Executive Summary
When RSUs vest, most employees see two numbers that feel contradictory: gross shares listed on the grant and a smaller deposit of net shares. The gap is not a secret fee—it is usually tax withholding funded by selling a portion of the shares at the vest price.
This guide explains the mechanics, how that interacts with supplemental wage withholding rules, and why high earners still owe more at filing. For deeper background on the 22% issue, see our RSU and option withholding guide. You can model simple scenarios with our RSU Sell-to-Cover Calculator.
The Economics of Vest Day
What is taxed?
On vest, the IRS generally treats the fair market value of shares that vest as ordinary wage income in the year of vesting.1 Payroll taxes and income tax withholding apply in the same broad way as other wages—subject to plan design and employer policy.
Why shares are sold
Unless you deposit cash, the plan must fund the tax obligation. The most common approach is sell-to-cover: sell as many whole shares as needed at the vest-day FMV so that after the sale, the broker has enough cash to remit withholding.
Net shares = vested shares − shares sold (minus any fractional rounding handled per plan rules).
Supplemental Wages and the 22% Rate
Employers often use the supplemental wage withholding methods described in IRS Publication 15-T. For many employees, federal withholding on RSU income is 22% on amounts up to $1 million of supplemental wages per year, and 37% on supplemental wages above that threshold.2
That does not mean your actual tax rate is 22%. It means initial withholding may be flat. If your marginal federal rate is 32–37%, you can still owe material additional tax at filing.
| Concept | What to remember |
|---|---|
| Marginal rate | Rate on the next dollar of income |
| Withholding | Estimate collected through payroll |
| True-up | Happens when you file Form 1040 |
Worked Example (Illustrative)
Assume 1,000 RSUs vest at $50 FMV. Gross income from the vest is $50,000.
- If the plan assumes 30% total withholding (federal + state + FICA stack—illustrative), taxes due ≈ $15,000.
- Shares sold ≈ ceil($15,000 ÷ $50) = 300 shares.
- Net shares ≈ 700 shares delivered to your account.
If the plan used only 22% federal on a portion and your actual all-in rate is higher, you may still owe at filing even though shares were sold.
Planning Checklist
- Read your trade confirmations after each vest: shares sold, FMV, and taxes remitted.
- Compare withholding to your marginal bracket—if you are above 22–24% federal alone, expect a gap.
- Adjust Form W-4 or make estimated tax payments if you see recurring balances due.
- Coordinate with state rules—California and New York residents often have parallel gaps.
FAQ Highlights
Does sell-to-cover mean I paid all my taxes?
Not necessarily. It means the plan remitted withholding based on its assumptions. Your final liability depends on your full return.
Can I switch to cash withholding?
Some employers allow you to deposit cash instead of selling shares—if liquidity allows—subject to plan rules.
Where can I learn about ISOs?
See ISO vs NSO—ISO taxation differs when you exercise and hold.
Disclaimer
This article is general information and not tax or legal advice. Plan documents, broker procedures, and IRS rules change. Consult a qualified professional for your situation.