Your Company Withholds 22% on RSUs. Your Real Rate Is Probably 32%.

Here is the arithmetic that catches people. Your RSUs vest. Say $200,000 worth. Your company withholds 22% for federal tax, sells enough shares to cover it, and hands you the rest. The paperwork looks handled.

Except that $200,000 lands on top of your salary, and your actual marginal rate is probably 32% or 35%. The 22% was never a calculation of what you owe. It is a flat rate the IRS tells employers to apply to supplemental wages, and it has nothing to do with your bracket.^[1]The difference is yours to settle in April, and on a vest that size it is tens of thousands of dollars.

That is the well-known problem. There is a second one, buried in your brokerage's tax forms, that makes people pay tax twice on the same shares. That one is worse, because nobody tells you about it at all.

What Actually Happens at Vest

An RSU is a promise. Nothing is taxable at grant. On the vesting date the shares are delivered, and the fair market value of those shares that day becomes ordinary income. It goes into your W-2 wages alongside your salary.

Two consequences follow, and both surprise people.

You owe the tax whether or not you sell. The taxable event is the vest, not the sale. If the stock falls 40% between vesting in November and the filing deadline in April, you still owe tax on the November value. This is the mechanism that hurt a lot of people in 2000 and 2022, and it will do it again.

Your vest-date value becomes your cost basis. Everything after that is a capital gain or loss measured from there. Sell immediately and the gain is roughly zero, which is why same-day sale is the simplest choice and not a tax-motivated one. Hold twelve months past vest and further appreciation qualifies for long-term capital gains rates, which is a meaningfully different tax on that second leg.

The Withholding Gap

Federal supplemental withholding is 22% on cumulative supplemental wages up to $1 million in a year, and 37% on anything above that.^[1] For 2026 the 24% bracket begins around $106,250 for a single filer and $211,400 for married filing jointly.^[1]

So the moment your total income clears roughly six figures, 22% is too little. Not by a rounding error. If you are in the 35% bracket, every dollar of RSU income is under-withheld by 13 cents, and nothing in your pay stub flags it.

The $1 million line has a sharp edge worth knowing about. It is cumulative across all supplemental wages for the year, so a bonus in March counts toward it. And a single vest can straddle it, with part withheld at 22% and the remainder at 37%.^[1] People who cross that line mid-year often see wildly different withholding on two vests of identical size and assume payroll made a mistake. It did not.

The $0 Cost Basis Trap

This is the one that costs real money, and it is an error rather than a shortfall.

When you sell RSU shares, your broker issues a Form 1099-B. For RSUs it very often reports a cost basis of $0.^[2]That is not fraud and not exactly a mistake on the broker's part: brokers are required to report what you paid for the shares, which for RSUs is nothing, and they generally have no visibility into what your employer already reported as wages on your W-2.^[2]

But if you or your software accept that $0, the entire sale proceeds get taxed as capital gain, on top of the vest-date value that was already taxed as ordinary income. You pay twice on the same money.

Sell $200,000 of just-vested stock with a reported basis of $0 and you have declared a $200,000 capital gain on shares whose real gain was approximately nothing.

Some brokers now supply a supplemental statement with the corrected basis alongside the 1099-B. If yours does, use it. If it does not, the number you need is on your own vest paperwork, and it is worth ten minutes.

No, You Cannot 83(b) an RSU

This comes up constantly and the answer is no. A Section 83(b) election lets you pay tax at grant on property transferred subject to vesting, which is powerful for early-stage equity when the value is near zero. It requires an actual transfer of property.

An RSU is not property. It is an unfunded contractual promise to deliver shares later, so there is nothing to elect on. The instrument 83(b) was written for is a restricted stock award, real shares issued now and subject to forfeiture. The names are close enough that people conflate them and occasionally file an election that does nothing. If your grant documents say “Units,” the election is not available to you.

What To Actually Do

Work out the gap once a year, not in April. Estimate total income, find your marginal rate, subtract 22%, multiply by the RSU income you expect. That is roughly what you will owe beyond withholding. Knowing it in October is a very different experience from discovering it at filing.

Close the gap deliberately. Most payroll systems let you add extra federal withholding to your regular salary, which is the cleanest fix because withholding is treated as paid evenly through the year. Quarterly estimated payments also work. Doing nothing works too, right up until the underpayment penalty.

Decide about the shares separately from the tax. The question of whether to hold vested stock is not a tax question, it is a concentration question. Your salary, your health insurance and your equity are already pointing at the same company. A useful test: if your employer handed you the cash instead, would you buy this much of their stock with it? Most people say no, and then hold anyway.

Do not let the tax tail wag the dog. Holding a concentrated position for twelve months to convert a gain to long-term rates can be right, and it can also mean risking 30% of the position to save 15% on the gain. Run the actual numbers rather than the instinct.

Once the tax is handled, the rest is ordinary portfolio construction: where the proceeds go is the same question as any other cash, and the default answers are in index funds, dollar-cost averaging versus lump sum, and the accounts worth filling first, including the HSA and the employer match you may already be leaving on the table.