If you’ve ever gotten a surprise tax bill after your RSUs vested, you’re not alone. It happens all the time to tech professionals, and it’s not because you—or your employer—did anything wrong. The issue is built into the way RSU taxes work, and most people don’t even realize what’s happening until they file their tax return and see the damage.
So, let’s talk about it. In this blog we’ll cover:
- Why RSU tax underwithholding issues is such a big problem
- How RSUs are taxed (and where the tax shortfall comes from)
- What you can do to avoid a nasty tax surprise
Because, honestly? The last thing you want is to be scrambling to come up with thousands of dollars in April when you could have planned for it months in advance.
Let’s start with the basics.
First, What Are RSUs?
Restricted Stock Units (RSUs) are one of the most common ways tech companies compensate employees. Instead of giving you cash, they give you company stock—except there’s a catch: you don’t get the shares right away.
Here’s how it works:
- Your company grants you RSUs. This might happen when you join the company or as part of an annual compensation package.
- The RSUs vest over time, usually in chunks (for example, 25% per year for four years, or monthly over four years).
- When they vest, the shares become yours, and that’s when taxes come into play.
A lot of people think RSUs are like bonuses, but they’re actually a form of income—which means the IRS wants its cut.
How Are RSUs Taxed?
Here’s the moment that catches people off guard: the second your RSUs vest, the IRS treats them as income, even if you don’t sell the shares.
So, let’s say your company’s stock is trading at $50 per share, and you have 1,000 RSUs vesting today. That means you’ve just received:
1,000 shares × $50 per share = $50,000 in taxable income
That $50,000 gets added to your W-2 as ordinary wages, just like your salary. It’s subject to:
- Federal income tax
- State income tax (if applicable)
- Social Security tax (if you’re under the annual cap)
- Medicare tax
But—and this is the key part—your employer doesn’t withhold enough in taxes to cover the full amount.
So, where does that leave you? Or better yet, your tax bill? Let’s dive a little deeper.
The Big Problem: RSUs Use a Flat Withholding Rate (and It’s Usually Too Low)
When RSUs vest, your employer automatically withholds 22% in federal taxes on the first $1 million worth of RSUs. Anything above $1 million is withheld at 37%.
Sounds fine, right? Well, not really.
Why 22% Is Almost Always Too Low
The problem is that 22% is a flat withholding rate, but your actual tax rate depends on your total income. For most tech professionals, it’s a lot higher than 22%.
Here’s what the federal tax brackets look like in 2025 for single filers:
- 22% tax rate: $47,151 to $103,350
- 24% tax rate: $103,351 to $206,700
- 32% tax rate: $206,701 to $365,600
- 35% tax rate: $365,601 to $638,950
- 37% tax rate: $638,951+
Now, let’s go back to our example:
- You make $175,000 in salary
- Your RSUs vest and add $50,000 in income
- Your total taxable income for the year is now $225,000
At this level, your marginal tax rate is 32%—but your employer only withheld 22% on your RSUs. That means you’re 10% short on withholding, which translates to:
$50,000 × (32% – 22%) = $5,000 in underwithholding
That’s $5,000 you’ll owe at tax time, just from this one vesting event. If you have multiple vesting dates throughout the year, the underpayment gets even worse.
And if your RSUs are worth even more—say, $200,000 in a big vesting year—your shortfall is $20,000 or more.
What Happens If You Don’t Cover the Shortfall?
As we all know, the IRS doesn’t like waiting for its money. If you don’t pay enough tax throughout the year, you could face:
- A big tax bill in April that you weren’t expecting
- Underpayment penalties (especially if you owe more than $1,000 when you file)
- Interest charges (which fluctuate but can be as high as 7-8%)
Let’s say you’re in the same situation we walked through earlier:
- You make $175,000 in salary
- You have $50,000 in RSUs vesting
- Your total taxable income for the year is now $225,000
- Your employer withheld 22% in federal tax on your RSU vesting income, but your actual tax rate on that money is 32%
- That means your tax shortfall is:
$50,000 × (32% – 22%) = $5,000
So now, when you go to file your taxes, you realize that you owe the IRS an extra $5,000—on top of whatever else you might have already paid in taxes throughout the year.
But it gets worse. Because the IRS expects taxes to be paid throughout the year (not just at filing time), it charges underpayment penalties and interest on any unpaid taxes.
Right now, the IRS interest rate on underpayments is around 7% per year (this rate changes quarterly, but it’s been hovering between 7-8%). That means if you didn’t make estimated tax payments or increase your RSU withholding, you could owe:
$5,000 × 7% = $350 in interest
That’s $350 extra you’re handing over to the IRS just for being short on your payments. And that’s just the interest—if your underpayment is large enough, you could also face additional penalties.
How to Fix RSU Underwithholding
Now that you know the problem, what can you do about it?
Option 1: Make Quarterly Estimated Tax Payments
One way to stay ahead is by making quarterly estimated tax payments to the IRS. These are essentially prepayments toward your tax bill to make up for the shortfall in withholding.
To avoid underpayment penalties, you generally need to pay:
- 90% of your total tax bill for the current year, OR
- 110% of your total tax bill from last year (if your income is over $150,000)
The downside? It requires keeping track of payments and setting aside money in advance.
Option 2: Increase Your RSU Withholding Rate
Some employers now offer elective withholding rates for RSUs, meaning you can choose to have more tax withheld upfront. Options often include:
- 22% (default federal rate)
- 32%
- 37% (maximum rate)
If your company offers this, it’s worth adjusting it to match your tax bracket. That way, you avoid needing to make estimated tax payments.
Option 3: Work with a Tax Professional to Run Projections
This is where we come in. At KB Financial Advisors, we help clients:
- Run tax projections based on stock price changes and vesting schedules
- Calculate estimated tax payments so you’re not caught off guard
- Determine the right withholding election (because 37% isn’t always the best choice)
A lot of people assume, “I’ll just choose 37%, and I won’t owe anything.” That might be true, but it also means you’re overpaying. If you overpay too much, you’re just giving the IRS an interest-free loan instead of investing that money throughout the year.
Final Thoughts
If you’re working in tech, RSU taxation isn’t something you can ignore. Your employer’s withholding method isn’t designed to cover your actual tax bill, which means you have to take proactive action.
The best approach depends on your income, stock vesting schedule, and how much you want to pay throughout the year. But the worst approach? Doing nothing—because that’s how people end up with painful tax surprises.
If you’re not sure what makes sense for you, let’s talk.
We can help you figure out the best way to handle your RSU taxes—so you never have to panic in April again.
Simply head over to our Getting Started page to book an introductory call with our team. We’re always here to help.
Until next time!
