RSU Withholding Not Enough? What Kestrel Bay Retirement Advisors Tells Clients

Why is RSU withholding not enough for high earners?

Employers withhold federal income tax on a vest at a flat 22% supplemental rate, which applies to the first $1 million of supplemental wages in a calendar year. Above that, the rate on the excess is 37%. The 22% doesn't change with your bracket, so a household earning $90,000 and a household earning $800,000 see the same percentage leave the same vest.

Your true rate comes from your whole return. For joint filers the 37% bracket starts above $768,700 of taxable income (2026), so a couple past that line owes 15 points more than was withheld. Social Security and Medicare taxes are withheld separately and usually aren't the problem, since the Social Security piece stops at the $184,500 wage base. The income tax gap is what shows up in April.

State withholding varies widely, so check your own state's rules for supplemental wages. Some states withhold a flat rate on vests, and some withhold very little.

The formula: vest value times the rate gap

The shortfall is vest value × (your marginal rate − 22%). Marginal rate means the rate on your next dollar of taxable income, not your average rate. People mix these up constantly, and it's why a 'my effective rate is only 24%' argument leads to a bad estimate.

At a 24% marginal rate, the gap on a $300,000 vest is 2 points, or $6,000. At 37% it is $45,000. The bracket you land in matters more than the salary you earn, because the vest itself can push you across a line.

Once supplemental wages pass $1 million in the year, withholding on the excess rises to 37%. On a $2 million release, then, the gap sits mostly in the first million, where only 22% was taken. The second million is closer to covered.

A $300,000 vest for Gwen and Sam, worked through

Hypothetical: Gwen and Sam, 52 and 53, file jointly. She is a VP of sales at a software company that just went public, and he teaches high school and will have a state pension. Her bonus and both salaries already put taxable income near $800,000, past the $768,700 line, so each added dollar is taxed at 37%. Her next vest is worth $300,000.

Withholding at 22% is $300,000 × 0.22 = $66,000. Tax at 37% is $300,000 × 0.37 = $111,000. The gap is $111,000 − $66,000 = $45,000, which is also $300,000 × 0.15. That is federal tax only.

They move the $45,000 into savings the week the shares vest and send it with the September 15 estimate. April then holds no surprise. The table runs the same math at other vest sizes, so you can find yours.

Gwen also has double-trigger RSUs that could release later in the same tax year. If her supplemental wages for the year pass $1 million, withholding on the excess jumps to 37%, and the gap on that part mostly closes. The couple is also weighing how much to sell before the next vest and how much to give, possibly as appreciated shares through a donor-advised fund. Both choices change taxable income, which changes the gap, so Kestrel Bay Retirement Advisors would run the projection before they decide. Giving appreciated shares can lower the tax cost of the sale side, and our team treats that as a tax question first.

Checklist: do you have a withholding gap this year?

Run these four checks before your first vest each year. Run them a second time whenever income shifts sharply, such as with a promotion, a new grant or a spouse changing jobs. For any vest under $1 million in a year, set aside vest value times (your marginal rate minus 22%) in cash the day shares vest. At 37% that is 15 cents of every vest dollar.

• List every vest date and the expected value of shares for the year, using a share price you'd be comfortable with, not the highest one.
• Add salary, bonus, your spouse's pay and other income, then ask which bracket the last vest dollar lands in.
• Compare year-to-date federal withholding on your pay stubs with the total tax you expect. The difference is your gap.
• Check last year's total tax and adjusted gross income, because they set your safe harbor (110% of last year's tax when AGI was over $150,000).

How do you cover the gap during the year?

You cover it by parking cash after each vest and sending the IRS payments on a schedule, either as quarterly estimates or as extra paycheck withholding. Extra withholding has one quirk: the IRS treats it as spread across all twelve months, even if you add it in November. That makes it the cleanest fix for a penalty you've already half-earned.

A few plans let you elect a higher rate at vest, so ask HR before assuming 22% is fixed. Many don't, which is why the steps below matter.

• Step 1, in January: project income and RSU vests and compute the gap with the formula.
• Step 2, after each vest: move vest value × gap into a separate savings account the same week, so the cash isn't spent.
• Step 3: pay it as an estimated payment by the due dates (about April 15, June 15, September 15 and January 15), or raise extra withholding on a spouse's or your own paycheck.
• Step 4, in December: compare year-to-date payments with the projection and top up through Q4 payroll withholding.

Mistakes that turn a vest into an April bill

The costliest one is treating the 22% withheld as the final tax. On a hypothetical $300,000 vest in the 37% bracket, that belief leaves a $45,000 surprise at filing time. An underpayment penalty can come on top of it when no estimates or extra withholding went in during the year.

A second slip is basing estimated payments on salary only. Leave that $300,000 vest out of the plan and April grows by $45,000. A third is leaning on the prior-year safe harbor when last year's tax was small. It can avoid the penalty but not the bill, so the cash still has to be ready.

Some people sell extra shares to cover the gap without checking which lot. A lot with a large gain adds capital gains tax on top of the income tax you were trying to cover. Last, state tax on the vest stacks on the federal gap, and it's easy to forget until the state return is open.

How does the answer change with age and income?

At a marginal rate of 24% the gap is small. At 32% to 37% it becomes five figures on a six-figure vest, so the larger your income the more the flat rate misleads. Your age matters mostly through the retirement accounts you can still fill.

Once you turn 50, your plan allows an extra $8,000 catch-up (total $32,500 for 2026), or $11,250 for the catch-up at ages 60 to 63. Earners whose FICA wages topped $150,000 last year have to put that catch-up in Roth, so it gives no deduction against the vest. A $24,500 pre-tax 401(k) deferral still lowers taxable income and the gap math, so raise it before the vest quarter.

In the year after you stop working your income falls and the gap can flip to a refund. Project that year separately. Investing involves risk, including loss of principal, and holding unsold shares to avoid tax adds exactly that risk.

Questions to ask an advisor about RSU withholding

Bring these to any planner, including us. At Kestrel Bay Retirement Advisors the tax estimate of a sale comes before any suggestion to change what you hold. If you have too much of your net worth in one stock, our team can also show how the plan for the gap fits with selling shares over time.

• What is my marginal rate after every vest this year, not just the next one?
• How much should I set aside per vest, and where should that cash sit?
• Is it cheaper to cover the gap with extra paycheck withholding or with quarterly payments?
• Which share lots should I sell if I need cash for the gap, and what tax does each lot cost?
• If you'd like help, send a note through the request form on kestrelbayretirement.com. Kestrel Bay Retirement Advisors serves clients anywhere in the US by video or phone, and we'll start with your vest schedule.