RSU Tax Withholding: How It Works at Vest and Why It May Differ From Your Tax Bill

How RSUs are taxed at vest

A restricted stock unit (RSU) is a promise from an employer to deliver shares, or sometimes cash, once vesting conditions are met. Under the IRS rules for restricted property in Publication 525, when property received for services is no longer subject to a substantial risk of forfeiture, you generally include its fair market value, minus anything you paid for it, in income for that year. For RSUs that pay out in shares at vest, that means the value of the shares on the vest date is typically treated as wages, and it normally appears in box 1 of your Form W-2 along with your salary and bonus.

The tax event is the vest, not the later sale. Your holding period for the shares generally begins when they vest. If you sell later, any gain or loss compared with the value already included in income is a separate capital gain or loss. Plan terms vary, and some plans, including certain private-company plans, follow different timing rules, so your award agreement and plan documents are the starting point.

Federal withholding on RSU income

Federal income tax withholding on RSU income follows the rules for supplemental wages in section 7 of IRS Publication 15. The IRS describes supplemental wages as wage payments that are not regular wages, such as bonuses, commissions, and severance pay. Employers commonly treat RSU income the same way, and your payroll department decides the method it uses.

Under the 2026 edition of Publication 15:

• Optional flat rate, 22%. If supplemental wages are paid separately, or identified separately from regular wages, and the employer withheld income tax from your regular wages in the current or previous calendar year, the employer can withhold a flat 22%. No other flat percentage is allowed.
• Aggregate method. If supplemental wages are paid together with regular wages and not separately identified, the employer withholds as if the total were a single payment for a regular payroll period. The employer can also choose this method for separately identified payments.
• Mandatory 37% above $1 million. When supplemental wages paid to an employee in a calendar year exceed $1 million, the excess is withheld at 37% regardless of the employee's Form W-4. Payments from businesses under common control count toward the total.

These are withholding rates, not tax rates. Federal income tax on your return is figured on your total taxable income using the rate schedules, which are described on the IRS page for federal income tax rates and brackets. Withholding is a prepayment that is reconciled when you file.

Why withholding can differ from your tax bill

Withholding is based on a payroll formula, while your tax bill is based on your full-year return. The two can diverge for several reasons:

• A flat rate versus a marginal rate. A flat 22% may be lower than the rate at which the last dollars of a high-income household's income are taxed, which is one reason a vest can leave a balance due. For a household in a lower bracket, the same flat rate could instead lead to a refund.
• Bonus and salary on top of the vest. Vest income stacks on top of regular pay and any bonus, which can push more of the household's income into higher brackets.
• A spouse's income. Each employer withholds as if its own payment were the main picture. Two earners, or a second employer with its own vests, can mean the combined income is higher than either payroll saw.
• Multiple vests in a year. Several vest dates, especially in the same tax year as a bonus or other equity event, add up on one return.
• Additional taxes. The Additional Medicare Tax and, depending on the situation, other taxes are figured on the return and may not match what was withheld.
• Deductions and credits. Pre-tax retirement contributions, itemized deductions, and credits reduce taxable income on the return but are not reflected in a flat supplemental rate.

None of these means withholding is wrong. It means withholding is a payroll estimate that may need to be compared with the household's own projection.

Withholding and payment methods compared

The grid describes how each method typically works. It is a comparison of mechanics, not a ranking, and the right choice depends on the household.

Questions to weigh around a vest

Withholding is one input among several. Households commonly weigh these questions, and none of them has a single correct answer.

• Tax timing: how the vest fits with the rest of the year's income, including bonuses, a spouse's vests, and other equity events.
• Cash needs: whether a balance due at filing, a quarterly estimate, or a near-term goal means holding more cash.
• Concentration: how much of the household's wealth, pay, and savings already depend on one employer. The SEC's Investor.gov describes concentration risk as having a large portion of holdings in one investment, and diversification does not guarantee against loss.
• Plan terms: the method, percentage choices, and deadlines the employer sets beyond the tax rules.
• Sequence of goals: how this fits with retirement contributions and reserves. Our financial order of operations guide sets out one common framework households adapt.

Holding shares after vest also means the value could rise or fall, so the tax result and market risk are separate questions.

How Flames FP approaches this

Flames FP is a Minnesota-based planning firm with fixed quarterly membership pricing and a 0% AUM fee. Its services cover investments, taxes, retirement, estate planning guidance, and ongoing advice as one connected plan, and the tax planning and filing page describes what each membership includes. The how it works page walks through the planning process and the pricing page lists current membership terms. Whether this structure fits depends on your household, and a separate CPA relationship is a reasonable choice for many situations.

If you would like to talk through how RSU vests fit with your bonus, your spouse's income, and your other goals, you can schedule a Discovery Meeting. The meeting is a conversation about your situation, not tax or legal advice.

Frequently asked questions

What tax do you pay on RSUs?

RSUs are generally taxed as ordinary income, based on the value of the shares on the vest date. That income is subject to federal income tax, Social Security up to the annual wage base, Medicare, and state income tax where applicable. If you later sell the shares, the difference between the sale price and the value already included in income is a capital gain or loss.

What is the RSU withholding tax rate?

There is no single rate. For federal income tax, employers commonly use the optional flat 22% supplemental rate or the aggregate method, and 37% is required on supplemental wages above $1 million in a calendar year. Social Security (6.2% up to $184,500 in 2026), Medicare (1.45%), any Additional Medicare Tax, and state withholding are added on top. Minnesota instructs employers to use 6.25% on separately paid supplemental payments.

How much should I withhold for taxes when selling stock?

There is no single percentage that fits every household. RSU vest income has usually already had withholding applied, and a later sale generally produces a capital gain or loss, which is often not subject to withholding. The amount a household may set aside depends on its taxable income, holding period, and state. The IRS Tax Withholding Estimator, or a tax professional, can project the figure for your situation.

Why can RSU withholding be less than what I owe?

Employers commonly withhold at a flat supplemental rate, while the tax on a return depends on total household income, including salary, bonuses, a spouse's pay, and other vests. If the household's marginal rate is higher than the withholding rate, a balance due may result. If it is lower, the household may receive a refund instead.

Is there an RSU tax withholding calculator?

The IRS offers a Tax Withholding Estimator that compares projected withholding with projected tax using your pay, other income, and deductions. Many plan administrators also show an estimated tax amount at vest. Neither one replaces a review of your own return, and a tax professional can run a full-year projection that includes every vest.