RSU Supplemental Withholding 101
Restricted Stock Units (RSUs) have become a popular form of compensation, especially for those who work in tech. While RSUs can be an excellent way to build wealth, they come with important tax implications. One aspect that often confuses employees (in addition to the sell-to-cover) is supplemental withholding.
In this post, learn about RSU supplemental withholding and the tax implications both federally and in California.
The Basics of Supplemental Withholding
When your RSUs vest, the fair market value of the shares immediately becomes taxable income on your paystub as ordinary income. Employers are required to withhold taxes on this income, just as they do on your regular paycheck. However, because RSU income is often considered supplemental income (i.e., a bonus or non-regular salary wage), it is subject to supplemental withholding rates.
Federal RSU Supplemental Withholding Rates
Flat Rate Method: As part of the sell-to-cover you are aware of, the IRS sets a flat rate for the supplemental income portion. As of 2023 (and continued into 2026), the rate is 22% for amounts up to $1 million. For amounts above $1 million, the rate automatically increases to 37%. Think of it like this: your company will sell 40% of the shares to cover the taxes, but “only” 22% of the 40% goes to the IRS. The rest goes to your applicable State, Social Security, and Medicare obligations.
Example #1: You have traditional W2 wages (your salary), and then $150k in RSU income. The RSUs will be withheld at 22% (supplemental rate) to the IRS because your total income is less than $1M.
Example #2: Once your gross wages exceed $1M on your paystub, your supplemental income (the RSUs) will automatically be withheld at 37%. If you are in CA, think of it like this: the 40% sell-to-cover now jumps to 55%. The 22% supplemental rate has increased by 15%, and you are still withholding 10.23% to CA + applicable Social Security and Medicare taxes.
State Taxes
In addition to Federal taxes, your RSU income is subject to State income tax. States have their own supplemental withholding rules and rates, so it’s essential to know your local tax laws. California uses a progressive income tax system, with marginal rates ranging from 1% to 13.3%. However, since RSUs are treated as supplemental wages, California withholds a flat 10.23% at vesting. That 10.23% rate lines up closely with California’s marginal brackets up through roughly $865K of joint income. So, in practice, California withholding on RSUs should be sufficient for most households.
Federal withholding works very differently. The IRS withholds RSUs at 22%, but that 22% marginal bracket tops out around $211K of income. Many households with RSUs are well above that threshold, which is why we commonly see Federal balances at tax time, while California often shows a small refund.
Why Supplemental Withholding Might Fall Short
The 40% sell-to-cover feels sufficient, but the flat 22% Federal supplemental portion will presumably be insufficient if you are in a higher tax bracket. For example, a household where one (or combined) salary exceeds $211K (2026) will immediately mean your RSU withholding is insufficient.
Think of RSU/supplemental income as being added to the backend of your W2, regardless of when earned. $211K will get us through the 22% marginal bracket, and every dollar north of $211K will be at 24%, 32%, and so on. You’ll immediately have a “shortfall” when your RSUs vest each quarter (or monthly, depending on the company).
How Do We Fix This
Some employers have started allowing employees to adjust their Federal supplemental withholding on a sliding scale from 22% to 37%. It’s not a perfect solution, but this immediately relieves some of the projected shortfall each year.
The perceived “negative” would be that you are selling more of your shares upfront vs. using cash you might have on the side. This is where you’d work with your advisor on ensuring we hit Safe Harbor each year.
Final Thoughts
RSU supplemental withholding is an automatic process driven by IRS and State rules, vs. a personalized calculation of your tax situation. Once you understand how the withholding actually works, the “surprise” becomes predictable each year. The planning conversation then becomes about how to manage your tax liability intentionally vs. reacting to surprises each April.
If you are struggling to navigate the RSU world and want to understand how RSUs fit into your broader tax picture, schedule a consultation with us to help you develop a customized tax and financial plan that works for you.
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