Your employer withholds taxes when your RSUs vest. For many high earners in tech, that withholding is not enough. Understanding why the gap exists and how to get ahead of it is one of the most practical things you can do for your finances.
Tax season catches a lot of women in tech off guard. Not because they did anything wrong, but because the way RSU income is withheld does not always match the amount actually owed. The result is a balance due at filing, sometimes a significant one, and in some cases an underpayment penalty on top of it.
This post explains how RSU tax withholding works, why it commonly falls short for high earners, what factors determine your actual tax liability at vest, and what you can do to get ahead of it before your next vest date.
RSUs Are Taxed as Ordinary Income at Vesting
When your RSUs vest, the value of the shares on that date is treated as ordinary income by the IRS. It is added to your taxable income for that year exactly the same way your salary is, and it is subject to federal income tax, state income tax where applicable, Social Security tax, and Medicare tax.
This happens whether you sell the shares immediately or hold them. The taxable event is the vest date, not the sale date. If you hold the shares and the price drops the following week, you already owe tax on the value they had when they vested.
💡 Key Concept
Vesting is the first taxable event. Holding your shares after they vest does not defer or reduce your income tax obligation for that vest. It only determines whether you also owe capital gains tax later, based on what happens to the price after the vest date.
How Employers Withhold RSU Taxes
Most employers withhold taxes at vest using one of two methods: share withholding, where a portion of your vesting shares is sold automatically to cover taxes, or cash withholding from a payroll account. In either case, the employer is required to remit taxes on your behalf at the time of vesting.
The amount withheld is typically based on the federal supplemental wage withholding rate. For most RSU income, this is currently 22%, regardless of your actual marginal tax bracket. Once total supplemental wages exceed a certain threshold in a calendar year, a higher rate may apply. Your state may also have its own supplemental withholding rate that your employer uses.
The important thing to understand is that supplemental withholding rates are flat rates applied uniformly. They are not calculated based on your individual tax situation, your total income for the year, your filing status, or any deductions you may have. They are a starting point, and for many high earners, they are not the ending point.
Why the Withholding Gap Exists
For employees whose total income puts them in a higher federal tax bracket than the supplemental withholding rate, there will be a gap between what was withheld and what is actually owed. This gap does not disappear. It shows up as a balance due when you file your return.
Several factors can widen this gap meaningfully. A high base salary means your RSU income layers on top of earnings that are already pushing you into higher brackets. A large vest event in a single calendar year can result in a substantial amount of income being recognized at once. If you have multiple vests across the year, the cumulative effect can be significant. And if you live or work in a high-tax state, state income tax adds another layer that supplemental withholding may not fully cover.
None of this is a penalty or an error. It is simply how the system works when flat withholding rates are applied to income that varies widely in size and timing across taxpayers. The responsibility to address any gap falls on you, not your employer.
📋 Planning Note
If you received a large tax bill last April and had significant RSU vests during the year, the withholding gap is likely what happened. The fix is not complicated, but it does require being proactive rather than reactive. Waiting until filing season to discover the gap means the money may already be spent.
Estimated Tax Payments
One of the most effective ways to address the withholding gap is through estimated tax payments. The IRS requires taxpayers to pay taxes as income is earned throughout the year, not just at filing. If your withholding does not cover enough of your tax liability, you may be required to make quarterly estimated payments to make up the difference.
Estimated payments are made directly to the IRS, and to your state tax authority if applicable, on a quarterly schedule. The due dates fall in April, June, September, and January of the following year. Missing these payments or underpaying them can result in an underpayment penalty, which is separate from the tax itself.
Whether estimated payments make sense for your situation depends on your total income, your existing withholding from salary, and the size and timing of your vest events. A financial planner or CPA can help you calculate whether you are on track or whether adjustments are needed.
Adjusting Your W-4 Withholding
Another option for addressing the gap is to adjust your W-4 with your employer to withhold additional federal income tax from each paycheck. This does not change the withholding on your RSU income directly, but it increases the total amount withheld from your compensation across the year, which can offset the shortfall from RSU vests.
This approach works well when your vest events are relatively predictable and your salary income is consistent. It spreads the additional withholding across pay periods rather than requiring a lump-sum estimated payment after each vest. The right additional withholding amount depends on your individual tax situation and is worth calculating carefully rather than estimating.
California and Other High-Tax States
State income tax adds another layer to the RSU tax picture that is often underestimated. Just like federal taxes, RSU income is taxed as ordinary income at vesting, and states such as California, New York, New Jersey, and Oregon apply their own income taxes to that income.
If you live or work in one of these states, your total tax liability at vest includes both federal and state taxes. State withholding on RSU income is often based on flat supplemental rates, which may not fully cover your actual liability, especially for high earners.
It is also important to understand how states source RSU income. For example, California allocates RSU income based on where you performed services during the vesting period, and other states apply similar sourcing rules, although the methodology can vary. This can create complexity if you moved into or out of a specific state while your RSUs were vesting, and may result in income being taxed by more than one state. Guidance from a tax professional familiar with multi-state equity compensation can be valuable in these situations.
⚠️ Things to Watch Out For
- Do not assume that because your employer withheld taxes at vest, you are fully covered. Verify the amount withheld against your expected tax liability for the year, particularly in years with large vest events.
- An unexpected tax bill in April is often a signal to adjust your withholding or make estimated payments going forward, not just to pay what is owed this year and move on.
- The underpayment penalty applies when not enough tax is paid during the year, even if you pay the full balance at filing. Addressing the gap proactively is generally preferable to discovering it at filing.
- If you have RSUs at multiple companies, perhaps from a job change during the year, the withholding at each company only accounts for income from that employer. The combined income and its tax implications need to be considered together.
- Selling shares immediately after they vest does not eliminate the income tax obligation. It determines whether you also owe capital gains tax, but the ordinary income tax at vest is already set.
What to Do Before Your Next Vest
The most useful thing you can do is look ahead rather than wait for the tax bill to arrive. Before a significant vest event, it is worth reviewing your expected total income for the year, estimating your likely tax liability, and comparing that to what your employer will withhold at vest plus your regular payroll withholding.
If there is a meaningful gap, you have options: make an estimated payment after the vest, adjust your W-4 to withhold more from your salary going forward, or set aside the estimated difference in a liquid account so it is available when you file. The right approach depends on your cash flow, the timing of your vests, and your overall financial picture.
Working through this calculation with a financial planner or CPA before a large vest is one of the highest-value conversations you can have around your equity compensation.
🌿 The Valoria Perspective
The withholding gap is one of the most predictable financial surprises in equity compensation. Predictable means preventable. The goal is to know your numbers before vest events happen, not after, so that you are making decisions with full information rather than managing consequences after the fact.
Post 1: What Is an RSU? A Plain-English Guide for Women in Tech |
Post 2: Vesting Schedules Explained |
Post 3: Double Trigger Vesting at Private Companies |
Post 4 of 5: The RSU Tax Bill Nobody Warned You About (You are here) |
Post 5: RSUs and Cost Basis
Not sure what to do with your RSUs?
I help women in tech build a clear, confident plan around their equity compensation.
Founder of Valoria Wealth Management. Maria specializes in financial planning for high-earning women in tech with equity compensation, with a focus on building long-term wealth, optimizing their tax situation, and creating more financial freedom in their lives.
This content is for informational and educational purposes only and is not intended as individualized financial, investment, or tax advice. Past performance is not indicative of future results. Any opinions expressed are as of the date of publication and may change. Please consult your financial advisor or tax professional regarding your specific situation before making financial decisions.
