Why Your RSU Tax Withholding Falls Short

If your paycheck withheld exactly 22% federal tax on your last RSU vest, there’s a good chance that’s not enough. The IRS’s flat supplemental-wage rate is a withholding shortcut, not a prediction of your actual tax bracket — and for most H1B and green card holders earning a base salary north of $130,000, a large vest pushes their real marginal rate well past 22%, leaving a gap that shows up as a bill the following April.

Why the mismatch happens

Under IRS Publication 15, Section 7, employers have two options for withholding on supplemental wages like RSU vests and bonuses: withhold at a flat 22% (37% on the portion of your supplemental wages that exceeds $1 million in the calendar year), or add the vest to your regular paycheck and withhold using your W-4 elections. Almost every large employer defaults to the flat 22% method because it’s simpler to run through payroll — regardless of what your actual marginal bracket is once salary and vest income are combined.

The 22% rate was calibrated years ago as a rough middle-of-the-road number. But 2026’s federal brackets run up to 37%, and a combined salary-plus-RSU income in the $250,000–$600,000 range for a single filer typically lands in the 32% or 35% bracket. Every dollar taxed at 22% but actually owed at 32%+ becomes a gap you have to close out of pocket later.

Worked example: the shortfall in dollars

Priya is a single-filer H1B software engineer earning a $175,000 base salary. In Q3, 900 of her RSUs vest at $55/share.

• Vest income: 900 × $55 = $49,500
• Combined taxable wages for the year (assuming no other vests): $175,000 + $49,500 = $224,500
• Federal withholding on the vest at the flat rate: 22% × $49,500 = $10,890
• Priya’s actual marginal bracket at $224,500 (2026 single-filer brackets): 32%
• What she should have had withheld on that $49,500 at her marginal rate: roughly 32% × $49,500 = $15,840
• Approximate shortfall: $15,840 − $10,890 = $4,950

That’s just the federal income tax piece — it doesn’t include any state tax shortfall, which can be significant in a state like California with double-digit marginal rates and no equivalent RSU-specific withholding fix. Multiply this shortfall across two or three vesting events in a year and it’s easy to owe $10,000–$15,000 more than what was withheld, discovered all at once at filing time.

Estimate your own shortfall

Plug in your filing status, your other income for the year, and this vest’s value — the tool runs the same progressive-bracket math as the worked example above, so you can see your combined income, your marginal bracket, and the estimated gap for your own numbers.

The tool intentionally leaves state tax out of the gap it shows — state supplemental-wage rules vary widely, and several states (California among them) don’t offer a flat rate that comes close to matching a high earner’s real bracket, so treat the federal figure above as a floor, not your full exposure. If you’re in a high-tax state, add a rough state-level estimate on top before deciding how much extra to withhold or pay quarterly.

Closing the gap before April

You have three practical levers, and none of them require guessing:

1. Increase W-4 withholding on your regular paycheck. You can add a flat extra-withholding dollar amount on Form W-4 Step 4(c) to cover the anticipated shortfall across the year, spreading it out instead of paying a lump sum.
2. Make quarterly estimated tax payments. If a big vest lands mid-year, a Q3 or Q4 estimated payment (Form 1040-ES) can close the gap and avoid the IRS underpayment penalty, which is calculated on how the shortfall tracked across the year, not just the year-end total.
3. Set aside cash proactively. Some employees sell a portion of newly-vested shares specifically to fund the expected tax gap, treating it as a mandatory “true-up” rather than optional.

The H1B-specific stakes

For a citizen colleague, an underpayment penalty is an annoyance. For an H1B holder, a large unplanned tax bill collides with other visa-adjacent cash needs — PERM/green card legal fees, relocation costs if you change employers, or the emergency fund you’re supposed to be building against a status-timeline that isn’t fully in your control. A withholding shortfall you didn’t plan for competes directly with money you may need on short notice for reasons unrelated to taxes at all.

Sources: IRS Publication 15 (Circular E), Section 7, Supplemental Wages; IRS Publication 15-T, Federal Income Tax Withholding Methods.