When restricted stock units vest, their value is generally treated as wage income and reported on Form W-2. Employers commonly withhold taxes by selling or withholding a portion of the vested shares.
Seeing shares withheld can create the impression that the taxes have been fully covered. Frequently, they have not.
The problem is that withholding is only a prepayment. It is not a calculation of your final tax liability.
Employers may treat separately identified RSU income as supplemental wages. The federal supplemental-wage withholding rate is generally 22%, increasing to 37% for supplemental wages exceeding $1 million during the calendar year. But a high-income employee’s actual marginal federal rate may be 32%, 35%, or 37%.
For example, assume $200,000 of RSUs vest and the employer withholds federal income tax at 22%, or $44,000. If the additional income ultimately falls within the 35% bracket, the approximate federal tax attributable to the vest could be $70,000. That creates a potential $26,000 gap before considering state taxes or other parts of the return.
The shortfall can become larger when a household also has:
A spouse with significant income
Bonuses or additional equity compensation
Investment or business income
Multiple RSU vesting events
Capital gains
ISO exercises that create AMT
Insufficient withholding from regular salary
Another issue arises when the shares are later sold. The value already reported as compensation generally becomes part of the shares’ tax basis. If the brokerage’s Form 1099-B does not reflect the correct basis, reporting the unadjusted figure can cause the same economic income to be taxed twice.
Before a major vest, project total household income, expected withholding, estimated payments, and the state allocation of the equity income. If withholding is projected to be insufficient, the gap can potentially be addressed through increased paycheck withholding, estimated payments, or setting aside part of the sale proceeds.
The number of shares withheld tells you how payroll handled the vest. It does not tell you whether enough tax was paid.
This article provides general educational information and is not tax, legal, or investment advice. Individual results depend on the applicable facts and circumstances.
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