Why Your RSU Withholding Is Probably Too Low and 6 Ways to Fix It Before April

Why Your RSU Withholding Is Probably Too Low and 6 Ways to Fix It Before April

Your company withheld taxes on your RSUs. That is true, and it is also why nobody expects the bill.

The RSU withholding shortfall is not an error by your payroll department. It is the predictable result of a rule doing exactly what it was designed to do, applied to an income level it was not designed for. Payroll followed the regulation. The regulation just does not know your marginal rate.

Here is the mechanic, and then six ways to close the gap while you still can.

The RSU Withholding Shortfall Starts With a Flat Rate, Not a Calculation

RSUs are compensation. When they vest, the value is wages, and your employer withholds.

But vesting income is treated as supplemental wages, and supplemental wages have their own withholding methods. For 2026, employers may use an optional flat rate of 22 percent on supplemental wages, and a mandatory 37 percent applies to supplemental wages above $1 million paid to one employee in a calendar year. That is per IRS Publication 15. The optional flat rate is available only in defined circumstances, and the alternative is the aggregate method, which combines the supplemental payment with regular wages. In practice most payroll systems apply the 22 percent flat rate by default, which is why it is the number you see.

Read that again with your own tax bracket in mind. If your marginal federal rate is 32 or 35 percent, and your RSUs were withheld at 22 percent, the gap is ten to thirteen points of a number that may be the largest single line on your W-2. That is the RSU withholding shortfall, and it accrues silently across every vest.

Sell to cover does not change this. Sell to cover describes how the withholding is funded, by selling some of the shares, not how much is withheld. The rate is still the flat supplemental rate.

Three Things Sell to Cover Does Not Cover

The federal gap is the headline. There are three more, and they compound it.

State withholding. Many states also apply a flat supplemental rate that may sit below your actual state marginal rate. Some states handle it differently or have no income tax at all. If you live in a high-rate state, this is a second gap stacked on the first.

Additional Medicare tax. An extra 0.9 percent applies to wages above a threshold. Employers are required to begin withholding it once an employee's wages from that employer exceed $200,000 in a year, which does not account for a spouse's income or a second employer, so a household can be under-withheld even when each employer followed the rule.

Net investment income tax. This one is not about the vest at all. It is about what happens afterward. A 3.8 percent tax can apply to investment income above certain thresholds, and gains on shares you hold and later sell are investment income. Your vest withholding never contemplated it.

Fix 1: Add a Fixed Extra Amount on Your W-4

The cleanest correction is the least clever one.

Form W-4 has a line for an additional amount to withhold from each paycheck. Estimate the annual shortfall, divide by remaining pay periods, and enter that number. Withholding is treated as paid evenly across the year regardless of when it actually happened, which is a genuine advantage over other methods.

Do not try to fix this by adjusting dependents or other entries to manufacture more withholding. The current W-4 is not built to be gamed that way, and you will produce a number nobody can explain later.

The cost: your take-home pay drops now, and if you overshoot you have given the government an interest-free loan until your refund arrives.

Fix 2: Make a Targeted Estimated Payment in the Vest Quarter

If the vest already happened and W-4 changes cannot catch up, an estimated payment is the direct route.

The nuance worth knowing: estimated tax penalties are generally calculated quarter by quarter, so a large payment in the fourth quarter does not necessarily cure a shortfall created by a first-quarter vest. If your income is lumpy, the annualized income installment method exists precisely for this, and it lets you match payments to when the income actually arrived. It requires an extra form and some work.

The cost: cash out the door earlier, and the annualized method adds real complexity to your return.

Fix 3: Use the Safe Harbor Deliberately

You do not have to pay exactly what you will owe to avoid an underpayment penalty. You have to hit a safe harbor.

In general terms, you can avoid the penalty by paying either 90 percent of the current year's tax or 100 percent of the prior year's tax, with that second figure rising to 110 percent if your prior year adjusted gross income exceeded $150,000, or $75,000 if you file married filing separately. Most people reading this are in the 110 percent lane.

This is a powerful planning tool in a year when your income jumps, because the prior year number is already known and fixed. You can compute the target in January instead of guessing at your December total.

The limitation, stated plainly: the safe harbor protects you from the penalty, not from the tax. You will still owe the balance in April, and if you used the safe harbor to defer, that balance may be large. Know the number before you rely on the strategy.

Fix 4: Sell Additional Shares at Vest on Purpose

Sell to cover sells just enough to fund the required withholding. Nothing stops you from selling more.

Shares sold immediately at vest generally have little or no gain, because your basis is the value taken into income at vest. That makes vest-day the simplest moment to raise cash for the tax, and it avoids the scenario where you owe tax in April on a vest whose shares have since fallen in value.

Whether you should hold or sell company stock is a portfolio question with concentration risk on one side and conviction on the other, and it belongs with your own advisor rather than a tax article. What is a tax observation, not investment advice, is that holding shares does not reduce the tax already triggered at vest.

Fix 5: Coordinate With a Spouse's Withholding

Two W-4s filled out independently will generally under-withhold a joint return, because each one assumes it is looking at the whole picture.

Add the household's expected income, including vests, and treat the withholding decision as one decision. The W-4 has a section for multiple jobs, and the IRS publishes an online estimator for this. If one spouse has more stable income, putting the additional withholding on that paycheck is usually simpler to manage.

The cost: this requires a conversation with real numbers in it, which is the actual barrier for most households.

Fix 6: Check the Year-End Paystub Before the Door Closes

The last useful week of the year is the one where you can still act.

Pull your final paystub of the year, or the last one you will receive in time, and compare total federal withholding against your safe harbor target. If you are short, there are still moves available: a final estimated payment, an increase in withholding on a December paycheck, or a deliberate decision to owe and plan for it.

After December 31, the withholding options are gone and only the payment options remain. That is the whole reason this fix is on the list.

Where a CPA Earns the Fee on an RSU Withholding Shortfall

This is not complicated math. It is arithmetic that requires knowing several numbers at once and doing it before a deadline, which is a different skill than knowing tax law.

Doug Johnson CPA is a Los Angeles firm founded in 2024, with three employees, serving clients nationwide. Its Sam's List profile describes the practice as built for growing businesses between $250,000 and $10 million in revenue and for high earners with equity compensation, and it lists minimums of $250,000 in income or $250,000 in revenue.

The equity compensation positioning is the reason it appears in this article. Equity comp is a place where the difference between a preparer and a planner is measurable, because a preparer tells you the number in April and a planner tells you the number in the quarter you can still do something about it.

Doug Johnson CPA has 15 verified client reviews on Sam's List as of 2026-09-15. Each review is submitted by an individual who identifies as a client of the firm and rates it on communication, subject-matter knowledge, and overall satisfaction. Reviews reflect those individual experiences and do not represent an endorsement by Sam's List. Doug Johnson CPA is a paying Sam's List member, and payment does not buy, influence, or remove reviews. Ratings and rankings are not indicative of future performance or results.

The limitations: those minimums exclude a lot of people with RSUs, a three-person firm founded in 2024 has a short track record, and proactive planning costs more than a return. If your equity is modest and your situation otherwise simple, the estimator plus a careful W-4 may get you most of the way.

Frequently Asked Questions

Why did I owe taxes on RSUs that were already taxed?

Because withholding and liability are two different numbers. Your employer withheld at the flat supplemental wage rate, which for 2026 is 22 percent below $1 million of supplemental wages. If your marginal rate is higher than that, the difference was never withheld and shows up as a balance due. Nothing went wrong; the default rate simply does not match your bracket.

Can I ask my employer to withhold more on my RSUs?

Usually not on the vest itself. The 22 percent figure is an optional flat rate the employer may use for supplemental wages, and most payroll systems apply it by default and will not vary it on request. The alternative aggregate method exists, but choosing between the two is the employer's decision rather than yours. What you can do is increase withholding on your regular paycheck through Form W-4, which is treated as paid evenly across the year. Ask your payroll team what your plan and system actually permit.

Does selling my shares immediately avoid the problem?

It helps with cash, not with tax. The tax was triggered when the shares vested, regardless of what you do next. Selling at vest generally produces little additional gain and gives you cash to pay the bill, which avoids owing tax on shares that later dropped in value. Whether to hold is a separate portfolio decision.

What is the safe harbor if my income jumped this year?

Generally, paying 100 percent of your prior year tax, or 110 percent if your prior year adjusted gross income was over $150,000 ($75,000 if married filing separately), avoids the underpayment penalty even if this year's liability is much larger. That makes a big-income year the classic case for using it. Confirm the current thresholds and your own eligibility with a tax professional, and remember the balance is still due in April.

If you have a vest this year and have not looked at your withholding against a safe harbor number, that is a twenty minute exercise that decides how April feels. You can browse accountants on Sam's List if you want someone to run it with you.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.