RSU Tax: the 22% Withholding Trap That Owes ~$13K in April

Priya is a senior engineer in Seattle, Washington, filing single. Her base salary is $202,500, and on her vest date $100,000 of RSUs hit at fair-market value. Her stock plan administrator withholds the standard supplemental rate — 22%, or $22,000 — and she assumes she is square with the IRS. She is not. That $100,000 stacks on top of her salary and lands almost entirely in the 35% federal bracket ($250,526–$626,350 for a single filer in 2026). Her true federal tax on that slice is about $35,000. The 22% withholding covered $22,000. She is roughly $13,000 short — a bill due April 15, possibly with an underpayment penalty stapled to it. Washington has no state income tax, so at least the state side is clean. The fix took her ten minutes once she understood the gap.

The two tax moments: vest and sale

RSUs (restricted stock units) are taxed at two distinct points, and conflating them is where most of the confusion starts.

1. At vest — ordinary income. The day your RSUs vest, the full fair-market value (FMV) of the shares becomes W-2 ordinary income under IRC §83(a). If 1,000 shares vest at $100, that is $100,000 of compensation income, taxed at your ordinary marginal rate — exactly like salary.
2. At sale — capital gain or loss. Your cost basis is the vest-date FMV. If you hold the shares and sell later, you owe capital gains tax only on the gain above that basis. Sell within 12 months and it is short-term (ordinary rates); hold longer than 12 months and it is long-term (0/15/20%).

This is why “are RSUs taxed twice?” gets a firm no. The vest taxes the full value once. The sale taxes only the new growth. You never pay tax on the same dollar twice — provided your broker reports the basis correctly, which is a separate trap (more below).

The 22% withholding trap

RSUs are supplemental wages. Under IRS Pub. 15 (§7) and IRC §3402, employers withhold federal income tax on supplemental wages at a flat 22% for amounts up to $1 million in a calendar year, and 37% on the portion above $1 million. That is a withholding rate, not your tax rate. The actual tax is settled at filing on the §1 brackets.

For someone whose total income sits in the 12% or 22% bracket, flat 22% withholding is roughly right. But RSUs are concentrated in tech, biotech, and pre-IPO compensation — populations where a single vest routinely pushes total income into the 32% or 35% bracket. For them, 22% is structurally too low, and the shortfall scales with the size of the vest.

Single-filer 2026 brackets per IRS Rev. Proc. 2025-32. The shortfall above is the income-tax gap alone — before FICA, which is withheld separately and correctly.

Priya’s numbers, line by line

Salary $202,500 puts Priya near the top of the 32% bracket before any RSUs. The $100,000 vest stacks on top: the first slice fills out the 32% band (up to $250,525), and the remaining ~$50,000 lands in the 35% band. To keep the math legible, treat the full vest as taxed at the 35% marginal rate — a defensible simplification because the bulk of it is.

FICA is the one piece payroll usually gets right: Medicare (1.45% plus the 0.9% Additional Medicare surtax over $200,000 single, per IRC §3101(b)(2)) is withheld at vest, and Social Security stops at the $181,800 2026 wage base — which Priya’s salary already exhausted, so the RSUs add $0 of Social Security tax. The problem is isolated to income-tax withholding, and it is $13,000.

FICA on RSUs: the part that’s usually correct

Because RSUs are wages, the full 7.65% FICA stack applies at vest:

• Social Security — 6.2% up to the 2026 wage base of $181,800. Once your salary plus other wages cross that base in the year, additional wages (including RSUs) carry $0 Social Security tax.
• Medicare — 1.45% on every dollar of wages, no cap.
• Additional Medicare — 0.9% on wages over $200,000 (single) / $250,000 (MFJ), under IRC §3101(b)(2). Employers start withholding it once your wages with that employer pass $200,000, regardless of filing status — which can itself create a small reconciling item at filing.

FICA withholding on RSUs is generally accurate, so it is not the source of the April surprise. Keep your eye on the income-tax line.

The cost-basis trap: $0 basis on your 1099-B

Here is the most expensive error RSU holders make, and it has nothing to do with withholding. When you sell vested shares, your broker issues Form 1099-B. For RSUs, brokers frequently report a cost basis of $0 — because the basis adjustment for compensation income is not always transmitted to them.

If you accept that $0 basis, you pay capital gains tax on the entire sale proceeds — including the $100,000 that was already taxed as ordinary income at vest. That is double taxation, and it is self-inflicted. The correct basis is the vest-date FMV under IRC §83(a). You fix it on Form 8949 by reporting the broker’s basis, then entering an adjustment (code B) to the correct vest-date basis. On Priya’s shares sold near the vest price, the difference is the gap between paying tax on a few hundred dollars of true gain versus on $100,000 of phantom gain.

Holding period: when capital gains kick in

If you sell at vest, there is essentially no capital gain — sale price equals basis — so the only tax is the ordinary income already discussed. The capital-gains question only matters if you hold:

For a high earner like Priya, any long-term gain sits at the 15% or 20% rate plus the 3.8% Net Investment Income Tax (IRC §1411), since her income tops the $200,000 single NIIT threshold. The hold-vs-sell decision is a separate analysis — concentration risk against a lower future tax rate — but it never changes the vest-date ordinary income, which is already locked in.

What most people miss: the safe harbor, not the bill

The $13,000 itself is not the real danger — you genuinely owe that tax, and setting it aside in a high-yield account is straightforward. The trap most RSU holders miss is the underpayment penalty under IRC §6654. The IRS expects tax paid throughout the year, not just by April 15. Under-withhold all year and you can owe an interest-style penalty even if you pay the full balance on time.

You avoid the penalty entirely by landing inside a safe harbor. Pay the smaller of:

• 90% of the current year’s total tax, or
• 100% of last year’s total tax — rising to 110% if your prior-year AGI exceeded $150,000 (which most RSU earners trip).

The 110% prior-year rule is the one to anchor on. If last year’s total federal tax was, say, $60,000, paying $66,000 in withholding and estimates this year shields you from penalty no matter how large this year’s RSU windfall turns out to be. This is the lever that turns a stressful April into a non-event.

The fix: close the gap before December 31

Two clean ways to cover the 22%-vs-marginal gap, both legal and both inside your control:

1. Extra payroll withholding (preferred). File a new Form W-4 with an additional flat dollar amount on line 4(c). Withholding is treated as paid evenly across the year regardless of when it actually happens — so a December W-4 bump can retroactively cure an early-year vest’s shortfall and satisfy the safe harbor. This is the single most powerful timing trick in the system.
2. Quarterly estimated payment. Send a Form 1040-ES payment for the gap in the quarter the RSUs vest. This works but is timing-sensitive — estimates are credited when paid, so a Q1 vest needs a Q1 estimate to avoid penalty on that quarter.

For Priya, the move is a December W-4 with roughly $13,000 of additional withholding on line 4(c) — or, since she gets paid through year-end, splitting it across her last few paychecks. That single form converts a $13,000 April surprise plus penalty into a $0 balance due.

Key takeaways

• RSUs are taxed at vest as ordinary income on the full FMV (IRC §83(a)), then as capital gains only on growth after vest. Not double taxation — two separate events with the vest-date FMV as your cost basis.
• The 22% flat supplemental-wage withholding (37% over $1M) is structurally too low for anyone in the 32–35% bracket. Per $100,000 vested, the shortfall is about $10,000 (32%) to $13,000 (35%).
• FICA is usually withheld correctly: 6.2% Social Security to the $181,800 2026 base, 1.45% Medicare uncapped, plus 0.9% Additional Medicare over $200K single. The April surprise is income tax, not FICA.
• Check your 1099-B for a $0 cost basis. Correct it on Form 8949 to the vest-date FMV or you will pay capital gains tax twice on the same dollars.
• The decision lever is the safe harbor: pay 110% of last year’s tax (AGI over $150K) via extra W-4 line 4(c) withholding before December 31. Withholding counts as paid evenly all year, so a December bump cures an early-year vest and kills the underpayment penalty.