Lesser Tax
9 min read
Quick answer: Employers usually withhold federal tax on RSU vests at a flat 22%, but if your salary plus RSUs puts you in the 32%, 35% or 37% bracket, that leaves a gap you pay in April. Owing money in April is not the same as owing a penalty. You avoid the underpayment penalty if your 2026 withholding and estimated payments cover the smaller of 90% of your 2026 tax or 100% of your 2025 tax (110% if your 2025 AGI was over $150,000). If you are short of that line, the fourth estimated payment for tax year 2026 is due January 15, 2027, and extra withholding from your last paychecks of December is often the better fix, because the IRS treats withholding as paid evenly through the year.
Key takeaways
- The optional flat withholding rate on supplemental wages such as RSU vests is 22% for 2026, and 37% on supplemental wages above $1 million in a calendar year (IRS Publication 15).
- For 2026, the 24% bracket starts at $105,700 of taxable income for single filers ($211,400 joint), 32% at $201,775 ($403,550 joint) and 35% at $256,225 ($512,450 joint) (Rev. Proc. 2025-32).
- No penalty if you owe less than $1,000 after withholding, or if you paid in at least the smaller of 90% of this year's tax or 100% of last year's tax (110% if last year's AGI was over $150,000, or $75,000 married filing separately).
- The 2026 estimated tax dates were April 15, June 15 and September 15, 2026, and January 15, 2027.
- Withholding counts as paid in four equal parts on the due dates, no matter when it was taken. An estimated payment counts only from the day you make it.
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Why does 22% RSU withholding fall short?
When RSUs vest, the value of the shares is wages on your W-2. Your employer treats that value as a supplemental wage payment and can withhold federal income tax at a flat 22%, without looking at your W-4 or your other pay. For 2026 the IRS kept that rate at 22%, with a mandatory 37% only on the part of your supplemental wages above $1 million in the year. We cover how vesting itself is taxed in our guide to RSU taxes on an H-1B.
The problem is that 22% is the rate of a middle bracket. Once your salary and vests together pass about $217,875 for a single filer (the $201,775 start of the 32% bracket plus the $16,100 standard deduction), every extra dollar of RSU income is taxed at 32% or more, while only 22 cents of it was withheld. A senior engineer whose vests push income past $272,325 is in the 35% bracket, so each dollar of vest is under-withheld by 13 cents.
The gap gets bigger in years with a job change, a large refresh grant, an IPO or a sign-on vest, and when both spouses earn well and each employer withholds as if that paycheck were the only income. Two W-2s in one year create the same issue, as we explain in changing jobs on an H-1B with two W-2s.
Owing tax in April vs owing a penalty
These are two different things. A balance due on April 15, 2027 is normal and carries no penalty if you pay it by then. The underpayment penalty (figured on Form 2210) applies only when you did not pay enough during the year. You are generally safe if either of these is true:
- Your 2026 return shows less than $1,000 owed after withholding and refundable credits.
- Your 2026 withholding plus timely estimated payments are at least the smaller of 90% of your 2026 tax, or 100% of the tax on your 2025 return (110% if your 2025 AGI was over $150,000, or $75,000 if you file married filing separately in 2026).
The prior-year test needs a 2025 return that covered all 12 months. If you arrived in the US during 2026, or did not file for 2025, only the 90% test is available to you. If you file Form 1040-NR, the payment voucher is Form 1040-ES (NR) instead of Form 1040-ES.
The penalty itself works like interest: it is figured on the amount you were short, for each quarter, for the number of days it stayed unpaid. The IRS underpayment rate for October to December 2026 is 7% a year, compounded daily. It is not huge on a small shortfall, but it cannot be waived just because RSU withholding was low.
A worked example: $180,000 salary plus $120,000 of RSUs
Priya is single, lives in Washington (no state income tax), earns a $180,000 salary and had $120,000 of RSUs vest in 2026. She has no other income and takes the standard deduction. These are rounded, illustrative figures.
- Total W-2 wages: $300,000. Taxable income: $300,000 minus $16,100 = $283,900.
- 2026 federal income tax: $58,448 + 35% of ($283,900 minus $256,225) = about $68,134.
- Withholding on salary, roughly the tax on salary alone: about $31,900. Withholding on RSUs at 22%: $26,400. Total withheld: about $58,300.
- Balance due in April 2027: about $9,800.
Case A: 2025 was a smaller year
Say Priya's 2025 return showed $40,000 of total tax and AGI over $150,000. Her safe harbor is the smaller of 90% of $68,134 ($61,321) or 110% of $40,000 ($44,000), so $44,000. She had about $58,300 withheld. She will owe about $9,800 in April, but no penalty, and no January 15 payment is needed to avoid one.
Case B: 2025 was just as big
Now say her 2025 tax was $66,000. 110% of that is $72,600, so the smaller figure is 90% of 2026 tax: $61,321, or about $15,330 per quarter. Her withholding of about $58,300 counts as about $14,575 per quarter. She is short roughly $755 in each of the four quarters, about $3,000 in all.
If she has an extra $3,000 of federal tax withheld from her December paychecks, that withholding is spread across all four quarters and every quarter is covered: no penalty. If she instead sends a $3,000 estimated payment on January 15, 2027, it fixes the fourth quarter only. The April, June and September shortfalls were still late, so a small penalty remains on them. At 7% a year, roughly $755 that is late for about a year costs around $50, so the total is modest, but the withholding route avoids it entirely.
Before December 31: what you can still change
Raise withholding on your last paychecks
Submit a new Form W-4 through your payroll portal and enter a dollar amount in Step 4(c), extra withholding per pay period. Payroll cutoffs come early in December, so check when your last 2026 paycheck runs. Remember to reset Step 4(c) in January, or the extra amount continues in 2027. If paystub lines are unfamiliar, see where your paycheck goes.
Check your equity plan settings
Some employers let you choose a higher withholding rate on future vests in the equity plan portal. Others do not. It is worth checking before the next vest date, especially for 2027 grants.
Know what a December sale does
Selling vested shares that went up adds capital gain and more tax for 2026. Selling shares that fell can create a loss, but a vest within 30 days of that sale can trigger the wash sale rule. See RSUs that fell after vesting before you sell.
How to make the January 15, 2027 estimated payment
If December withholding is no longer possible, an estimated payment still helps the fourth quarter and stops interest from running on that part.
- Add up 2026 federal withholding from your last paystub of the year and any RSU withholding shown in your equity portal or year-end statement.
- Find your 2025 total tax on your 2025 Form 1040 and your 2025 AGI, and work out 100% or 110% of it.
- Estimate 2026 tax with the 2026 brackets and take 90% of it.
- Compare the smaller of the two figures with what you have paid in. The difference is what you are short.
- Pay it by January 15, 2027 through IRS Direct Pay, your IRS online account or EFTPS, and choose estimated tax for tax year 2026. Keep the confirmation number.
There is one alternative: if you file your complete 2026 return by January 31, 2027 and pay everything you owe, you do not need the January 15 payment. In practice most RSU holders cannot do this, because Forms W-2 and 1099-B often arrive close to that date or later.
When most of the income came late in the year
If a large vest, an IPO lockup release or a sale landed in the last months of 2026, the annualized income installment method (Form 2210, Schedule AI) can show that less tax was due in the earlier quarters. That can reduce or remove the penalty for those quarters. You must file Form 2210 with your return to use it, and if you use it for one due date you must use it for all of them.
What about state tax?
States run their own estimated tax rules. In California, for example, 2026 payments are 30% by April 15, 40% by June 15, nothing in September, and 30% by January 15, 2027. California filers with 2025 AGI over $150,000 use 110% of 2025 tax for the prior-year test, and anyone with 2026 AGI of $1,000,000 or more ($500,000 married filing separately) cannot use the prior-year test at all. If RSUs vested while you lived in more than one state, see the two-state return after a move.
What this means for your taxes
If RSUs pushed your 2026 income up, do the safe harbor check now, while December payroll can still fix it. If you are covered, plan for a balance due in April. If you are short, extra withholding before December 31 beats a January 15 payment. This is general information, not advice for your situation. If you would like a CPA to run the numbers with your equity statements, Lesser Tax offers US tax filing for NRIs and visa holders.