RSU tax withholding usually runs at a flat 22% federal rate on vest income up to $1 million, and 37% above that. Clients in the 32% to 37% brackets can owe tens of thousands in April after a stock run-up. A tax firm should project each equity-comp client's 2026 tax now, test it against the safe harbor, and close any gap through extra December withholding or a January 15, 2027 estimated payment.
Key takeaways
- Employers usually withhold federal income tax on RSU vests at a flat 22%, switching to 37% only on supplemental wages above $1 million for the year.
- A rising share price makes each vest worth more, so the dollar gap between 22% and the client's true bracket grows with the stock.
- There are two gaps to measure: the cash a client will owe in April, and the shortfall against the safe harbor that decides whether a penalty applies.
- Extra withholding from a December paycheck generally counts as if it were paid evenly through the year, which a fourth-quarter estimated payment does not.
- ESPP and RSU sales often arrive on Form 1099-B with basis that leaves out income already taxed on the W-2, so the firm should flag these clients now for filing season.
Why does a stock run-up create an RSU tax withholding gap?
A restricted stock unit becomes taxable wages on the day it vests, valued at the share price that day. The employer then withholds federal income tax on that value, almost always at a flat supplemental rate rather than at the employee's real marginal rate. When the stock climbs, the vest income climbs with it, and so does the distance between what was withheld and what the client will actually owe.
This week gave plenty of reasons to run the numbers. Cisco beat earnings and raised its AI guidance, Cerebras jumped 18% after its quarterly report, and Applied Materials guided above estimates on chip demand. Plenty of engineers, sales staff and managers at those companies, and at their suppliers, have November and December vests coming.
The problem rarely shows up on a pay stub. The client sees shares land in a brokerage account, sees some shares sold to cover tax, and assumes the tax is handled. It is handled at 22%. If their household sits in the 35% bracket, roughly 13 cents of every vested dollar is still unpaid.
How much do employers withhold on RSU income?
Supplemental wages are pay outside the regular salary, such as bonuses, commissions and the value of vested stock. Under IRS Publication 15 for 2026, an employer may withhold at a flat 22% on supplemental wages, and must use 37% on the part of an employee's supplemental wages for the calendar year above $1 million, ignoring the Form W-4.
Some employers use the aggregate method instead, treating the vest as if it were part of a regular paycheck. That can withhold more or less than 22%, depending on the W-4 and the pay period. Either way, the employer is not projecting the client's full-year household tax.
Payroll taxes come off the vest too. Social Security applies until the employee hits the annual wage base, and Medicare applies to all of it. The Additional Medicare Tax of 0.9% must be withheld once one employer pays a person more than $200,000 in the year, whatever the filing status. Married couples with two high earners, or one spouse with two jobs, can still come up short on that 0.9% because each employer looks only at its own payroll.
State withholding follows each state's own rules, so check it separately. A federal fix does not repair a state shortfall.
Which clients should a firm check before year-end?
Most firms already hold the data to find these clients. Last year's W-2s show large box 12 or box 14 entries from tech employers, and last year's 1099-Bs show sell-to-cover lots. Sort the book by those signals before anyone builds a projection.
| Signal in the file | Likely issue | What to ask the client for |
|---|---|---|
| 2025 W-2 from a public tech or chip company, wages well above base salary | RSU vests withheld at 22% against a 32% to 37% bracket | Year-to-date pay stub and the 2026 vest schedule |
| Employer stock price up sharply since January | Q4 vests worth far more than last year | Number of units vesting in November and December |
| Two high-earning spouses filing jointly | Additional Medicare Tax and bracket stacking not withheld | Both spouses' latest pay stubs |
| Form 3922 received last year | ESPP sale with basis missing the discount income | Purchase confirmations and any 2026 sales |
| Form 3921 received last year | Incentive stock option exercise with possible AMT | Exercise dates, share count and whether shares were sold |
| Large 2026 sale of vested shares | Capital gain with no withholding at all | Broker realized gain report |
Expect a mid-sized practice to find a short list, not hundreds. The value is in reaching those few clients while there are still paychecks left in the year.
How big is the gap? A worked example
Take an illustrative single client at a chip-equipment maker. Salary is $210,000. RSUs vested in February, May and August for a combined $160,000, and a November vest of 600 units at $250 adds $150,000. Total 2026 wages come to $520,000.
- Withholding so far. The employer withheld 22% on $310,000 of RSU income, which is $68,200. Salary withholding under the W-4 adds about $38,000. Total federal income tax withheld: $106,200.
- Projected tax. The firm's projection, using the client's actual deductions, puts 2026 federal income tax at about $145,000.
- Cash gap. $145,000 less $106,200 leaves roughly $38,800 due in April 2027.
- Safe harbor test. The client's 2025 total tax was $98,000 and adjusted gross income was over $150,000, so the prior-year safe harbor is 110%, or $107,800. Withholding of $106,200 misses it by $1,600.
The two numbers tell different stories. Paying an extra $1,600 through payroll before December 31 likely removes the penalty question, since the client then meets the prior-year test. The $38,800 bill does not go away, and the client needs to know about it now, not on April 10. A short, clear message that separates “penalty risk” from “what you will owe” is what clients remember.
All figures above are illustrative. Run each client's own numbers, and check the rules on IRS Topic 306 for their circumstances.
What are the options to close the gap before December 31?
There are three practical routes, and the right one depends on how many paychecks remain and whether the client has cash on hand.
1. Raise withholding on the last paychecks
The client submits a new W-4 asking for extra withholding per pay period. Under Publication 505, withholding is treated by default as paid in equal amounts across the four installment periods. That means a large December withholding can cover shortfalls from earlier quarters, which a late estimated payment cannot. The catch is timing: payroll cut-offs vary, and some employers need two weeks to process a W-4 change.
2. Make a fourth-quarter estimated payment
The payment for September through December is due January 15, 2027. It is useful when the client has no payroll left or wants the money in hand until January. It counts only from the date paid, so it will not fix an underpayment from April or June. If you already send Q4 reminders, fold these clients into that list rather than running a separate campaign; our fourth-quarter estimated tax reminder plan covers the mechanics.
3. Sell vested shares and set the cash aside
Some clients prefer to sell part of the vested position and park the proceeds for April. That is an investment decision as much as a tax one, and the client's adviser should be involved. If the shares have fallen since vesting, the sale may also produce a loss; see our tax-loss harvesting guide for the wash sale points.
Whatever the route, record which one the client chose and when. In April that note saves a long email thread.
What equity-comp paperwork causes trouble at filing time?
The withholding check is also the right moment to warn clients about the forms they will receive in January and February.
- Form 1099-B basis. When vested RSU shares are sold, the broker may report a basis of zero or leave basis blank. The vest value was already taxed on the W-2, so the real basis is the share price at vest. Left uncorrected, the client is taxed twice on the same dollars.
- Form 3922 and ESPP sales. Shares bought through an employee stock purchase plan often show only the discounted purchase price as basis. Any compensation element that lands on the W-2 needs adding back through an adjustment on Form 8949.
- Form 3921 and ISOs. Exercising incentive stock options and holding the shares can create alternative minimum tax even though no cash came in.
- Sell-to-cover lots. Each vest usually produces a small sale on the 1099-B. These lots are easy to miss and easy to double count.
A simple fix is to ask clients now for their supplemental gain report or vest history from the plan administrator, so it is in the file before the 1099-B arrives. The Form 8949 instructions explain how to report a corrected basis with an adjustment code.
How should a firm run this check across its client book?
Treat it as a short, time-boxed project with a clear owner, not a series of one-off favours.
- This week: filter the client list on the signals in the table above and assign each flagged client to a preparer.
- By November 20: send each flagged client a short request for a year-to-date pay stub, the vest schedule and any 2026 share sales.
- By December 1: run projections, then send each client one message with two numbers: the safe harbor shortfall and the expected April balance.
- By December 10: confirm which clients changed their W-4, and diary a check of their final pay stub.
- By January 10, 2027: confirm Q4 estimated payments for clients who chose that route.
Two common mistakes are worth avoiding. The first is projecting with salary only and forgetting the November vest. The second is quoting a figure in a phone call with nothing in writing, so the client remembers a smaller number. Bill the projection as a separate advisory service where your engagement letter allows it; it is real work, and clients with large equity grants are usually happy to pay for certainty.
How Zaquil handles RSU withholding checks for equity-comp clients
In Zaquil the check runs as a job rather than a pile of emails. A firm sets up a job template called, say, "Equity comp year-end review" with a checklist: pay stub received, vest schedule received, projection done, client told, W-4 change confirmed. Each flagged client gets a copy, and the kanban board shows at a glance who is stuck at which step.
What the client sees. A request lands in the firm's branded secure client portal asking for the year-to-date pay stub, vest schedule and broker gain report. The client uploads from a phone, and can answer a short questionnaire about planned share sales. When the projection is ready, the firm sends a short summary letter through the portal for the client to approve or e-sign, which leaves a signed PDF certificate on file.
What the firm sees. Every reply, whether it comes by email, SMS, WhatsApp or a call, lands in one inbox against the client record. Automations send a reminder after three days without an upload and move the job to the next stage once documents arrive. Deadlines for December 10 and January 15 sit on the job, so nobody depends on memory.
Getting paid for the advice. Time logged on projections can be billed, and the client pays the invoice online from the portal.
See the full workflow on our software for accounting and tax practices page, or check Zaquil plans and pricing: from $19 a month, with a 14-day free trial and no credit card to start.
Frequently asked questions
Why is my RSU withholding only 22%?
Most employers treat vested RSUs as supplemental wages and withhold federal income tax at the flat 22% rate that IRS Publication 15 allows. The rate is not based on your household income or your filing status. If your marginal bracket is higher than 22%, the difference is not collected during the year and shows up as a balance due when you file your return.
When does the 37% supplemental withholding rate apply to RSUs?
Employers must withhold at 37% on the part of an employee's supplemental wages for the calendar year that exceeds $1 million, regardless of the W-4. Below that level, 22% is the usual flat rate. A client whose vests total $1.2 million in a year would generally see 22% on the first $1 million and 37% on the remaining $200,000.
Can I ask my employer to withhold more on RSU vests?
Some equity plans let employees choose a higher withholding rate for share vests, but many do not. The more reliable route is a new Form W-4 asking for a fixed extra dollar amount from each regular paycheck. Ask payroll how long a change takes to process, because a late submission may miss the last pay run of December.
Does extra December withholding really fix an earlier underpayment?
Generally yes. Publication 505 treats income tax withheld as paid in equal amounts across the four installment periods unless you choose to use actual withholding dates. That means a large December withholding is spread back across the year for penalty purposes, which a January estimated payment is not. Check the client's own figures before relying on it.
What is the safe harbor for estimated tax penalties?
Most taxpayers avoid the underpayment penalty if they owe less than $1,000 after withholding and credits, or if payments cover at least 90% of this year's tax or 100% of last year's tax. If last year's adjusted gross income was over $150,000, or $75,000 if married filing separately, the prior-year figure becomes 110%.
When is the fourth-quarter 2026 estimated tax payment due?
The estimated payment covering September through December 2026 is due January 15, 2027. It counts from the date it is paid, so it helps with the fourth installment but does not cure underpayments from earlier quarters. Clients who still have paychecks left in 2026 may be better served by extra withholding instead.
Why is the cost basis on my 1099-B wrong for RSU shares?
Brokers often report RSU shares with a basis of zero, or no basis at all, because the vest value was taxed through payroll rather than paid in cash. Your real basis is generally the market value on the vest date, already included in W-2 wages. Report the sale on Form 8949 with the corrected basis so the same income is not taxed twice.
What is Form 3922 used for?
Form 3922 reports transfers of stock bought through an employee stock purchase plan under section 423. It shows the purchase date, the price paid and the market values the plan uses. You do not file it with your return, but you need it to work out the correct basis and any compensation income when you sell the ESPP shares.
Do ISO exercises need a year-end withholding check too?
They should be reviewed, though the issue is different. Exercising incentive stock options usually creates no regular income tax withholding, but the spread can count toward alternative minimum tax if you hold the shares past year-end. Form 3921 reports the exercise. A projection that includes AMT is the only way to know whether a payment is needed.
Does the Additional Medicare Tax apply to RSU income?
Yes. Vested RSUs are wages for Medicare purposes. An employer must withhold the extra 0.9% once it pays an employee more than $200,000 in the calendar year. Couples filing jointly owe it above $250,000 combined, so two working spouses can end up underwithheld even when each employer follows the rules exactly.
Should a client sell vested shares to pay the tax gap?
It is one option, and it is partly an investment decision. Selling locks in cash for April and reduces concentration in one employer's stock, but may create a gain or loss of its own. The client's financial adviser should weigh in. The tax firm's job is to show the size of the bill and the deadlines either way.
How does state tax withholding on RSUs work?
Each state sets its own rules for supplemental wages, and some use a flat rate that is well below a high earner's real state rate. A federal fix through the W-4 does nothing for state tax. Check the state pay stub lines separately, and consider a state estimated payment if the state shortfall is material.
What should a firm send clients after the RSU projection?
Send one short written summary with two numbers: the shortfall against the safe harbor and the expected balance due in April. Add the recommended action, the deadline and what the client must send back. A written note the client approves avoids disputes later about what was said on the phone.
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