Why do I owe taxes on my RSUs? The 22% trap

Step 1: at vesting, RSUs are ordinary income

When your RSUs vest, the fair market value of the shares that day becomes ordinary wage income — it shows up in Box 1 of your W-2 just like salary. You didn't sell anything, but the IRS treats the value as if you were paid it in cash. That's the taxable event.

Step 2: the flat 22% withholding — and why it's often too low

Because this income is paid apart from your normal paycheck, employers use the IRS supplemental wage rule: withhold a flat 22% for federal income tax (a mandatory 37% on any amount over $1,000,000 in a year). On top of that comes FICA — Social Security 6.2% up to the 2026 wage base of $184,500, Medicare 1.45%, plus 0.9% over $200,000. So a big chunk disappears at vest.

Step 3: the gap becomes your April bill

At filing, your RSU income is taxed at your real marginal rate, and the 22% already withheld is credited against it. If your rate is higher than 22%, you owe the gap. On a $100,000 vest for someone in the 35% bracket, that's roughly $13,000 more than was withheld — a nasty surprise if nobody warned you.

Sell-to-cover: why shares vanish at vest

Most employers sell or hold back a portion of the vested shares ("sell-to-cover" or net settlement) to fund the 22% withholding, delivering you the rest. That's why you receive fewer shares than vested — and it's the same reason the withholding is only 22% and not your full rate.

Selling later is a separate tax

Once you own the shares, your cost basis is the vest-date value you already paid income tax on. If you sell later, only the gain above that basis is taxed, as a capital gain — short-term (ordinary rates) if held ≤1 year, long-term (0/15/20%) if held >1 year. You are not taxed twice on the same value; a common filing error is forgetting the basis and over-reporting the gain.

How to avoid the surprise

Estimate your real marginal rate, compare it to 22%, and set aside the difference the moment RSUs vest. You can also ask payroll to withhold extra, or make a quarterly estimated payment to dodge underpayment penalties. The point is simple: plan for your bracket, not for the 22%.