TECh TAX TIPS
Why RSUs Cause Surprise Tax Bills, and 3 Tips to Fix It
Why tech employees get hit with surprise tax bills
Did you just finish up tax season, open your return, and think, "Wait, I owe how much?" If you work in tech and part of your compensation comes from restricted stock units (RSUs), this is incredibly common. And usually, it's not because you did something wrong; it's due to how RSUs are taxed, and more specifically, how your taxes are withheld from them.
Many tech employees assume that because some shares were sold or withheld at vesting, the tax side is fully handled. But that’s sometimes not the case. The result can be a frustrating surprise in April: a tax bill you weren’t expecting.
Here’s why that happens, and what you can do now to avoid it next time.
What are RSUs? And when do RSUs become taxable?
RSUs, or Restricted Stock Units, are a form of compensation your employer promises to give you over time, usually according to a vesting schedule.
For example, your employer might grant you 500 shares, but instead of giving them to you all at once, they vest gradually, as long as you remain employed. Common vesting schedules include monthly and quarterly stock transfers over a 3- to 5-year time period.
While you're granted the RSUs up front, they generally do not become taxable until they vest and settle, meaning the shares are actually transferred to you and become yours.
At many tech companies, those shares land in an investment account through a platform like Morgan Stanley at Work or E*TRADE. Once they settle, you can usually keep them, sell them, or transfer them, depending on your company’s plan rules.
How are RSUs taxed?
When your RSUs vest and are transferred to you, the IRS generally treats the value of those shares as ordinary income. Not capital gains. Not a special tax category. Just ordinary income, similar to salary.
The amount of taxable ordinary income is based on a formula: Number of shares vesting × stock price on the transfer date.
To make this even more confusing, if you hold your RSUs instead of selling them, you actually experience two different income tax events:
First, the RSUs get taxed as ordinary income when they vest and transfer to you as described above.
Then, the RSUs get taxed as a capital gain (or loss) when they're sold at a later date.
Fictional Example
Imagine you’re a designer at Google earning a $150,000 salary, and you have 500 RSUs vesting this year. For simplicity, let’s assume they vest in two chunks with two different hypothetical stock prices:
250 shares in April x a stock price of $200/share = $50,000 of ordinary income
250 shares in October x a stock price of $300/share = $75,000 of ordinary income
When you file your tax return, the IRS just doesn't see a $150,000 salary. It sees:
$150,000 of salary
$50,000 of income from the April RSU vest
$75,000 of income from the October RSU vest
That brings your total taxable income to: $275,000.
And this is often the moment people realize why their tax bill was so much higher than expected. Their income is so much higher than they realized! Psychologically, RSUs may not feel the same as cash hitting your checking account every two weeks. But from a tax standpoint, they still count as income.
The withholding gap: Why tech employees end up with a surprise tax bill
When RSUs vest, your employer will generally withhold taxes. Often they do this by withholding or selling some of the shares to cover taxes.
So naturally, many people assume their taxes are taken care of. But not necessarily.
The issue is that many employers withhold RSU taxes at a flat supplemental withholding rate, often 22%, and that may be too low for your actual marginal tax bracket.
This creates what I call the withholding gap.
Fictional Example
Let’s go back to our example of a designer who earned $150,000 in salary and $125,000 of RSUs. With a total taxable income of $275,000, even after deductions, your actual federal marginal tax rate may be significantly higher than 22%.
So if your company only withheld 22% on the RSU income, you may not have paid enough in throughout the year.
Here's what that can look like:
RSU income: $125,000
Federal withholding at 22%: $27,500
Federal tax owed if your true marginal rate is 32%: $40,000
Potential shortfall: $12,500
That shortfall doesn’t automatically mean you’ll owe exactly that amount, because your full return depends on deductions, other withholding, filing status, state taxes, and additional income. But it shows how easy it is for a sizable balance due to build up if your employer isn't withholding enough income on your RSU vests.
How to fix withholding gap before next tax season
The good news is the withholding gap is often very fixable. If RSUs caused a surprise tax bill this year, the goal is to get ahead of the problem before your next round of vesting.
Here are a few steps to do that.
1. Estimate your total income for the year
Don’t just look at your salary. Project:
base salary
expected bonus
expected RSU vesting
any spouse’s income
investment income or other taxable income
This gives you a more realistic picture of where your tax bracket may land.
2. Review how much is actually being withheld
Check your paystub and vest confirmations. You want to understand:
how much federal tax is being withheld from salary
how much is being withheld from RSU vesting
whether state withholding is also too low
A lot of people discover the issue only after looking at these numbers side by side.
3. Increase paycheck withholding or make estimated tax payments
If you identify a likely shortfall, you can usually address it in one of two ways:
Increase W-4 withholdings: You elect to have more tax withheld from each paycheck
Make estimated quarterly tax payments: You send payments directly to the IRS during the year
For many employees, increasing paycheck withholding is the simplest option, but it also means having less money deposited in your checking account each pay period. While quarterly estimated payments don't affect your take-home pay, you have to remember to pay them every few months.
4. Revisit the plan after each vest
RSU income isn’t static. If your company stock price moves a lot, your taxable income can be very different from what you originally expected. Revisiting the numbers after a major vest can help you make course corrections before year-end.
The bottom line
If RSUs caused a surprise tax bill this year, you’re not alone. In many cases, the issue is not that you made a mistake. It’s that the default withholding on RSU income didn’t match your actual tax rate. A little planning now can help you avoid a much bigger surprise next April.
Disclaimer
You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. This video is intended for educational purposes only. Nothing in this video constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost. Advisory Services offered through Avise Financial Cooperative Inc, a Registered Investment Adviser with the SEC. Registration of an investment adviser does not imply a certain level of skill or training."
Want help planning around RSUs?
I’m Theresa Pablos, a fee-only Certified Financial Planner, and I help tech employees design a life with options.
If you’re trying to understand how your RSUs affect your taxes, decide whether to hold or sell shares, or make equity compensation part of a broader financial plan, I can help you think it through.
