For California high earners paid in equity
Your RSUs Withhold at 22%. In California, Your Real Rate Almost Certainly Isn't.
The flat supplemental rate is 22% for 2026. A single filer's federal marginal rate reaches 24% at $105,700 of taxable income and 32% at $201,775. California and the ESPP, which withholds nothing, stack on top. Here is the arithmetic, the California layer, and the two levers that close the gap.
When restricted stock units vest, the value on the vest date is ordinary income on your W-2 whether or not you sell a single share. The tax your employer withholds at that moment is a flat statutory rate, and for most people paid meaningfully in equity it is not the tax they actually owe. The difference is the bill that shows up in April without warning.
This covers where that gap comes from, the California layer that sits on top of it, how an employee stock purchase plan changes the picture, and the two levers that close the gap before the year ends. If you work at a company we have written a plan guide for, the specifics of your plan are covered on their own. See theQualcomm andIntuit guides.
The withholding gap
Why your RSU vest withholds too little
Federal supplemental withholding on a vest is a flat 22% for 2026, a number the IRS restates in Publication 15 each year. Once your cumulative supplemental wages pass $1,000,000 in a calendar year, the rate on the excess jumps to a mandatory 37%. Below that million-dollar line the 22% is a statutory default applied to everyone. It is not a calculation about your income, and for anyone receiving real equity it stops matching the actual marginal rate quickly.
Here is where it comes apart. Under the2026 rate schedules, a single filer reaches a 24% marginal rate at $105,700 of taxable income and 32% at $201,775. Married filing jointly, 24% starts at $211,400 and 32% at $403,550. Anyone with meaningful equity is very likely past the first of those, and often past the second. The shortfall is simple arithmetic, the gap between your marginal rate and 22%, applied to the vest. We worked it through on a single Q4 vest inwhy your Q4 RSUs withheld at 22% probably came up short.
None of this announces itself. The vest looks handled, the shares appear in your account, and nothing on the paystub tells you a balance is quietly building.
| Your marginal rate | Begins at, single | Begins at, joint | Federal shortfall per $100,000 |
|---|---|---|---|
| 22% | $50,400 | $100,800 | None, withholding matches |
| 24% | $105,700 | $211,400 | $2,000 |
| 32% | $201,775 | $403,550 | $10,000 |
| 35% | $256,225 | $512,450 | $13,000 |
| 37% | $640,600 | $768,700 | $15,000 |
The stack
California and Medicare stack on top
If you are taxed in California, the state withholds supplemental wages at its own flat rate. For the category that covers stock options and bonuses, which is where RSU vest income is generally withheld as a matter of payroll practice, that rate is 10.23%, and it has been unchanged since November 2009. A California marginal rate at these income levels runs from 9.3% upward, reaching 13.3% at the very top once the state's 1% Mental Health Services Tax applies above $1,000,000 of taxable income. So the flat 10.23% covers some people and falls short for others, independent of whatever the federal side is doing.
Then there is the Additional Medicare Tax, 0.9% on wages, which your employer has to start withholding once it has paid you more than $200,000 in a year. The problem is that your employer cannot see your filing status or your spouse's income. Two spouses who each earn $180,000 have nothing withheld, because neither employer crossed $200,000, while their combined wages of $360,000 sit well above the $250,000 married-filing-jointly threshold.
There is a fourth gap, and it is the quietest one. ESPP compensation income carries no employer withholding at all. Not a reduced rate, none. It lands on your W-2 with nothing withheld against it, which is a reliable source of April surprises for people who assumed payroll had it covered.
The ESPP
The ESPP lookback, and the two clocks
The discount on an employee stock purchase plan is real, and it is built into the purchase price before the stock can move. What happens after the purchase is the actual decision, and it turns on holding periods.
Most employer ESPPs are qualified plans under Section 423 of the Internal Revenue Code. The plan caps the discount at 15%, so the purchase price is often 85% of fair market value, and many plans add a lookback. The price becomes 85% of the lesser of the value on the offering date or the value on the purchase date. That lookback is what makes an ESPP worth more than a flat discount, because if the stock rose across the offering period, you buy at 85% of the older, lower price.
The $25,000 annual ceiling most people have heard of is measured somewhere they do not expect. Section 423 sets it at $25,000 of stock at 100% of the offering-date value, not the discounted price you actually pay. Two things follow, and both work in your favor. Your real cash outlay tops out around $21,250 rather than $25,000. And because the limit is fixed at the offering-date price, a stock that rises during the period does not eat into your allowance faster, which is the opposite of what most people assume.
The tax on a sale turns on whether the disposition is qualifying or disqualifying, and two clocks decide it. A qualifying disposition requires holding at least two years from the offering date and at least one year from the purchase date, and the later date controls. Because the two-year clock usually runs past the one-year clock, the offering-date test is the binding one more often than not. Some plans also include an automatic reset that restarts the two-year clock when the stock drops, and nothing about the transaction flags that it happened. The full mechanics are inhow an ESPP actually works.
Concentration
The concentration builds up underneath both
Every vest and every ESPP purchase adds another slice of one company's stock to your net worth. It arrives a little at a time, year after year, until one company is a much larger share of your wealth than you meant it to be.
There is no universally right percentage to hold. The point is to know your actual number on purpose, because a figure you chose is a position and a figure that accumulated is an accident. The decision to sell, hold, or diversify is its own question, worked through inwhat to do with vested RSUs. And once you sell an appreciated position, the tax on the gain is a separate event from the tax at vesting, priced out inwhat a long-term capital gain actually costs a San Diego high earner.
The fix
Two levers that close the gap before April
The first is the prior-year safe harbor. Pay in 110% of the tax shown on last year's return, the 110% applying because your prior-year adjusted gross income was above $150,000, and you are protected from an underpayment penalty no matter how large this year's equity income turns out to be. That last part is what makes it useful when vest values are hard to predict. You do not have to forecast the year correctly, only cover a number you already know. See Form 1040-ES.
The second is a timing quirk worth knowing. Wage withholding is treated as paid evenly across the whole year, no matter when it actually happened, while an estimated payment is credited to the quarter you make it in. So if you find in October that you are short, raising withholding on your remaining paychecks can cure a shortfall from earlier in the year in a way a fourth-quarter estimated payment cannot. For most people reading this late in the year, the fix is a W-4 change, not a check. The two routes are not treated the same by the IRS, which we cover intwo ways to cover an RSU tax shortfall.
Near the finish
Within five years of retirement, the questions change
Most writing about equity compensation is built for the years when you are still accumulating. Inside five years of retirement the questions invert, and a few of them need real lead time.
Turning concentrated stock into income comes first. A position you have held for years as a savings vehicle now has to become a dependable income stream, on a schedule you control rather than one the market sets. The tax year a 401(k) rollover lands in matters too, because the year you roll it interacts with your equity income and your bracket that year. When you claim Social Security interacts with the income you generate selling stock in the same window. And if you stop working before 65, the income from selling concentrated stock in those bridge years can raise your Medicare premiums later through IRMAA. None of this has to be solved at once. The point of naming it early is that it takes time to plan around.
Your plan
What turns on your own plan
Two things depend on facts that no public filing states, and each is settled by something you already have.
Whether your employer's payroll lets you elect a higher supplemental withholding rate on a vest. Some do, some do not. If yours does, the fix for the gap is a form. If not, it is estimated payments or a W-4 change. Ask payroll.
And the administrative layer around your ESPP, meaning the actual purchase dates as administered, the broker, and how insider-trading blackouts overlay the purchase dates. None of that is in the tax code. Your plan portal and your Form 3922 carry what you need.
Questions people ask
Why is only 22% withheld when my RSUs vest?
Because 22% is the flat rate employers apply to supplemental wages, restated by the IRS for 2026 in Publication 15. It is a statutory default applied to everyone below $1,000,000 of cumulative supplemental wages in a year, not a calculation about your income. Above $1,000,000 the rate on the excess is 37% and becomes mandatory.
How much am I actually short?
It is the difference between your marginal rate and 22%, applied to the vest. Each $100,000 that vests is short $2,000 at a 24% marginal rate, $10,000 at 32%, and $13,000 at 35%. In California a second gap opens where the flat 10.23% falls below your state marginal rate, and unwithheld ESPP income stacks on top of both. A senior employee with several hundred thousand vesting in a year can be tens of thousands short across the three.
How are RSUs taxed in California?
As ordinary income, the same as your salary. The state withholds this supplemental income at a flat 10.23%, which for most high earners sits below their actual California marginal rate of 9.3% or more, so the shortfall shows up when you file.
What is the simplest way to avoid an underpayment penalty?
Pay in 110% of the tax shown on your prior-year return. The 110% figure applies because your prior-year adjusted gross income was above $150,000. It protects you regardless of how large this year's equity income turns out to be, which is what makes it workable when vest values are unpredictable.
I have already had a big vest and it is October. Is it too late?
Usually not. Wage withholding is treated as paid evenly across the whole year regardless of when it happened, while estimated payments are credited to the quarter you make them. So raising withholding on your remaining paychecks can cure a shortfall from earlier in the year in a way a fourth-quarter estimated payment cannot. For most people in that spot the fix is a W-4 change rather than a check.
Can I file an 83(b) election on my RSUs?
Generally no. The 83(b) election applies to actual restricted stock and to early-exercised options, not to standard public-company RSUs, because a restricted stock unit is a promise to deliver shares later rather than a transfer of property now. If you hold restricted stock or are weighing an early exercise at a startup, the 30-day clock and the two-sided decision are covered in the 83(b) election and its 30-day deadline.
A guide to RSUs, the ESPP and retirement timing, by email
A plain-English guide to where the tax decisions sit when your pay is mostly equity: why the flat rate withheld on a vest tends to fall short, how the ESPP lookback and its two holding clocks work, how concentrated a single position has quietly become, and the questions to take to your own plan.
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While you're here
Most people who download one of these have a specific situation behind it. A concentrated stock position, a tax bill that keeps growing, a decision about when they can actually step back from work. Reading about it is a start. Talking it through with someone who does this all day is faster.
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Work out the number before April does it for you
Bring your most recent vest statement, your Form 3922 if you have bought through the ESPP, and last year's return. Between them we can work out what your marginal rate actually is, how far 22% is falling short across the vests you have coming, and whether the prior-year safe harbor or a W-4 change is the cleaner fix.
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What these figures assume
Every figure on this page depends on the sources below, and they change. Verify anything you intend to act on.
Withholding rates, 2026 brackets, California and the ESPP
- Federal supplemental withholding rate, 22% for supplemental wages up to $1,000,000 cumulative in a calendar year, and 37% mandatory on the excess above $1,000,000. IRS Publication 15 (Circular E) for use in 2026. The $1,000,000 threshold is fixed by statute and is not indexed. The 22% and 37% rates are restated each year and must be re-verified every January.
- 2026 federal rate schedules, IRS Rev. Proc. 2025-32. Single: 22% from $50,400, 24% from $105,700, 32% from $201,775, 35% from $256,225, 37% above $640,600. Married filing jointly: 22% from $100,800, 24% from $211,400, 32% from $403,550, 35% from $512,450, 37% above $768,700. All figures are taxable income and all are inflation-indexed annually.
- The shortfall column is the marginal rate minus 22%, times $100,000: $2,000 at 24%, $10,000 at 32%, $13,000 at 35%, $15,000 at 37%. It approximates the shortfall on incremental RSU dollars for someone already above the 22% crossover. It is not a substitute for a projection on an actual return, because the flat 22% applies to the gross supplemental payment while a marginal rate applies to taxable income.
- Additional Medicare Tax, 0.9% on wages, employee only. Employer withholding is triggered once wages from that employer exceed $200,000 in a year. Liability thresholds are $250,000 married filing jointly and $200,000 single. Not indexed, unchanged since 2013. The IRS is explicit that an employer does not consider the employee's filing status or a spouse's wages.
- California supplemental withholding, 10.23% for the category covering stock options and bonuses, and 6.6% for other supplemental payments. California EDD DE 231PS, effective for payments on or after November 1st, 2009. The publication names the category "stock options and bonuses" and does not use the term RSU; RSU vest income is generally withheld within that category as a matter of payroll practice.
- California's top marginal rate reaches 13.3% once the 1% Mental Health Services Tax applies to taxable income above $1,000,000 (Rev. & Tax. Code section 17043).
- ESPP rules, Internal Revenue Code Section 423. The 15% discount cap, the lookback mechanic, the two-year-from-offering and one-year-from-purchase holding periods, and the $25,000 limit measured at 100% of the offering-date value. The $25,000 figure is statutory and has not been indexed since 1964.
- Estimated tax safe harbor, 110% of the prior-year tax where prior-year adjusted gross income exceeded $150,000. IRC Section 6654, 2026 Form 1040-ES. The $150,000 figure is statutory and not indexed. Wage withholding is deemed paid in equal installments across the year under IRC Section 6654(g) unless the taxpayer elects otherwise, while estimated payments are credited when made. This is why a late-year withholding increase can cure an earlier shortfall and a fourth-quarter estimated payment cannot.
- 2026 standard deduction, $32,200 married filing jointly and $16,100 single. Rev. Proc. 2025-32.
- All IRS and California figures are for 2026 and reset each January. Your own plan documents and Form 3922 govern your specific plan.