Why Do I Owe Taxes on My RSUs When They Were Already Withheld? The 22% Gap.

A product manager at a tech company watches $150,000 of restricted stock units vest in 2026. The pay stub shows tax was withheld, the company sold a block of shares to cover it, and the rest landed in her brokerage account. Then she files her return and the software shows a five-figure balance due. The question I hear every spring is the same: why do I owe taxes on my RSUs when the company already withheld? The answer is that your employer almost certainly withheld federal tax at the flat 22% supplemental wage rate, and if your marginal bracket is 32% or 35%, that rate is built to come up short. The shortfall is not a payroll error. It is baked into the withholding rules.

When RSUs vest, the fair market value of the shares is ordinary wage income reported on your W-2, exactly like salary. The IRS classifies that income as supplemental wages, the same bucket as bonuses and commissions. Under IRC §3402 and Treas. Reg. §31.3402(g)-1, an employer paying supplemental wages can use the optional flat-rate method, and for 2026 that rate is 22%. Most large employers default to it because it is simple: withhold 22%, sell enough shares to raise the cash, and move on. The 22% figure has nothing to do with your actual tax bracket, your other income, or your filing status. It is a one-size flat rate, and for high earners it is the wrong size.

The 22% rate happens to match the 22% marginal bracket, which tops out at about $103,350 of taxable income for a single filer in 2026. If your RSUs stack on top of a $250,000 salary, the vest is not taxed at 22%. It is taxed at the rate that applies to your last dollar of income, which for many equity earners is 32% or 35%, and 37% above roughly $640,000. The withholding covers 22 cents of every dollar, your true liability is 32 to 35 cents, and the 10 to 13 cent difference is the balance the software hands you in April. Nothing was lost or stolen. The company simply withheld at a rate well below your bracket, and the IRS expects you to make up the rest yourself.

The same arithmetic explains why two coworkers can have wildly different outcomes. An employee whose total income lands in the 24% bracket is under-withheld by only two points and barely notices. A senior engineer in the 35% bracket on a large vest can owe twenty thousand dollars or more. The bigger the vest and the higher the salary it stacks on, the wider the gap.

There is one point where the flat rate stops being optional. Once your supplemental wages for the year exceed $1,000,000, Publication 15 requires the employer to withhold at the highest individual rate, 37%, on the portion above $1 million. The One Big Beautiful Bill Act (P.L. 119-21) made both numbers permanent, the 22% optional rate and the 37% mandatory rate. So a founder with a $3 million vest sees 22% on the first million and 37% on the next two. That is closer to the real liability, but it can still leave a gap, and it can over-withhold someone pushed above $1 million by a one-time event. Either way, the only number that matters at filing is your actual bracket, not the rate payroll used.

You have two levers, and they are not equal. The first is a quarterly estimated payment on Form 1040-ES. After a large vest, send the IRS the difference between your bracket and the 22% already withheld, by the next quarterly deadline. The second, and usually better, lever is to file a new Form W-4 with your employer and add a dollar amount on line 4c, extra withholding from each regular paycheck. The reason the W-4 route is stronger is a quirk in IRC §6654: tax withheld from wages is treated as paid in equal installments across the whole year, even if it was actually withheld in December. An estimated payment, by contrast, only counts for the quarter you make it. So bumping your W-4 withholding late in the year can retroactively cure an underpayment from an earlier quarter, while a Q4 estimate cannot.

Whichever lever you pull, aim at the safe harbor rather than the exact bill. Under IRC §6654(d), you avoid the underpayment penalty if your total withholding and estimates equal at least 90% of this year's tax, or 100% of last year's total tax, and that second figure rises to 110% if your prior-year adjusted gross income was over $150,000. Hit the safe harbor and the penalty disappears even if you still owe a large balance in April, because a safe-harbored balance due is not a penalty, just a payment. Miss it and the IRS charges interest on the shortfall at the federal underpayment rate, which is 7% for the quarter beginning July 1, 2026, computed on Form 2210. The penalty is modest on small gaps and meaningful on a $20,000 one.

Two related mistakes make the April number worse. The first is the cost-basis trap when you sell the vested shares: your brokerage 1099-B often reports a basis of zero or only the purchase-side amount, even though you already paid ordinary tax on the full vest value. If you do not correct the basis on Form 8949, you pay tax twice on the same dollars, the same double-counting I describe for an ESPP disqualifying disposition. The second is state sourcing. If you earned the RSUs in one state and vested after moving, more than one state may want a slice, which is the subject of how California taxes RSUs after you move out of state. Both are separate from the withholding gap, and both add to the surprise.