Is the RSU withholding rate the same as my tax rate?

No. The withholding rate is a flat statutory percentage (22% federal up to $1 million in annual supplemental wages, 37% above that). Your tax rate is whatever your marginal bracket actually is based on total income — they only coincidentally match if your income keeps you inside the 22% bracket.

Can I choose a different withholding rate on my RSUs?

Sometimes. Some employers' stock plans let you elect a higher flat rate (like 32% or 37%) instead of the 22% default. Ask your stock plan administrator whether this option exists; if not, use extra W-4 withholding or estimated payments instead.

What happens once my supplemental wages pass $1 million in a year?

Any supplemental wages above $1 million from the same employer in that calendar year are withheld at a mandatory 37% — no election, no exception — per IRS Publication 15.

Does sell-to-cover withholding include state taxes too?

Usually yes, if you owe state income tax — your broker typically sells enough shares to cover federal, state, Social Security, and Medicare withholding together, though the specific mix depends on your state and employer.

How do I avoid an underpayment penalty from RSU under-withholding?

Aim to have your total withholding plus any estimated payments meet the IRS safe harbor: the smaller of 90% of your current year's total tax or 100% of last year's tax (110% if last year's adjusted gross income exceeded $150,000).

What is the RSU withholding rate, and why might it be wrong for you?

RSUs are withheld at a flat 22% federal rate, but that's often below your real bracket. Learn why, and how to avoid a surprise tax bill.

Companies withhold federal tax on vested RSUs at a flat 22% supplemental wage rate (37% on any amount over $1 million in supplemental wages in a calendar year), regardless of your actual tax bracket. If your real marginal rate is higher than 22% — common for anyone earning a solid salary on top of RSU income — you'll be under-withheld and owe the difference when you file.

Devon just had 500 RSU shares vest at $120 each. Her paycheck shows tax already withheld, so she assumes she's covered. She isn't: her salary alone puts her well above the 22% bracket, and the flat rate her company used has nothing to do with her actual tax situation.

Key points

RSU withholding uses a flat statutory rate — 22% federal up to $1 million in supplemental wages per year, 37% above that — not your real marginal tax rate.
This flat rate systematically under-withholds anyone whose combined income lands them in the 24%, 32%, 35%, or 37% brackets, which describes most meaningful RSU recipients.
The gap between what's withheld and what you actually owe becomes a bill at tax filing, unless you proactively increase withholding or make estimated payments.

Why companies use a flat rate instead of your real bracket

Your regular paycheck withholding is personalized: it factors in your W-4 elections, your pay frequency, and IRS wage tables designed to approximate your actual annual tax liability. RSU income doesn't get that treatment. The IRS classifies vested RSU value as a supplemental wage — the same category as bonuses and commissions — and for supplemental wages, employers are allowed to skip the personalized calculation entirely and withhold a flat percentage instead.

Here's the intuition for why this shortcut exists: your payroll system doesn't necessarily know your spouse's income, your other investments, or what bracket your total household income will land in by December. Rather than guess, the IRS lets employers apply one flat number to every supplemental payment and move on. It's administratively simple. It is not personalized, and it was never designed to be.

Under IRS Publication 15 (Circular E), the current flat supplemental wage withholding rate is:

22% on supplemental wages up to $1 million paid to an employee by one employer in a calendar year
37% — the top marginal rate — mandatorily applied to any supplemental wages above $1 million from that employer in the same year, with no election available on that excess

Some employers instead use the "aggregate method," combining your RSU income with a regular paycheck and withholding as if the total were one ordinary payment — this can land closer to your real rate, but flat-rate withholding is far more common for standalone vesting events.

Why 22% is usually too low for RSU recipients

The 22% flat rate happens to match the middle of the federal 22% bracket for a single filer's 2026 taxable income (roughly $50,400 to $105,700, per IRS 2026 rate schedules). If your total income keeps you inside that bracket, 22% withholding is a reasonably close match to your real liability.

The problem is that most people receiving meaningful RSU grants have total income — salary plus vesting value — well above that range. Once your taxable income crosses into the 24%, 32%, 35%, or 37% brackets, every additional dollar of RSU income is actually taxed at that higher marginal rate, while your company is still only withholding 22% of it. The government isn't forgiving the difference — it's just not collecting it yet. That gap comes due when you file.

Think about it this way: withholding is a down payment, not a receipt. The 22% that came out of Devon's vest is a rough deposit against her eventual tax bill, not the final answer to "how much tax do I owe on this stock." If her real marginal rate is 35%, she's short by 13 percentage points on every dollar of that vest — and that shortfall doesn't show up until she files her return, by which point the stock may have moved, the cash may be spent, and the surprise is much harder to absorb.

The sell-to-cover mechanic

Most companies don't ask you to write a check for RSU withholding. Instead, they use sell-to-cover: at vesting, your broker automatically sells a portion of your newly vested shares — enough to generate cash equal to the withholding amount — and remits that cash to the IRS and other tax authorities on your behalf. You keep the remaining shares.

This is convenient, but it's easy to misread as "I've paid my RSU taxes in full." All it guarantees is that the 22% flat withholding requirement has been satisfied — not that your actual tax liability has been covered. If your real bracket is higher, sell-to-cover still leaves a gap, just an invisible one, because the shares withheld came directly out of your position rather than out of a bank account where you'd notice the shortfall.

A worked example

Devon earns a $160,000 salary and just had 500 RSU shares vest at $120 each.

Value of vest: 500 × $120 = $60,000, added to her W-2 wages on top of her $160,000 salary — total wages of $220,000 for the year.
Federal withholding on the vest at the flat rate: $60,000 × 22% = $13,200. Her broker sells 110 shares (110 × $120 = $13,200) to cover this, leaving her with 390 shares.
Devon's actual marginal federal bracket: At $220,000 of taxable income (single filer, 2026 brackets), Devon is well into the 32% bracket (which runs from $201,776 to $256,225 for single filers in 2026, per Tax Foundation's summary of 2026 IRS brackets). Every dollar of her RSU income is taxed at 32%, not 22%.
What she actually owes on the RSU income: $60,000 × 32% = $19,200.
The shortfall: $19,200 − $13,200 = $6,000 still owed, purely on the withholding gap for this one vest, before accounting for FICA, state tax, or any other income changes.

If Devon does nothing else, that $6,000 (times however many vesting events she has that year) shows up as a balance due when she files — potentially along with an underpayment penalty if her total withholding and estimated payments fall short of the IRS safe harbor (generally the smaller of 90% of the current year's tax or 100% of last year's, 110% if last year's income was over $150,000).

Her options to close the gap proactively: - Increase withholding on future paychecks via Form W-4, Line 4c ("extra withholding"), spreading the $6,000 across remaining pay periods. - Ask her stock plan administrator if she can elect a higher flat withholding rate on future vests (some plans allow 24%, 32%, or higher instead of the 22% default). - Make a quarterly estimated tax payment directly to the IRS via Form 1040-ES ahead of the filing deadline.

The formula

Withholding at vesting = Vested share value × 22% (up to $1M in supplemental wages per year; 37% on the excess)

Actual tax owed on vest = Vested share value × your real marginal tax rate

Shortfall (or excess) = Actual tax owed − Withholding at vesting

How WealthOS helps

WealthOS calculates your real marginal tax rate from your actual income and grants, then flags the gap between that and the flat 22% (or 37%) withheld on each vest — before it becomes a surprise at filing. Connect your paycheck and equity details and we'll estimate exactly how much extra to set aside or withhold.

Frequently asked questions

Is the RSU withholding rate the same as my tax rate?: No. The withholding rate is a flat statutory percentage (22% federal up to $1 million in annual supplemental wages, 37% above that). Your tax rate is whatever your marginal bracket actually is based on total income — they only coincidentally match if your income keeps you inside the 22% bracket.
Can I choose a different withholding rate on my RSUs?: Sometimes. Some employers' stock plans let you elect a higher flat rate (like 32% or 37%) instead of the 22% default. Ask your stock plan administrator whether this option exists; if not, use extra W-4 withholding or estimated payments instead.
What happens once my supplemental wages pass $1 million in a year?: Any supplemental wages above $1 million from the same employer in that calendar year are withheld at a mandatory 37% — no election, no exception — per IRS Publication 15.
Does sell-to-cover withholding include state taxes too?: Usually yes, if you owe state income tax — your broker typically sells enough shares to cover federal, state, Social Security, and Medicare withholding together, though the specific mix depends on your state and employer.
How do I avoid an underpayment penalty from RSU under-withholding?: Aim to have your total withholding plus any estimated payments meet the IRS safe harbor: the smaller of 90% of your current year's total tax or 100% of last year's tax (110% if last year's adjusted gross income exceeded $150,000).

Sources

This article is educational and not tax, legal, or financial advice. Talk to a CPA or tax advisor about your specific situation.

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