Equity compensation
Why $200K in RSUs Wasn’t Enough: Understanding RSU Tax Withholding Shortfalls
By Matt Hightower · September 7, 2026
The mechanics
How Supplemental Withholding Works for RSU Vesting
When RSUs vest, the employer treats the fair market value of the shares as supplemental wages, the same category used for bonuses and other irregular pay. Under IRS rules for supplemental wages, the default federal withholding rate is 22% on the first $1 million of supplemental wages paid to an employee in a calendar year. For supplemental wages exceeding that $1 million threshold, the withholding rate jumps to 37%.
Most RSU grants for medtech executives fall under the $1 million threshold in any given year, so 22% is the typical default rate applied at vesting. That 22% is a flat withholding rate: it is not a calculation based on an individual’s actual tax bracket, filing status, or other income for the year. It is simply applied to the vesting value, regardless of what that employee actually owes when the return is filed.
Consider a hypothetical $200,000 RSU vesting event. At the 22% federal supplemental rate, $44,000 would be withheld. If that executive’s actual marginal federal rate is 37%, the federal tax owed on that same vesting could be closer to $74,000, leaving a $30,000 federal shortfall from this single vesting event alone. Hypothetical example for illustration only. Results not guaranteed.
This gap is a common theme for medtech executives, whose RSU grants are often large and layered on top of an already high salary. Our comprehensive RSU tax planning guide covers the fuller picture, including sell-to-cover decisions, concentration risk, and coordinating RSUs with other equity compensation.
By the numbers
The Federal Withholding Gap
The size of the withholding gap depends on how far an executive’s actual marginal federal rate sits above the flat 22% rate. Using the same hypothetical $200,000 vesting value, the shortfall widens considerably as the marginal bracket rises:
| Marginal bracket | Federal tax owed | Withheld at 22% | Shortfall |
|---|---|---|---|
| 24% | $48,000 | $44,000 | $4,000 |
| 32% | $64,000 | $44,000 | $20,000 |
| 35% | $70,000 | $44,000 | $26,000 |
| 37% | $74,000 | $44,000 | $30,000 |
These figures are hypothetical and reflect federal income tax only. They do not include Social Security tax, Medicare tax, or any state income tax, all of which may add further to the total gap between what was withheld and what is actually owed. Depending on the size of the shortfall and an individual’s other withholding and estimated payments, an uncovered gap may result in an underpayment penalty at filing.
Beyond federal
State-Level Withholding Gaps
The federal gap is often only part of the picture. Many states also apply a flat supplemental withholding rate to RSU vesting income, and that flat rate may be lower than an employee’s actual state marginal rate. States with a typically flat supplemental withholding rate, including California, may under-withhold relative to what a high earner actually owes at the state level.
Some states do not withhold on RSU vesting at all, which creates a complete state-level gap rather than a partial one. Combined with the federal shortfall, the total tax gap on a single vesting event could be substantially larger than the federal number alone suggests.
State tax treatment of equity compensation varies considerably and depends on residency, where the income was earned, and state-specific withholding rules. Individuals should consult a tax professional about how their specific state treats RSU vesting income.
Planning ahead
The Estimated Tax Top-Up Strategy
High-income earners who expect a withholding shortfall from RSU vesting may need to make quarterly estimated tax payments to cover the gap. The IRS generally provides safe-harbor rules that could help avoid an underpayment penalty: for taxpayers with adjusted gross income over $150,000, paying at least 110% of the prior year’s total tax liability through withholding and estimated payments combined is generally treated as sufficient. Alternatively, paying at least 90% of the current year’s actual tax liability may also satisfy the safe harbor, depending on individual circumstances.
For executives who also receive a base salary subject to W-2 withholding, increasing that withholding may be an alternative to quarterly estimated payments. Because withholding is generally treated as paid evenly throughout the year, even if it is increased late in the year, it could help cover an RSU tax gap in a way that a single late-year estimated payment may not, depending on the timing involved.
For the prior tax year, the fourth-quarter estimated tax deadline generally falls on January 15. Missing that deadline, or underpaying throughout the year, could increase exposure to underpayment penalties, so estimating the gap before it compounds across multiple vesting events may be worth doing ahead of year-end.
A planning tool
Using the RSU Tax Gap Calculator
Estimating the withholding gap ahead of a vesting event is generally more useful than discovering it at tax season. Our RSU Tax Gap Calculator lets executives input their RSU vesting value, marginal tax bracket, and state to estimate the potential withholding shortfall before it becomes a surprise.
The calculator provides estimates for planning purposes only. Actual tax liability depends on an individual’s full income picture, filing status, deductions, and state of residence, so the output is a starting point for a conversation rather than a substitute for a completed tax return.
Straight answers
Questions about RSU withholding shortfalls
The default federal supplemental withholding rate is 22% on supplemental wages up to $1 million in a calendar year. Supplemental wages exceeding $1 million are subject to a 37% withholding rate. Most RSU vesting events fall under the $1 million threshold, so 22% is typically the rate applied.
The 22% supplemental withholding rate is a flat percentage that does not account for your actual marginal tax bracket. If your marginal rate is 32%, 35%, or 37%, the amount withheld at 22% may be substantially less than the tax you actually owe on the vesting value.
You may be able to avoid underpayment penalties by meeting IRS safe-harbor rules, such as paying at least 110% of your prior year's total tax liability (if your adjusted gross income exceeds $150,000) through withholding and estimated tax payments, or by making quarterly estimated payments to cover the projected shortfall. Whether either safe harbor applies to you depends on individual circumstances.
State treatment of RSU income varies significantly. Some states apply flat supplemental withholding rates that may be lower than your actual state marginal rate, while others may not withhold on RSU vesting at all. This could create an additional state-level tax shortfall beyond the federal gap, and the details depend on the state involved.
You can estimate your RSU tax withholding gap by comparing the 22% federal supplemental withholding on your vesting value against your actual marginal tax rate applied to the same amount. The RSU Tax Gap Calculator at /tools/rsu-tax-calculator may help you estimate this shortfall for planning purposes.
This material is for general educational purposes only and is not intended as tax, legal, or investment advice. Neither GGM Wealth Advisors nor Cambridge provides tax or legal advice. Please consult a qualified professional about your specific situation.
See what your own vest schedule may owe
The size of the withholding gap depends on your specific vesting value, marginal bracket, and state. Our equity compensation planning work looks at that full picture rather than a single vest in isolation.