RSU Taxes for High Earners: Why Your Withholding Falls Short

Disclaimer: This article is for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws are complex and subject to change. Consult a qualified CPA or tax attorney before implementing any tax strategy.

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The RSU Tax Problem Every Tech Worker Faces

You worked hard, your company’s stock went up, and your RSUs vested. Congratulations—you just got a surprise tax bill.

Here’s the math that catches most high earners off guard:

What Happened	Amount
RSU Value at Vest	$100,000
Employer Withheld (22%)	$22,000
Your Actual Tax Rate	~35-40%
What You Actually Owe	$35,000-$40,000
Surprise Tax Bill	$13,000-$18,000

This isn’t a mistake. It’s how the system works. And if you don’t understand it, you’ll face this surprise every single vest.

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How RSU Taxation Actually Works

RSUs (Restricted Stock Units) are taxed as ordinary income the moment they vest. Not when you sell. Not when you exercise. The instant those shares become yours.

The Taxable Event

On vesting day:

1. Your company determines the Fair Market Value (FMV) of the shares
2. That FMV is treated as W-2 income—just like your salary
3. Taxes are withheld automatically, typically by “selling to cover”
4. The remaining shares land in your brokerage account

Example: 500 RSUs vest when stock = $200/share

• Gross value: $100,000
• This $100,000 is added to your W-2 income
• Employer withholds shares worth ~22% ($22,000) for taxes
• You receive shares worth ~$78,000

Future Gains Are Separate

After vesting, any additional gains or losses are capital gains, not ordinary income:

• Sell within 1 year: Short-term capital gains (taxed as ordinary income)
• Hold over 1 year: Long-term capital gains (0%, 15%, or 20% rate)

The key insight: you’ve already been taxed on the vesting value. Your cost basis is the FMV at vest. Any increase from there is capital gains; any decrease is a capital loss.

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The Full Tax Stack on Your RSUs

High earners face a stacked tax burden that far exceeds the 22% supplemental withholding rate.

Federal Income Tax: 32-37%

If you’re earning enough to receive significant RSU grants, you’re likely in the 32%, 35%, or 37% federal bracket.

2026 Federal Tax Brackets (Single):

Taxable Income	Rate
$0 - $12,200	10%
$12,200 - $49,550	12%
$49,550 - $105,600	22%
$105,600 - $201,650	24%
$201,650 - $256,050	32%
$256,050 - $640,300	35%
Over $640,300	37%

Your RSUs are taxed at your marginal rate—the highest bracket your total income reaches. A senior engineer with $300K base salary plus $100K in RSUs has the RSUs taxed at 35%.

State Tax: 0-13.3%

State taxes compound the problem:

State	Top Rate	Notes
California	13.3%	No favorable treatment for equity
New York	10.9%	Plus NYC tax up to 3.876%
New Jersey	10.75%	On income over $1M
Oregon	9.9%	Progressive brackets
Massachusetts	9%	4% surtax on income over $1M
Washington	0%	No state income tax
Texas	0%	No state income tax
Florida	0%	No state income tax

A California resident in the 35% federal bracket pays nearly 48.3% in combined federal and state income tax on RSUs—before FICA.

Social Security: 6.2%

Social Security tax applies to wages up to the annual wage base ($176,400 in 2026). If your salary alone exceeds this cap, your RSUs may not trigger additional Social Security tax. If you’re below the cap, RSUs are subject to the full 6.2%.

Medicare: 1.45% + 0.9%

Regular Medicare tax (1.45%) applies to all wages with no cap. Plus, the Additional Medicare Tax (0.9%) kicks in on wages exceeding:

• $200,000 for single filers
• $250,000 for married filing jointly

For high earners, RSUs are almost always subject to both—adding 2.35% to the tax burden.

Net Investment Income Tax (NIIT): 3.8%

NIIT applies to investment income when your Modified AGI exceeds $200K/$250K. While RSUs themselves are earned income (not subject to NIIT), the additional income from RSUs can push your investment income over the threshold, triggering NIIT on dividends, interest, and capital gains.

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Why Your Withholding Falls Short

The Supplemental Income Rule

The IRS allows employers to withhold federal tax on “supplemental wages” (bonuses, RSUs, commissions) at a flat 22% rate, regardless of your actual bracket.

This made sense when 22% was a middle-class tax rate. For high earners in the 32-37% bracket, it creates a systematic shortfall.

The Math of Underwithholding

Your Marginal Rate	Withholding	Gap Per $100K RSU
22%	22%	$0
24%	22%	$2,000
32%	22%	$10,000
35%	22%	$13,000
37%	22%	$15,000

Add state taxes (9-13% in high-tax states) and you’re looking at 20-25% underwithholding on every RSU vest.

Why Employers Use 22%

It’s the default. It’s easy. It’s what the IRS says they can do. Most employers have no incentive to withhold more—it requires additional systems and employee education. Some companies do offer higher withholding elections (up to 37%), but you often have to actively request it through your equity portal.

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Strategies to Avoid the Tax Bill Surprise

Strategy 1: Adjust Your W-4 Withholding

File a new W-4 with your employer requesting additional withholding from your regular paychecks.

How it works: Calculate your expected RSU shortfall for the year, divide by remaining pay periods, and add that amount to your per-paycheck withholding.

Example:

• Expected RSU income: $150,000
• Withholding gap: 13% × $150,000 = $19,500
• Remaining pay periods: 24
• Additional withholding per paycheck: $813

Advantages:

• Withholding is treated as paid evenly throughout the year
• Even December withholding counts as if paid in January
• Avoids estimated tax payment paperwork

Strategy 2: Make Quarterly Estimated Payments

Pay the IRS directly using Form 1040-ES, due quarterly:

• Q1: April 15
• Q2: June 15
• Q3: September 15
• Q4: January 15

How much: Take your expected RSU shortfall and divide by four. Or calculate a “safe harbor” amount (110% of prior year’s tax for high earners) and pay that in installments.

Payment methods: EFTPS (recommended), IRS Direct Pay, or check

Strategy 3: Elect Higher Withholding at Vest

Check your equity compensation portal (E*TRADE, Fidelity, Schwab, etc.) for withholding elections. Some companies allow you to:

• Choose withholding rates up to 37%
• Specify additional dollar amounts
• Set different rates for different vests

This “sells more to cover” at each vest, reducing the gap automatically.

Strategy 4: Set Aside Cash at Each Vest

The simplest approach: treat 15% of each RSU vest as “not yours” and immediately transfer it to a high-yield savings account earmarked for taxes.

Example: $50,000 RSU vest → Transfer $7,500 to tax savings account

This doesn’t reduce your tax bill, but it ensures you have cash available when April 15 arrives.

Strategy 5: Sell RSUs at Vest

Many financial advisors recommend immediately selling RSUs at vest to:

1. Lock in your after-tax value
2. Avoid concentration risk in your employer’s stock
3. Eliminate the risk of paying taxes on gains that later evaporate

If you want to own company stock, you can always buy it back later—but at least you’ve secured the money to pay your taxes.

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State Tax Considerations

High-Tax State Residents

If you live in California, New York, or another high-tax state, your effective rate on RSUs can exceed 50%.

California-specific issues:

• 13.3% top rate on income over $1M (plus 1% mental health services tax)
• 10.23% default supplemental withholding
• Still leaves a gap for top earners
• No source rule protection—California taxes residents on all income

New York-specific issues:

• 10.9% state tax
• Plus 3.876% NYC tax for city residents
• Combined top rate of ~51% on RSUs

Zero-Tax State Residents

If you live in Washington, Texas, Florida, or another state with no income tax, your RSU tax burden is significantly lower—often 8-13% less than high-tax states.

This is why many tech workers relocate from California to Washington or Texas. A $200K annual RSU grant saves $20,000+ per year in state taxes.

Multi-State Complications

If you moved or worked in multiple states during the vesting period:

• Each state may claim a portion of RSU income
• Typically prorated by days worked in each state
• California is particularly aggressive about claiming income
• Keep detailed records of where you worked

Example: RSUs granted while you lived in California, but you moved to Texas mid-year before they vested. California may still tax a portion based on how much of the vesting period you worked there.

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Case Study: Senior Engineer at a Tech Company

Profile: Sarah, Senior Software Engineer in San Francisco

• Base salary: $250,000
• Annual RSU grants: $200,000 (vesting quarterly)
• Filing status: Single
• Annual RSU vest schedule: 4 vests of $50,000 each

The Problem

Each quarterly vest triggers:

• Federal income: $50,000 taxed at 35% marginal rate
• California: $50,000 taxed at 9.3% marginal rate
• Medicare: $50,000 × 2.35% (base + additional)

Per vest:

Tax	Rate	Amount
Federal	35%	$17,500
California	9.3%	$4,650
Medicare	2.35%	$1,175
Total Tax	~46.7%	$23,325
Employer Withheld	~32%	$16,000
Shortfall		$7,325

Annual shortfall: $7,325 × 4 = $29,300

The Solution

Sarah implements a multi-pronged approach:

1. Adjusts W-4: Adds $1,200/month in additional withholding ($14,400/year)
2. Quarterly estimated payments: $3,700 per quarter ($14,800/year)
3. Total coverage: $29,200—almost exactly covering the gap

The Outcome

• No surprise tax bill in April
• Predictable cash flow throughout the year
• No underpayment penalties

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Case Study: Staff Engineer Hitting Additional Medicare and NIIT

Profile: Marcus, Staff Engineer in Seattle

• Base salary: $350,000
• Annual RSU grants: $400,000
• Filing status: Married filing jointly
• Spouse income: $100,000

The Problem

Combined household income: $850,000

At this level, Marcus faces:

• Federal: 35% bracket
• Washington: 0% state tax
• Additional Medicare: Full 0.9% on RSUs
• NIIT: Applies to investment income (dividends, capital gains)

RSU tax calculation:

Tax	Amount
Federal (35%)	$140,000
Medicare (1.45%)	$5,800
Additional Medicare (0.9%)	$3,600
Total	$149,400
Employer Withheld (22%)	$88,000
Shortfall	$61,400

The Solution

Marcus takes advantage of employer options:

1. Elects 37% federal withholding in equity portal
2. Combines with regular paycheck withholding adjustment
3. Makes Q4 estimated payment for any remaining gap

The Washington Advantage

Despite the large RSU grants, Marcus saves ~$44,000 annually compared to if he lived in California (9.3% × $400,000 + additional bracket taxes). This compounds over a career.

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Action Steps

Before Your Next Vest

• Log into your equity portal and check withholding election options
• Calculate your marginal federal and state rates
• Determine the gap between 22% and your actual rate

This Month

• File a new W-4 if increasing paycheck withholding
• Set up EFTPS for estimated payments if needed
• Create a “tax savings” account if using the set-aside method

Annually

• Review your withholding strategy after tax filing
• Adjust for changes in RSU grant size or tax brackets
• Consider location arbitrage if RSU taxes are significant

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Related Resources

Calculators

• RSU Tax Calculator — Calculate your exact RSU tax burden and withholding shortfall
• Tax & Take-Home Pay Calculator — See how RSUs affect your overall tax picture

Related Articles

• Estimated Tax Payments: The $300K+ Earner’s Complete Guide — How to avoid underpayment penalties
• Maximizing Retirement Contributions — Reduce taxable income to offset RSU taxes

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This article is for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws are complex, change frequently, and vary by jurisdiction. The strategies discussed may not be appropriate for your specific situation. Always consult with qualified tax professionals before implementing any tax strategy.