What exactly is the withholding gap?
The withholding gap is the dollar difference between what's withheld when your RSUs vest (federal income tax, state income tax, Social Security and Medicare) and the tax that RSU income actually adds to your bill. A negative gap means you'll owe more when you file; a positive gap means a refund.
It isn't a mistake by your employer. Federal law lets employers withhold a flat 22% on supplemental wages like RSUs (37% above $1 million a year), whatever your bracket. Once your taxable income passes $105,700 (single, 2026), the RSU income is taxed at 24% or more, and the 22% no longer covers it.
Two examples: why your bracket decides everything
$160,000 salary: the whole vest is in the 24% bracket. Federal tax owed is $7,200; the broker withheld $6,600. Gap: −$600.
$220,000 salary: the whole vest is in the 32% bracket. Federal tax owed is $9,600; the broker withheld the same $6,600. Gap: −$3,000. Five times larger, on the same vest.
Social Security and Medicare are withheld exactly as owed in both cases, so they don't change the gap.
What makes the gap bigger or smaller
1. Your federal bracket. In the 24% bracket, the federal shortfall is 2% of the vest. In the 32% bracket it's 10%, in the 35% bracket 13%, and in the 37% bracket 15%. Crossing about $217,875 of salary (single) is where the gap starts to hurt.
2. State withholding. States handle RSUs very differently. California requires 10.23% withholding on stock compensation and New York allows 11.70%. At most tech salaries that's more than those states actually charge, so the state side is over-withheld and partly offsets the federal gap. In other states the withholding roughly matches what you owe, and in some it falls short.
3. Several vests in one year. Each vest adds to your income, so later vests in the year can land in a higher bracket than earlier ones. Four quarterly vests of $25,000 aren't the same as four separate $25,000 events: the last ones may be taxed at 32% or 35%.
4. Filing status. Married couples filing jointly have brackets about twice as wide, so the same vest often stays in a lower bracket. But employers withhold Additional Medicare above $200,000 for each person, while couples owe it only above $250,000 combined, so it can come out slightly too high or too low.
How large is a typical gap? Real 2026 numbers
These scenarios use 2026 federal brackets, single filer, standard deduction, no bonus, a vest in the second half of the year, and each state's usual withholding at vest.
| Salary + vest | State | Federal gap | State gap | Total gap |
|---|---|---|---|---|
| $120k + $20k | Texas | −$364 | $0 | −$364 |
| $150k + $30k | Washington | −$600 | $0 | −$600 |
| $160k + $30k | New York | −$600 | +$1,740 | +$1,140 |
| $180k + $50k | California | −$1,970 | +$465 | −$1,505 |
| $220k + $80k | California | −$8,830 | +$744 | −$8,086 |
Two things stand out. First, below roughly $200,000 of salary the gap is usually modest, and in New York it can even turn into a refund. Second, once the vest reaches into the 32% and 35% brackets, the federal shortfall grows quickly: the last example leaves an $8,086 bill on a single $80,000 vest.
How to close the gap: three methods
1. Withhold more at vest. Some equity plans let you elect a higher federal withholding rate for RSUs, commonly up to 37%. It's the most automatic option: the tax is covered before the shares reach your account. Check your equity portal (for example Schwab, Fidelity, E*TRADE or Morgan Stanley at Work) or ask your stock plan administrator.
2. Make an estimated tax payment. Pay the shortfall with the estimated payment for the quarter the vest falls in. 2026 deadlines: April 15, June 15, September 15 and January 15, 2027. Federal payments go through IRS Direct Pay; states have their own payment portals.
3. Adjust your W-4. Ask payroll to withhold an extra amount from each paycheck. This is useful when you know your vest schedule in advance, and paycheck withholding is treated as paid evenly through the year for penalty purposes.
What if you don't close the gap?
If you owe $1,000 or more when you file and didn't meet a safe harbor, the IRS charges an underpayment penalty. It works like interest: the federal short-term rate plus 3 percentage points, reset each quarter, calculated from each quarterly due date until paid, on Form 2210.
Safe harbor: no penalty if your withholding and estimated payments cover at least 90% of this year's tax, or 100% of last year's tax (110% if last year's adjusted gross income was over $150,000). If most of your income arrived late in the year, the annualized income method on Form 2210 can reduce the penalty for earlier quarters.