The RSU and Bonus Tax Gap

A standard failure mode for equity-comp employees: RSUs vest, the employer withholds federal at the 22% supplemental rate (section “Supplemental withholding rate”), and the actual marginal rate is 37% federal plus state. On a $500,000 RSU vest, federal alone under-withholds by $500,000 $\times$ (0.37 - 0.22) = $75,000; for a CA resident, state stacks another $500,000 $\times$ (0.133 - 0.1023) $\approx$ $15,350 because the CA bonus supplemental rate of 10.23% sits well below the 13.3% top rate. The combined  $90,000 arrives as an April 15 cash demand the W-2 employee did not budget for, often the same April the SALT cap denied them the state-tax deduction they used to get. Add an estimated-tax penalty on top if the safe harbor was not also met.

The $1 million cliff, which cuts the other way. The 22% supplemental rate is not universal — it applies only to the first $1,000,000 of aggregate supplemental wages you receive in a calendar year. Above that line, IRC §3402(g)(1)(A), “Income tax collected at source” makes withholding at the highest rate (37%) mandatory, and the employer has no discretion. So the gap is largest for the employee vesting $300,000 to $900,000 a year and closes on its own for the one vesting $3 million. If you are near the threshold, know which side of it a given vest lands on before you size the sinking-fund transfer: a vest that crosses $1 million mid-year is withheld at 22% up to the line and 37% after it.

The mechanic: at each vest, immediately compute the under-withholding delta and wire it into the April-15-maturity sinking-fund T-bill. Treat the vest as if it had withheld at the correct rate; the money was never yours to spend. The same logic applies to year-end performance bonuses — 22% supplemental withholding leaves the same gap for any taxpayer above the 22% federal bracket. The year-end-planning section in the tax chapter (section “Year-End Planning With Stock Compensation”) covers the moves that shrink the gap (cover transactions, W-4 adjustments, additional withholding via Q4 bonus); this section is about funding what remains after those.