RSU Supplemental Withholding 101

Restricted Stock Units (RSUs) are generally taxed as ordinary income when they vest. Your employer withholds taxes on that income, but the amount withheld may not equal the amount you ultimately owe.

One of the biggest reasons is RSU supplemental withholding. Employers commonly treat RSU income as supplemental wages for withholding purposes, which means federal income tax may initially be withheld at a flat rate rather than based on your individual tax bracket.

In this post, we’ll explain how RSU supplemental withholding works, federal and California withholding rates, why RSU withholding can fall short, and what you can do about it.

Key Takeaway

RSU supplemental withholding is the tax your employer withholds when your RSUs vest. Federal withholding is generally 22% on supplemental wages up to $1 million and 37% on supplemental wages above $1 million. If your actual federal tax rate is higher than the withholding rate, you could still owe additional tax.

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What Is RSU Supplemental Withholding?

When Restricted Stock Units (RSUs) vest, the fair market value of the shares is generally reported as W-2 compensation and taxed as ordinary income.

Your employer is required to withhold taxes on that income. Because RSU income is typically treated as supplemental wages for withholding purposes, employers may use supplemental withholding rules rather than calculating federal income tax withholding the same way they do for your regular paycheck.

Depending on your employer, shares may be withheld or sold through a sell-to-cover transaction to satisfy these taxes.

The important distinction is this:

Tax withholding is not the same as your actual tax liability.

Withholding is simply the amount sent to the government throughout the year. Your actual tax liability depends on your total income, filing status, deductions, credits, and other factors.

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What Is the Federal Supplemental Withholding Rate for RSUs?

For federal income tax withholding, employers generally use a 22% supplemental withholding rate on supplemental wages up to $1 million.

Once supplemental wages exceed $1 million during the calendar year, amounts above that threshold are generally subject to 37% federal withholding.

Example

Suppose you earn a salary and have an additional $150,000 of RSU income during the year.

Your employer may withhold 22% for federal income taxes on that RSU income.

But if your total taxable income places some of that income in a higher federal tax bracket, 22% may not be enough to cover the tax you ultimately owe.

This is one of the most common reasons employees with significant RSU compensation can end up with an unexpected tax bill.

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Why Is More Than 22% of My RSUs Sold for Taxes?

This is a common point of confusion.

You might see 35%, 40%, or more of your vested shares withheld or sold for taxes even though the federal supplemental withholding rate is 22%.

That is because federal income tax is only one component of the taxes being withheld.

Your RSU withholding may also include:

• Federal income tax
• State income tax
• Social Security tax, when applicable
• Medicare tax
• Additional Medicare Tax, when applicable
• Other required payroll taxes

So if approximately 40% of your shares are sold through sell-to-cover, that does not mean you are paying a 40% federal income tax rate.

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How Are RSUs Taxed in California?

California also treats RSU income as wages for income tax purposes.

For supplemental wage withholding, California generally uses a 10.23% withholding rate for stock options and bonuses, including certain equity compensation.

This withholding is separate from federal income tax withholding and applicable payroll taxes.

California's actual income tax system is progressive, however, meaning the amount you ultimately owe depends on your total taxable income.

As a result, the amount withheld when your RSUs vest should not automatically be assumed to equal your final California tax liability.

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Why Can RSU Supplemental Withholding Be Too Low?

The biggest issue with RSU supplemental withholding is that the withholding rate may not match your marginal tax rate.

For example, your employer might withhold federal income tax on your RSUs at 22%. But if your total income puts you in a 32%, 35%, or 37% marginal federal tax bracket, the withholding on your RSUs could leave a meaningful gap.

Think of your RSU income as sitting on top of the rest of your income for the year.

If your salary, bonus, spouse's income, and other sources of income have already moved you into higher tax brackets, additional RSU income may be taxed at those higher marginal rates even though your employer initially withheld only 22%.

Simple Example

Imagine $100,000 of RSUs vest and your employer withholds 22% for federal income tax.

That's $22,000 of federal withholding.

If much of that income ultimately falls within a 35% federal marginal tax bracket, the tax associated with that income could be substantially higher.

That difference is why the phrase "my company already sold shares for taxes" does not necessarily mean your RSU tax obligation has been fully covered.

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What Can You Do if Your RSU Withholding Is Too Low?

Some employers allow employees to increase their federal supplemental withholding rate from the standard 22%, sometimes up to 37%. If you expect the standard rate to leave a tax shortfall, increasing your withholding can help cover more of your projected tax liability throughout the year.

The tradeoff is that more of your shares may be sold or withheld at vesting, leaving you with fewer shares afterward.

Another option is to work with your advisor to estimate your tax liability and determine whether you're on track to meet safe harbor rules. This can help you plan for the potential gap between what is withheld from your RSUs and what you may ultimately owe.

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Should You Increase Your RSU Withholding?

It depends on your situation.

Increasing your RSU withholding can make sense when you expect the standard supplemental withholding rate to leave a significant tax shortfall.

However, higher withholding also means giving up more shares or cash upfront.

Instead of automatically choosing the highest available withholding rate, consider your:

• Expected annual income
• Projected RSU vesting
• Federal and state tax brackets
• Available cash
• Concentration in company stock
• Estimated tax payments
• Safe harbor requirements
• Broader financial goals

The right withholding strategy should be part of your overall tax and equity compensation plan.

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Frequently Asked Questions About RSU Supplemental Withholding

• What is the supplemental withholding rate for RSUs?

  For federal income tax purposes, supplemental wages are generally withheld at 22% up to $1 million. Supplemental wages above the applicable $1 million threshold are generally subject to 37% federal withholding.

• Are RSUs taxed at 22%?

  Not necessarily. 22% is a federal withholding rate, not necessarily your final tax rate. Your actual tax liability depends on your total taxable income and individual tax situation.

• Why did my company sell 40% of my RSUs for taxes?

  Sell-to-cover may account for several different taxes, including federal income tax, state income tax, Social Security, and Medicare. The percentage of shares sold therefore may be significantly higher than the federal supplemental withholding rate alone.

• Why do I owe taxes if my company already withheld taxes on my RSUs?

  You may owe additional taxes if the amount withheld at vesting was lower than your actual tax liability. This commonly happens when RSUs are federally withheld at 22% but the employee's income places them in a higher marginal federal tax bracket.

• What is the California supplemental withholding rate for RSUs?

  California generally applies a 10.23% supplemental wage withholding rate to certain stock-based compensation and bonuses. Your actual California income tax liability may be higher or lower depending on your overall tax situation.

• Can I increase the tax withholding on my RSUs?

  Some employers allow employees to elect a higher supplemental withholding rate. Available elections vary by employer and equity plan, so check your company's equity compensation or payroll settings.

• Do I need to make estimated tax payments for RSUs?

  Possibly. If your withholding is not expected to cover enough of your annual tax liability, additional withholding or estimated tax payments may be appropriate. Safe harbor rules can also play an important role in determining how much you should pay during the year.

The Bottom Line

RSU supplemental withholding is not a personalized calculation of how much tax you actually owe.

Your employer follows federal, state, and payroll withholding rules when your RSUs vest. For higher-income employees, the standard 22% federal supplemental withholding rate can create a gap between taxes withheld and the final tax liability.

Understanding that gap before your RSUs vest can help you plan your withholding, estimated payments, cash flow, and equity strategy instead of being surprised at tax time.

At DiversiFi, we specialize in helping tech professionals navigate RSUs, taxes, and concentrated company stock as part of a coordinated financial plan.

Have RSUs vesting this year? Schedule a consultation with us to understand your potential tax exposure and build a plan before your next vest.

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