The Default Supplemental Wage Withholding Rate for RSU Vesting
The default supplemental wage withholding rate for Restricted Stock Unit (RSU) vesting is 22% for federal income tax purposes. This rate applies to the portion of your income that the IRS classifies as supplemental wages, which includes bonuses, commissions, and the taxable value of equity awards that vest. When an RSU vests, the fair market value of the shares on the vesting date is treated as ordinary income and is subject to this flat 22% federal withholding. However, this flat rate only applies to supplemental wages up to $1 million in a calendar year. If your total supplemental wages, including the RSU vesting, exceed $1 million, the withholding rate jumps to 37%, the top marginal federal income tax rate. Understanding this distinction is important because many people assume the 22% withholding is their final tax bill, which can lead to a significant surprise when they file their annual return.
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How the 22% Rate Applies to RSU Vesting Events
When a batch of RSUs vests, your employer’s payroll system typically applies the 22% flat rate to the gross value of the shares at their market price on the vesting date. For example, if 1,000 RSUs vest when the stock price is $50 per share, the gross supplemental wage is $50,000, and the federal withholding would be $11,000. This withholding is treated as an advance payment toward your total tax liability for the year. The 22% rate is a simplified method designed to make payroll processing easier for employers, but it is not a precise calculation of your actual tax obligation. The actual rate depends on your total annual income, your filing status, and the various deductions and credits you claim. If you are a single filer with a high income, the 22% withholding may be insufficient, whereas for a married couple filing jointly with a moderate income, it might be more than enough. The IRS treats the vesting event as a single pay period for withholding purposes, which means the flat rate is applied in isolation from your regular salary withholding.
The $1 Million Threshold and the 37% Rate
The supplemental wage withholding rules change dramatically once your supplemental wages for the year exceed $1 million. For the portion of RSU vesting that pushes your total supplemental wages over this threshold, the withholding rate is 37%, not 22%. This is the same top marginal rate that applies to ordinary income, and it applies only to the amount above $1 million, not to the entire vesting value. Suppose you have already received $900,000 in bonuses and commissions during the year, and then a large RSU vesting event adds $200,000 in supplemental wages. The first $100,000 of that vesting is taxed at 22%, and the remaining $100,000 is taxed at 37%. This tiered structure means that high earners who vest large RSU positions late in the year can face a much higher effective withholding rate than the standard 22%. Employers are responsible for tracking cumulative supplemental wages and applying the correct rate, but errors can and do happen, especially when vesting schedules are complex or when multiple equity awards vest simultaneously.
Why the Default 22% Rate Is Often Insufficient
The 22% flat rate is a withholding rate, not a tax rate, and this distinction is the source of many people’s tax surprises after an RSU vesting. Your actual federal income tax rate is determined by your total taxable income after adjustments, deductions, and credits, which may be significantly higher than 22%. If you are a single filer with $200,000 in total income, your marginal rate is 32%, and if you are married filing jointly with $400,000 in combined income, your marginal rate is 35%. The 22% withholding covers only a fraction of the tax you actually owe, and the remaining balance becomes due when you file your tax return. This is why a large RSU vesting can create a tax bill that feels disproportionate to the cash you actually receive, because the shares are sold to cover the withholding, and the remaining shares are subject to tax at your true marginal rate. The withholding is a prepayment, and if it falls short, you will owe the difference at tax time, potentially with interest and penalties if the underpayment is significant.
State and Local Tax Withholding on RSU Vesting
The 22% federal rate is only one piece of the tax withholding puzzle for RSU vesting. State and local income taxes also apply to the value of vested shares, and the rates vary enormously depending on where you live and where your employer is headquartered. In states with no income tax, such as Texas, Florida, or Washington, the state withholding on RSU vesting is zero, which can make a significant difference in your net proceeds. In contrast, states like California, New York, and New Jersey impose top marginal income tax rates that can exceed 10%, and some localities add their own taxes on top of that. Your employer’s payroll system should calculate state withholding based on your work location and the state’s rules for supplemental wages, but the rules are not uniform. Some states apply a flat rate similar to the federal 22%, while others require withholding at the employee’s marginal rate. If you live in a high-tax state and your employer is based in a no-tax state, the state withholding may be incorrect, leading to either a refund or a balance due when you file your state return.
FICA Taxes on RSU Vesting
In addition to federal income tax withholding, RSUs that vest are subject to FICA taxes, which include Social Security and Medicare taxes. The Social Security tax rate is 6.2% on wages up to the annual wage base limit, which for 2025 is $176,100, and the Medicare tax rate is 1.45% on all wages with no cap. An additional 0.9% Medicare surtax applies to wages above $200,000 for single filers and $250,000 for married couples filing jointly. When RSUs vest, the fair market value of the shares is subject to these FICA taxes in the same pay period as the income tax withholding. The 22% federal withholding rate does not cover FICA taxes, which are calculated separately. For a high earner whose RSU vesting pushes total wages above the Social Security wage base, no additional Social Security tax is owed on the vesting value, but the Medicare taxes still apply. If you are subject to the Additional Medicare Tax, the effective FICA rate on the RSU vesting can be 2.35% or higher, which further reduces the net value of the shares you receive.
Practical Steps to Adjust Your Withholding After an RSU Vesting
Because the default 22% withholding rate is rarely sufficient for high earners, the most important practical step you can take is to update your W-4 form with your employer after an RSU vesting event. The W-4 form tells your employer how much federal income tax to withhold from your paycheck, and you can increase the withholding amount by claiming fewer allowances or by adding a specific dollar amount to each paycheck. The IRS introduced a new W-4 form in 2020 that eliminated allowances and instead asks for your expected deductions, credits, and additional income, but many employers still accept the old format for existing employees. After an RSU vesting, you should calculate your expected tax liability for the year and compare it to the total withholding from your salary and the RSU vesting. If the withholding is likely to fall short, you should submit a new W-4 with a higher withholding amount as soon as possible, ideally before the next payroll cycle. Some employers also allow you to make a one-time additional withholding request specifically for a bonus or equity payout, which can be a useful tool if you do not want to permanently increase your regular paycheck withholding.
Common Mistakes People Make with RSU Tax Withholding
One of the most common mistakes is assuming that the 22% withholding is the final tax on the RSU vesting and not planning for the difference between the withholding and the actual tax owed. This mistake is especially costly when the RSU vesting pushes a taxpayer into a higher marginal bracket or triggers the Net Investment Income Tax of 3.8% for higher earners. Another frequent error is failing to account for state taxes, which can add 5% to 13% or more to the effective tax rate on the vesting, depending on the jurisdiction. Some people also make the mistake of selling their vested shares immediately to cover the withholding and taxes, without considering the long-term capital gains implications if they held the shares for more than a year. If you hold the shares for at least one year after the vesting date, any subsequent appreciation is taxed at the long-term capital gains rate, which is 0%, 15%, or 20% depending on your income, rather than the ordinary income rate. Conversely, selling immediately means the entire gain from the vesting date to the sale date is taxed as ordinary income, which can be a missed opportunity for tax savings if the stock price rises after you sell.
When to Act and How to Recalculate Your Withholding
You should act to adjust your withholding as soon as you know the value of an upcoming RSU vesting, particularly if it is a large vesting that will significantly increase your supplemental wages for the year. The best time to update your W-4 is at the beginning of the calendar year or immediately after a major vesting event, so that the correct withholding is applied for the remainder of the year. If you vest RSUs late in the year, it may be too late to adjust withholding for that tax year, but you can make estimated tax payments for the current year or increase withholding for the following year. The IRS provides a Tax Withholding Estimator tool on its website that can help you calculate the correct withholding amount based on your expected income, deductions, and credits. You should also review your withholding after any major life change, such as a marriage, divorce, birth of a child, or a significant change in income from a new job or a large RSU vesting. Failing to update your withholding can result in a large tax bill at filing time, and in extreme cases, it can trigger the IRS underpayment penalty, which is calculated based on the difference between the tax you owed and the tax you paid through withholding and estimated payments.
Comparing RSU Withholding to Other Equity Compensation Methods
The 22% supplemental wage withholding rate for RSUs is distinct from the withholding treatment of other forms of equity compensation, such as Incentive Stock Options (ISOs) and Employee Stock Purchase Plans (ESPPs). ISOs do not trigger withholding at the time of exercise, because no income is recognized for tax purposes when you exercise an ISO and hold the shares, although the alternative minimum tax may apply. ESPPs withholding is also different, as the discount on the purchase price is treated as compensation income and is subject to ordinary income tax and FICA, but the withholding rate for ESPP purchases is not automatically set at 22% and depends on the employer’s payroll setup. RSUs are the simplest form of equity compensation from a tax perspective because they are taxed as ordinary income at vesting, with a clear and predictable withholding rate of 22% (or 37% above $1 million). However, this simplicity can be misleading, because the flat 22% rate does not reflect the true tax cost for most people, and the lack of a tax deduction at the time of vesting means you are paying tax on income that you may not have received in cash. Understanding how RSU withholding compares to other equity awards can help you make informed decisions about when to vest, when to sell, and how to manage your overall tax strategy.