Answer (2026): RSUs are taxed as ordinary income the day they vest, at the fair market value of the shares delivered. Your employer withholds federal tax at a flat 22% on supplemental wages up to $1 million, and 37% above that. If your household income puts you in the 32%, 35%, or 37% bracket, that 22% default under-withholds at every single vest. On a $200,000 vest in the 35% bracket, the gap is roughly $26,000 in federal tax alone, due at filing unless you close it during the year.
Context: Best for households earning $150K to $2M with a recurring vest schedule, especially when RSU income stacks on top of a working spouse's salary, business income, or other equity events.
Action: Pull your year-to-date withholding and run the Year-End Tax Projection before your next vest date. Twenty minutes now beats an April surprise.
Last reviewed: June 11, 2026.
- Vesting is the taxable event. The full market value of delivered shares hits your W-2 as ordinary income, whether you sell or not.
- The federal supplemental withholding rate is 22% up to $1 million of supplemental wages and a mandatory 37% above it. Both rates are now permanent. Neither one matches a 32% to 37% marginal bracket on the first million.
- Selling at vest does not avoid the income tax. It only stops future gain or loss from accumulating in a position you may not have chosen to hold.
- A vest schedule is a re-concentration machine. Every quarter it adds more of your employer's stock to a balance sheet that already depends on the same company for salary, bonus, and health insurance.
- The fix is coordination, not heroics: a safe-harbor check, a written hold-or-sell policy, and a short document packet your CPA can act on before year-end.
- You have a quarterly or monthly vest schedule at a public company and your total household income is above roughly $400,000.
- You are the household's de facto CFO: one spouse with equity comp, maybe a business or rental on the side, a CPA in one inbox and an advisor in another.
- You sold RSU shares last year, got a 1099-B that looked wrong, and paid your CPA to untangle it after the fact.
Read these three statements. If two apply, this guide was written for you:
- You could not say, within $10,000, whether your withholding is on track for this year.
- Employer stock is more than 10% of your investable assets and the next vest will push it higher.
- Your CPA finds out what vested in February, when the W-2 arrives, instead of in October when something could still be done.
The lifecycle has three moments. Only two of them are taxable.
- Grant. Your employer promises shares on a schedule. Nothing is taxable yet, and unlike stock options there is no exercise decision and no 83(b) election to weigh for standard RSUs.
- Vest. Shares are delivered. Their fair market value on that day is ordinary income on your W-2, subject to federal and state income tax, Social Security up to the $184,500 wage base, and Medicare with no cap (plus the 0.9% additional Medicare tax on wages above $200,000 single or $250,000 married filing jointly).
- Sale. Any movement after vest is capital gain or loss. Your cost basis is the market value on the vest date. Hold the shares more than a year past vest and gains qualify for long-term rates; sell sooner and gains are taxed as ordinary income.
Most employers handle the vest-day tax bill by selling a slice of your shares automatically (sell-to-cover) or by withholding shares (net settlement). Either way, the amount withheld is calculated at the supplemental rate, and that is where the problem starts.
The IRS lets employers withhold federal tax on supplemental wages (bonuses, commissions, RSU vests) at a flat 22%, as long as your cumulative supplemental wages stay under $1 million for the year. Above $1 million, a mandatory 37% kicks in. The One Big Beautiful Bill Act made both rates permanent, so this is the regime for 2026 and beyond.
But 22% is not your tax rate. It is a payroll convenience. In 2026 the 32% bracket starts at $202,850 of taxable income for single filers and $403,550 for married filing jointly. A household at $450,000 of salary plus a $200,000 vest is paying 35 cents of federal tax on every vested dollar while the equity portal withholds 22.
The math on that vest:
- Withheld at vest: $200,000 x 22% = $44,000
- Actual federal cost at a 35% marginal rate: $70,000
- Gap: $26,000, before state tax
That gap repeats at every vest. Four quarterly vests can stack a six-figure liability by December, and because the IRS expects tax to be paid as income arrives, waiting until April can add an underpayment penalty on top. The IRS interest rate on underpayments has been running at 7% annualized, so the gap is not just deferred, it compounds.
High-tax states widen it. California withholds supplemental wages at 10.23%, but its top marginal rates run to 13.3%. The same structural shortfall, twice.
| Item | 2026 figure | Why it matters at vest |
|---|
| Federal supplemental withholding | 22% up to $1M supplemental wages; 37% above $1M (mandatory) | The default rate applied to your vest, regardless of your bracket |
| 37% bracket begins | $640,600 single / $768,700 MFJ (taxable income) | High earners face up to a 15-point withholding shortfall per vested dollar |
| 35% bracket begins | $257,540 single / $512,450 MFJ | The most common bracket for the $400K to $800K household |
| 32% bracket begins | $202,850 single / $403,550 MFJ | Even here, the default withholding runs 10 points short |
| Long-term capital gains (20% rate begins) | $545,500 single / $613,700 MFJ | Applies to appreciation after vest, if you hold past one year |
| Net investment income tax | 3.8% above $200K single / $250K MFJ MAGI (not indexed) | Stacks on capital gains when you eventually sell appreciated shares |
| Additional Medicare tax | 0.9% on wages above $200K single / $250K MFJ | Applies to the vest itself; employer withholding may not match your filing status |
| Social Security wage base | $184,500 | Usually already maxed by salary before the vest lands |
| Safe-harbor threshold | 110% of prior-year tax if prior AGI was over $150K | The cleanest penalty shield for a high-income vest year |
Sources for every figure are listed at the bottom of this page. Bracket thresholds are taxable income, after deductions.
Two things catch people after vest.
The "taxed twice" myth, and the real version. RSUs are not taxed twice by design. Ordinary income at vest sets your cost basis; only appreciation after vest is taxed again, as capital gain. But there is a real version of the problem: brokers are not required to report your equity-comp basis on the 1099-B, so many report a basis of zero. If you (or your preparer) file the 1099-B as printed, you pay income tax on the vest and capital gains tax on the same dollars. The fix is a basis adjustment on Form 8949 using the supplemental statement your broker issues. This is worth checking on any year you sold.
Holding past vest is a purchase decision. Once shares vest and the income tax is set, holding them is economically the same as taking your bonus in cash and buying your employer's stock the same day. Some households decide that is exactly what they want. The point is to decide it once, in writing, rather than defaulting into it vest after vest.
A vest schedule does something a bonus never does: it keeps rebuilding the same concentrated position. Sell down to a comfortable level in March and the June vest pushes you right back up. Meanwhile your salary, bonus, unvested grants, and possibly your health coverage all depend on the same company. A common reference point in portfolio construction is that a single stock above 10% of investable assets deserves an explicit decision rather than a default, and equity-comp households blow through that level on autopilot.
This is a household-level number, not an account-level one. The brokerage account where shares land may look fine while the household total (including a spouse's holdings of the same stock, ESPP shares, and vested-but-unsold grants) tells a different story. The Concentrated Stock Position Playbook walks the full unwind menu (staged selling, exchange funds, charitable gifting, collars) with the real tradeoffs; the investment coordination guide covers how to see the picture across accounts. The short version is that concentration risk hides in fragmentation.
Trading windows complicate the cleanup. If you are an executive subject to blackout periods, the quarters where you can sell are limited, which makes a standing plan (or a 10b5-1 arrangement, for insiders) worth a conversation with counsel and your advisor.
None of these are recommendations. They are the menu, with the tradeoff each one carries. The right subset depends on your bracket, your state, and how concentrated you already are.
- Raise the withholding election. Some equity portals let you elect supplemental withholding above 22%, up to 37%. The cleanest fix when available, because it requires no quarterly discipline. Many employers do not offer it; confirm in your portal before assuming.
- Use the safe harbor. Pay in (through withholding plus estimates) at least 110% of last year's total tax and the underpayment penalty disappears regardless of what this year's vests do. For 2026, estimated payment dates are April 15, June 15, September 15, and January 15, 2027. Note the IRS periods are not equal calendar quarters; the estimated tax catch-up guide walks the mechanics.
- Write a hold-or-sell policy. One sentence, decided once: "We sell X% of every vest at delivery and review the rest annually." A written default removes the per-vest agonizing and the accidental accumulation.
- Give appreciated shares, not cash. In a heavy-vest year, donating long-held appreciated shares (often through a donor-advised fund) can deduct full market value while skipping the embedded capital gain. The deduction value rises with your bracket, which is exactly when vests spike it.
- Harvest losses against the sales. If diversifying out of vested shares realizes gains, losses elsewhere in the portfolio can offset them. This is a year-round discipline, not a December scramble.
- Coordinate the vest calendar with other income events. A Roth conversion, a business sale, or a big K-1 year stacked on top of heavy vests can push dollars into the 37% bracket that planning could have kept at 35% or below. The vest schedule is known months in advance, which makes it the easiest input to plan around.
- Fill the tax-advantaged space you already have. Maxing 401(k), HSA, and (where the plan allows) after-tax contributions does not fix the withholding gap, but it lowers the taxable base the vest stacks on top of.
If you choose to pursue any of these, confirm eligibility, state impacts, and timing with your CPA. Several interact (the safe harbor changes what a withholding election needs to accomplish, charitable timing changes the harvest math), which is why sequencing belongs in one conversation, not seven.
- Does my equity portal allow a withholding election above 22%, and is it set?
- Will my total payments this year reach 110% of last year's tax without an estimated payment? If not, which IRS date is the next one I can hit?
- What percentage of household investable assets is employer stock today, counting ESPP, spouse holdings, and vested-but-unsold shares?
- Do we have a written hold-or-sell rule for new vests, or are we deciding ad hoc each quarter?
- On the last return with RSU sales, was the 1099-B basis adjusted on Form 8949?
- Which trading windows remain this year, and do they line up with the cleanup we want to do?
This is the difference between a 20-minute working session and a month of email. Before the meeting, assemble:
- The next 12 months of vest dates with share counts and a current price estimate, exported from your equity portal.
- Your most recent paystub, showing year-to-date federal and state withholding, including the supplemental amounts.
- Last year's full return, for the safe-harbor calculation (110% of total tax, not of what feels right).
- Grant agreements for anything unvested, especially if any grants have performance triggers or double-trigger terms.
- The 1099-B and supplemental statement from any year you sold, so basis adjustments can be verified.
- Your trading-window calendar, if you are subject to one.
- A list of other expected income events: bonus timing, K-1 estimates, planned conversions, a side business's projected profit.
Households that keep these documents organized in one place can hand a professional the whole picture in minutes. That is the job X1's document vault and advisor packet were built for: every account, grant, and prior-year filing in one place, shareable before the meeting instead of dribbled out after it. If your equity comp sits alongside a business entity, the LLC vs S-corp guide covers the parallel set of questions on that side of the house.
- You, this week: export the vest schedule and year-to-date withholding, then run the Year-End Tax Projection. You are looking for one number: the size of the gap.
- You and your CPA, before the next vest: confirm whether the safe harbor is met, and if not, whether a withholding election or an estimated payment closes it. June 15 and September 15 are the remaining mid-year payment dates.
- Household, this month: agree on the hold-or-sell sentence and write it down. Revisit annually, not quarterly.
Are RSUs taxed twice?
Not by design. Vesting is taxed as ordinary income and sets your cost basis; sales are taxed only on movement after vest. The practical risk is a 1099-B that reports zero basis, which double-counts the vest income unless adjusted on Form 8949.
Why does my employer only withhold 22%?
Because IRS rules allow a flat 22% on supplemental wages up to $1 million per year. It is an administrative rate, not an estimate of your bracket. Above $1 million of supplemental wages, 37% withholding is mandatory.
Should I sell RSUs as soon as they vest?
Selling at vest locks in the income tax outcome (which is fixed either way) and stops further concentration. Holding is a decision to invest in your employer's stock at today's price. Reasonable households land on either answer; the failure mode is not deciding at all. A written policy, reviewed with your advisor, beats a quarterly debate.
How do I avoid an underpayment penalty in a heavy vest year?
The safe harbor: pay in at least 110% of last year's total tax (for prior-year AGI above $150,000) through withholding and timely estimates, or 90% of this year's actual tax if that is lower. Withholding counts as paid evenly through the year, which makes a late-year withholding election more forgiving than a late estimated payment.
What changes above $1 million of supplemental wages?
Withholding on the excess jumps to a mandatory 37%, which matches the top bracket. The under-withholding trap mostly lives below that line, in the $400K to $1M households where 22% meets a 32% to 37% marginal rate.
Do state taxes have the same problem?
Often, yes. States set their own supplemental withholding rates, and in high-tax states the flat rate can sit below the top marginal rate. California's 10.23% supplemental rate against a 13.3% top bracket is the largest common example.
If you only do one thing, run the Year-End Tax Projection before your next vest date. If the gap is meaningful, the Estimated Tax Catch-Up shows whether the next IRS payment window can absorb it.
This guide is for planning and coordination only. It does not provide tax, legal, or investment advice. Tax outcomes depend on your full situation; confirm eligibility, amounts, and timing with a qualified professional before acting.
