RSU Supplemental Withholding 101
Restricted Stock Units (RSUs) have become a popular form of compensation, especially in tech. While RSUs can be an excellent way to build wealth, they come with important tax implications. One aspect that often confuses employees is supplemental withholding.
In this post, learn about RSU supplemental withholding, the tax implications both federally and in Califonia, and four things you can do to avoid a surprise bill.
WHAT ARE RSUS?
RSUs are a form of equity compensation granted by your employer. Instead of giving you cash upfront, your employer promises to give you company shares in the future. These shares "vest" over time, typically according to a predetermined schedule. Once your RSUs vest, the value of the shares is treated as taxable income.
THE BASICS OF SUPPLEMENTAL WITHHOLDING
When your RSUs vest, the fair market value of the shares becomes taxable 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 (i.e., a bonus or non-regular wage), it is subject to supplemental withholding rates.
FEDERAL RSU SUPPLEMENTAL WITHHOLDING RATES
Flat Rate Method: The IRS sets a flat rate for supplemental income. As of 2023 (and continued into 2025), the rate is 22% for amounts up to $1 million. For amounts above $1 million, the rate increases to 37%.
Example #1: If you earned $150k in regular income and $150k in supplemental income, the supplemental income will be withheld at 22% IRS because your total income of $300k is less than the $1 million threshold for using the higher 37% flat rate. Any supplemental income you earn as you exceed $1 million of any income in a given year on your paystub will then be withheld at 37%.
Example #2: If you earn $900k on your paystub and receive a $200k RSU vest, $100k will be withheld at 22%, and then $100k will be withheld at 37%, as that is the amount that finally exceeds $1 million.
STATE TAXES
In addition to federal taxes, your RSU income is subject to state income tax, where applicable. States have their own supplemental withholding rules and rates, so it’s essential to know your local tax laws.
California has a progressive income tax system, with rates ranging from 1% to 13.3%, depending on your income level. For supplemental wages like RSUs, California applies a flat supplemental withholding rate of 10.23% as of 2025. However, this withholding rate may not reflect your actual tax liability, especially if you are in a higher tax bracket. It’s important to review your total tax situation and plan accordingly.
SOCIAL SECURITY AND MEDICARE TAXES
RSU income is also subject to Social Security and Medicare taxes (FICA).
These taxes are withheld at the same rate as your regular wages:
Social Security: 6.2% (up to the annual wage base limit, which is $160,200 in 2023).
Medicare: 1.45% on all income, with an additional 0.9% for income exceeding $200,000 (for single filers).
WHY SUPPLEMENTAL WITHHOLDING MIGHT FALL SHORT
The flat 22% federal withholding rate might seem like a lot, but it could be insufficient if you’re in a higher tax bracket. For example, if your effective tax rate is 35%, you’ll owe additional taxes when you file your return.
Here’s why:
RSU income is added to your total taxable income, which could push you into a higher marginal tax bracket.
If the supplemental withholding rate doesn’t cover your actual tax liability, you’ll have to pay the difference at tax time.
4 STRATEGIES TO AVOID A SURPRISE TAX BILL
Tax planning isn’t just for tax season; making adjustments throughout the year can reduce tax burdens and maximize income.
Here are some strategies to consider:
Adjust Your Withholding: Use Form W-4 to increase the amount withheld from your regular paycheck. This can help cover the shortfall from the flat 22% RSU withholding rate.
Make Estimated Tax Payments: If you expect a significant tax liability from RSU income, you can make quarterly estimated tax payments to the IRS.
Set Aside Cash: Be prepared to pay the difference when you file your tax return. Set aside a portion of your RSU income for taxes.
Consult a Tax Professional: A CPA or financial advisor can help you plan for RSU-related taxes and ensure you’re not caught off guard.
FINAL THOUGHTS
RSUs can be a valuable part of your compensation package, but understanding the tax implications is crucial. Supplemental withholding is just one piece of the puzzle. By planning ahead and leveraging strategies to manage your tax liability, you can make the most of your RSUs without the stress of an unexpected tax bill.
If you’re unsure about your specific situation, schedule a consultation with us to help you develop a customized tax and financial plan that works for you.
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Tax information given is provided as a general strategy and not intended as tax advice.