Restricted stock units are one of the most common forms of equity compensation, especially in tech. They're also one of the most commonly misunderstood — not because the rules are exotic, but because the way they're withheld can leave even careful people with a surprise tax bill. Here's how RSU taxation actually works, and where the trap is.
RSUs are taxed as ordinary income at vesting
When your RSUs vest, the IRS treats their full market value on that day as ordinary income — exactly like salary or a cash bonus. If 500 shares vest at $200 each, that's $100,000 of ordinary income added to your W-2 for the year. It's subject to federal income tax, Social Security, Medicare, and state income tax, all in the year of vesting. This happens whether or not you sell the shares.
The 22% withholding trap
Here's where people get caught. The IRS lets employers withhold federal tax on supplemental wages — including RSUs — at a flat 22% (rising to 37% on amounts over $1 million in a year). Many employers use that flat 22% by default. The problem: if your salary already puts you in the 32% or 35% marginal bracket, withholding only 22% on your RSU income means not enough tax is being taken out.
That gap doesn't vanish. It shows up as a balance due when you file your return — sometimes a very large one, and sometimes with an underpayment penalty on top.
A concrete example
Say you earn a $300,000 base salary and $100,000 of RSUs vest during the year. Your employer withholds 22% on the RSUs — that's $22,000. But because that $100,000 stacks on top of your salary, it's actually taxed at your marginal rate, around 35% — roughly $35,000. The difference, about $13,000, is what you'll owe at filing. Across multiple vesting events in a year, the shortfall multiplies.
What about Social Security and Medicare?
RSU income is wages, so payroll taxes apply too. Social Security only applies up to the annual wage base — if your salary already exceeds it, your RSUs owe no additional Social Security. Medicare's 1.45% applies to every dollar, and high earners pay an extra 0.9% above the threshold. State income tax depends on where you live; in no-income-tax states, your RSUs escape state tax entirely.
How to avoid the surprise
- Estimate the gap in advance. Compare your true marginal rate to the 22% withheld and know the dollar difference before filing season.
- Set the money aside. Park the shortfall in savings so it's ready when the bill comes.
- Increase withholding or pay estimates. Adjust your W-4 or make quarterly estimated payments to close the gap and avoid penalties.
See your exact gap
The fastest way to know your number is to run it. Our RSU tax calculator stacks your RSU income on your salary, applies your real marginal federal and state rates plus FICA, and shows the exact withholding gap — the amount you may owe at filing.
The reason this trap exists comes down to marginal vs. flat rates. If that distinction is fuzzy, our guide on understanding tax brackets makes it concrete.
Educational information, not tax advice. RSU and withholding rules vary; consult a CPA for your situation.