The deposit hits and the withholding looks reasonable. Here’s what’s actually happening — and why the number you see isn’t the number you keep.
The Number That Shows Up Is Not the Number You Keep
There’s a moment every tech executive knows. The vest date arrives, the shares are delivered, and after the automatic sell-to-cover, a deposit lands in the account. It looks like a good day. The number is real. The withholding happened. Everything seems handled.
It usually isn’t.
The withholding that happens at vest is a default — a flat rate applied automatically by payroll that has nothing to do with your actual tax situation. For most tech executives earning total compensation well above $200K, the default withholding rate creates a gap between what was withheld and what is actually owed. That gap accumulates across every vest, every year, until April when it shows up as a balance due that nobody planned for.
Understanding what you actually keep after taxes starts with understanding how RSU taxation actually works.
How RSU Taxation Works
Ordinary Income at Vest
RSUs are taxed as ordinary income at the moment they vest — not when you sell the shares. The taxable amount is the fair market value of the shares on the vest date, regardless of what you paid for them (you paid nothing) and regardless of whether you sell immediately or hold for years.
This is the most important thing to understand about RSU taxation: the tax event is the vest, not the sale.
What that means in practice:
- 1,000 shares vest at $50 per share → $50,000 of ordinary income recognized on that date
- That $50,000 is added to your W-2 income for the year
- It is taxed at your marginal federal rate, state rate, and is subject to FICA taxes up to the applicable limits
- The withholding that happens automatically covers some of that liability — but often not all of it
The Withholding Gap
The IRS requires employers to withhold on supplemental wages — which includes RSU income — at a flat federal rate of 22% for amounts up to $1 million. For income above $1 million in a single payment, the rate increases to 37%.
For most tech executives, the actual marginal federal rate is 32% or 37% — well above the 22% default. The gap between what gets withheld and what is actually owed is real money:
- On a $50,000 vest, the withholding gap between 22% and 37% is $7,500 in federal taxes alone
- State taxes add to this depending on where you live
- Across multiple vesting events in a year, the cumulative gap can reach five or six figures
That gap doesn’t disappear. It shows up as a balance due on the tax return — with potential underpayment penalties if estimated payments weren’t made to cover it.
What Happens After the Vest
Once the shares are in your account, the tax treatment shifts. The cost basis of the shares is set at the fair market value on the vest date — the same value that was recognized as ordinary income.
From that point:
- If you sell immediately — no additional gain or loss, since the sale price equals the cost basis
- If you hold and sell later at a higher price — the difference between the sale price and the vest-date cost basis is a capital gain
- Short-term capital gain if held less than one year from vest — taxed at ordinary income rates
- Long-term capital gain if held more than one year from vest — taxed at preferential rates of 0%, 15%, or 20% depending on income
The decision to hold or sell after vest is a separate tax decision from the vest itself — and it interacts with the portfolio concentration picture in ways that need to be evaluated together.
The Full Tax Picture on a Single Vest Event
To understand what you actually keep, walk through a complete example.
The Scenario
- 1,000 RSUs vest
- Stock price on vest date: $100 per share
- Total value at vest: $100,000
- Total compensation for the year including salary and bonus: $450,000
- Federal marginal rate: 35%
- State: California (13.3% top marginal rate)
- Medicare surtax: 0.9% additional on high earners
What Gets Withheld Automatically
- Federal withholding at 22%: $22,000
- State withholding (varies): approximately $10,000–$12,000
- FICA (Social Security already maxed at this income level): $0 additional
- Medicare: $1,450
Total withheld: approximately $33,000–$35,000
What Is Actually Owed
- Federal at 35%: $35,000
- State at 13.3%: $13,300
- Medicare at 1.45% + 0.9% surtax: $2,350
Total actually owed: approximately $50,650
The Gap
Approximately $15,000–$17,000 underpaid on a single $100,000 vest event.
Across four vesting events in a year of similar size, that gap reaches $60,000–$70,000 — all of which shows up as a balance due in April.
What Affects the Final Number
Your State of Residence
State income tax on RSU income varies significantly:
- California — up to 13.3%, among the highest in the country
- New York — up to 10.9% state plus New York City tax if applicable
- Texas, Florida, Washington — no state income tax, which meaningfully changes the after-tax picture
- Other states — rates vary widely and should be factored into any projection
If you live in a high-tax state, the combined federal and state rate on RSU income can approach or exceed 50% at the top brackets. That’s the real number — not the gross value of the vest.
The Year the Vest Lands
Not all vesting years are equal. A vest that lands in a year with a large bonus, a business distribution, or another significant income event pushes more income into the top bracket. A vest that lands in a lower-income year — a transition year, a sabbatical, early retirement — may be taxed at a meaningfully lower rate.
When someone has flexibility over the timing of other income, coordinating that timing with the vesting schedule is a real planning opportunity.
What Offsets Are Available
The tax cost of a vest can be reduced by offsets in the same tax year:
- Realized investment losses that offset the ordinary income
- Charitable contributions — especially appreciated stock donations or donor-advised fund contributions
- Business deductions for clients with self-employment or business income
- Retirement contributions that reduce taxable income
- Deferred compensation elections where available
The availability of these offsets depends on the full financial picture — which is why the vest can’t be planned in isolation.
The Hold vs. Sell Decision
Selling at Vest
Selling shares immediately at vest is the simplest approach from a tax standpoint. The cost basis equals the sale price, so there is no additional gain or loss beyond the ordinary income already recognized. The concentration risk is eliminated immediately. The cash is available for redeployment.
The downside is that you’re also selling at whatever the stock price happens to be on the vest date — with no opportunity to benefit from future appreciation on those shares.
Holding After Vest
Holding shares after vest creates the opportunity for long-term capital gain treatment if the stock appreciates and you hold for more than one year. At the top bracket, the difference between ordinary income rates and long-term capital gains rates is approximately 20 percentage points — a meaningful difference on large positions.
The tradeoff is concentration risk. Every share held is a share tied to a single employer’s performance. The longer shares are held, the larger that concentration can grow.
The Planned Approach
The right answer isn’t always sell everything or hold everything. A structured plan — sell a defined percentage at vest to manage concentration and cover tax liability, hold a defined percentage for long-term appreciation — gives you a framework that doesn’t require a new decision at every vest event.
What You Actually Keep: The Simplified Version
After federal taxes, state taxes, and Medicare, the after-tax value of RSU income for a tech executive in a high-tax state at the top federal bracket is typically:
- 45–55 cents on the dollar in California or New York
- 55–65 cents on the dollar in states with moderate income tax
- 60–70 cents on the dollar in states with no income tax
These are approximations. The actual number depends on total income, deductions, filing status, and state of residence. But the directional point is consistent: the gross value of the vest significantly overstates what you actually keep.
Planning around that reality — adjusting withholding, making estimated payments, identifying offsets, managing the hold/sell decision — is what changes the outcome. The vest is coming regardless. The tax cost is largely set by the decisions made before it arrives.
