Your RSUs vest. Fewer shares show up than the grant letter showed. The gap is usually tax withholding, often funded by selling some of the new shares. That sale is called sell-to-cover. The rate used on vest day is a payroll deposit rule. Your Form 1040 still taxes the vest at your ordinary bracket for the whole year.
How are RSUs taxed at vesting?
RSUs (restricted stock units) are a promise of shares that deliver when you hit the vest date. Grant day usually creates no tax. Vest day does.
The fair market value of the shares delivered that day is ordinary income, the same category as salary or a bonus. It lands on your Form W-2. That same number becomes your cost basis going forward.
Example: 1,000 RSUs vest when the stock trades at $100. You recognize $100,000 of ordinary income before withholding. Sell later at a different price, and the move from the $100 basis is capital gain or loss, a separate event from the vest. For how that path compares to options, see RSUs vs. stock options.
What is RSU supplemental withholding?
Payroll can withhold RSU income with your regular W-4 tables, or treat it as a supplemental wage (the same category as many bonuses). Under the federal supplemental-wage rules, employers can use a flat rate:
- 22% on supplemental wages up to $1 million for the year
- 37% once cumulative supplemental wages for the year exceed $1 million
That flat rate doesn’t use your bracket. Your return still taxes the vest at your ordinary rate once salary, bonus, spouse income, other equity, and deductions add up. Plenty of senior tech employees land in the 32% or 35% federal bracket for the year. Withholding at 22% leaves a gap you settle when you file. For more on that gap, see why RSUs are taxed so high.
A federal example
Say $80,000 of RSUs vest in a year where your marginal federal rate is 35%.
- Employer withholds 22% federally: $17,600
- Federal tax on that income at 35%: about $28,000
- Still owed when you file: about $10,400, before state tax and the rest of the year
If the household already crossed $1 million in cumulative supplemental wages, the mandatory 37% federal withholding can overshoot a lower marginal rate. The vest-day percentage is the deposit your employer remits. Your return sets the tax you owe.
Sell-to-cover, same-day sale, and cash withholding
Companies need cash to send the IRS and your state. Most public-company plans use one of three patterns.
Sell-to-cover
The brokerage sells enough newly vested shares to cover required withholding, then delivers the rest to you. If $100,000 vests and total withholding (federal, state, local, Social Security, Medicare) runs about 30% in your case, roughly $30,000 of stock is sold and about $70,000 of stock remains. That sale usually happens at about the vest-day price, so it rarely creates a large separate capital gain or loss. You leave with fewer shares and a cash deposit toward taxes.
Same-day sale (sell all)
Some plans sell the entire vest and wire you the cash after withholding. You end the day with cash, no shares. That reduces single-stock concentration. You also give up post-vest price moves in either direction.
Cash withholding
Less common at large tech employers, but allowed on some plans: you wire cash, or have cash taken from salary, so every vested share stays in your account. You keep full share count and still fund the deposit. You need liquid cash on vest day.
Each method funds the withholding your employer must remit. Your Form 1040 still taxes the vest at your ordinary bracket. If 22% federal withholding sits below that bracket, sell-to-cover can leave you short for filing season.
State withholding and payroll taxes
Federal supplemental withholding is only part of the deposit.
- State income tax. Some states apply their own flat supplemental rate to RSU income. Others withhold at your regular state rate. Move mid-year, or work in one state while your employer withholds for another, and the state gap can grow.
- Social Security and Medicare. RSU wages are generally subject to FICA like other pay, subject to the Social Security wage base and the Additional Medicare Tax above the usual thresholds.
- Local taxes. Where they apply, they withhold on the vest too.
Run a specific vest through Nino’s RSU tax calculator if you want federal withholding versus a stated marginal rate before the next tranche.
Planning beyond the vest-day sale
Sell-to-cover answers a payroll question: how the company funds the deposit. Planning still has to cover:
- Will 22% (or 37%) federal withholding match this year’s bracket once every vest stacks up?
- Do you need a W-4 tweak or quarterly estimates timed to the vesting calendar?
- Should you hold the net shares, sell more for diversification, or raise cash another way?
- How does this vest interact with ISOs (incentive stock options), NSOs (non-qualified stock options), a bonus, or a spouse’s equity?
An RSU tax advisor who sees the whole year can track those. If your grants mix RSUs with options or early-exercise stock, start from the equity compensation advisor page. The full set of Nino service pages is under services.
How to close the withholding gap before you file
- Model the year. Add remaining tranches, bonus targets, and other household income before you treat 22% as close enough.
- Fund any shortfall on purpose. Extra salary withholding, estimated payments after large vests, or selling more than the minimum cover amount.
- Split tax deposits from portfolio choices. Keeping every net share is a concentration choice. Covering taxes is a cash-flow choice. They can differ.
- Keep tax and planning on one timeline. Payroll sees the deposit. Tax software sees the return months later. A CPA and CFP on the same team can watch the gap while the year is still open.
How Nino helps
Nino pairs a dedicated CPA and CFP on one flat annual fee. Vesting calendars, the supplemental withholding gap, and what to sell or hold get modeled before the tranche hits. Start from the RSU tax advisor page, or use the RSU tax calculator for a quick federal withholding estimate. If a large unlock is ahead, see post-liquidity planning.
Book a demo before your next vest. Through August 31, 2026, new members who start a one-year membership get $500 off their first year. Every plan includes a 30-day money-back guarantee.
