people commonly use. Which fits your situation is a conversation for your tax professional.

First, you can check the math after each vest: pull the paystub and compare withholding against your expected bracket.

Second, you can make quarterly estimated payments or adjust your W-4 to withhold extra from your regular paychecks.

Third, some employers let you elect a higher withholding rate on RSU vests. Just shoot your stock plan administrator an email to inquire if you have this option.

Alright. That's vesting. Now let's talk about selling. And this section holds the most misunderstood question in all of equity compensation.

Once your shares vest, your cost basis is generally the market value on the vest date. In our hypothetical example we’ve been using, $200 per share. The capital gains clock starts that day.

Sell right away, and there's usually little additional gain or loss, because the price hasn't had time to move. The vest income was already taxed through your W-2.

Hold the shares, and any movement from that $200 becomes capital gain or loss. Hold more than a year from vest, and gains above your basis can qualify for long-term capital gains treatment, often a lower rate.

Which brings us to that question I mentioned: should I hold for the lower rate?

I can't answer that for you, but here's a way to think about it. The long-term rate only applies to growth after vest. In our example, the $100,000 that vested was generally taxed as ordinary income no matter what. So the real question: if your company had paid you a $100,000 cash bonus instead, would you have used all of it to buy company stock that same day?

For some people, the honest answer is yes. For others, especially when your paycheck, unvested equity, and future grants already ride on the same company, holding adds single-stock concentration, and concentrated positions carry the risk of significant loss. Either path has trade-offs. Model it with your financial advisor or tax professional before defaulting either way.

Two more traps before we wrap.

First, timing risk. Your tax on the vest is set by the vest-date price. If the stock drops after vest and you sell later, you can end up having paid ordinary income tax on value that no longer exists, with a capital loss that offsets ordinary income only in limited annual amounts. Prices move both ways.

And now the big one - the double-tax trap on your 1099-B. When you sell, brokers often report your cost basis as zero, or as a number that leaves out the income already taxed at vest. If that goes uncorrected, you'd pay capital gains tax on some of the same dollars again. Same money, taxed twice. Your CPA should reconcile the W-2 against the 1099-B and, where appropriate, adjust the basis on Form 8949.

Before we go, an important note. This video is educational and general in nature. It is not tax, legal, or investment advice, and it is not a recommendation to buy, sell, or hold any security. The figures used here are hypothetical, and reflect federal rules as of 2026, which can change. State taxes and your individual circumstances can meaningfully change the outcome.

So here's the summary. RSUs generally get taxed at two points: at vest as ordinary income, and at sale on any movement since vest. Many employers withhold a flat 22% at vest, and if your bracket is higher, the gap is yours to manage. Know your vest dates. Know your bracket. Check the withholding. And make the hold-or-sell decision intentionally.

Because every vest date is a decision, whether you make it or not. In my experience, the people who get hurt by equity compensation are rarely the ones who made a bad call. They're the ones who never made a call at all.

So if RSUs are vesting for you this year and you don't know your number, do something about it this week. Talk to your CPA. Or if you'd like a second set of eyes on your full equity comp picture, click the link in the description and tell us a little about your situation. We'll set up a time to talk. A 30-minute conversation now beats a five-figure surprise tax bill in April.