Why Rising Stock Prices Can Lead to RSU Underwithholding

It’s natural to feel confident when your company’s stock is rising. Each vest shows up at a higher value, your compensation feels solid, and the overall trajectory seems positive. That same momentum, though, can introduce a tax issue that builds quietly in the background: Underwithholding.

Most companies withhold only 22 percent on RSU vesting, even if your actual tax bracket is 32, 35, or 37 percent. When the stock rises, that gap gets bigger. Over the course of a year, the shortfall can turn into a large balance due at tax time — and you may not realize it until filing your return.

If equity compensation is a meaningful part of your income, this is something you need to plan for.

How RSU withholding works for you

Your RSUs are taxed as ordinary income as soon as they vest. Your company typically withholds taxes using the IRS supplemental wage rate:

• 22% federal withholding for most vests
• 37% federal withholding if your supplemental income exceeds $1 million in the year

The important detail is that this withholding percentage does not adjust to your actual tax bracket. If you’re in a higher bracket, your withholding is already behind — even before the stock price goes up.

Why rising stock prices put you at risk

As your employer’s stock appreciates, your vesting events generate more taxable income. The withholding rate, however, stays flat.

For example:

• If a vest is worth $50,000, your company will withhold $11,000
• If a vest is worth $90,000, withholding only rises to $19,800

If you’re in a 35 percent bracket, you owe more than 35 percent of that vested income. The difference becomes your responsibility, and that gap widens with every vest when stock prices rise. Because withholding doesn’t adjust automatically, the shortfall builds quietly behind the scenes until everything shows up at once in April.

How underwithholding compounds across a full vesting cycle

Before you look at your own vesting schedule, it helps to see how underwithholding builds over time in a typical equity structure. Many employees receive RSUs that vest over 4 years, with a 1-year cliff and quarterly vesting thereafter. When the stock price rises during those years, each vesting event grows in value while the withholding rate stays fixed. The gap doesn’t feel obvious in the moment — you only see the net shares hit your account — but the tax shortfall compounds quietly behind the scenes. The table below shows how that gap can accumulate across an entire vesting cycle when the stock appreciates steadily.

This is a hypothetical example for educational purposes only and not a prediction of future stock prices or tax outcomes. Due to various factors, including changing market conditions and/or applicable laws, this content may no longer be reflective of current opinions or positions. Brighton Jones, its affiliates, and employees do not provide personalized investment, financial, tax, or legal advice through this communication. 

Note how quickly the tax gap can build when the stock price rises during a standard four-year vesting cycle. The cliff creates the first shortfall, and each quarterly vest increases it as the share price climbs while withholding stays fixed. Nothing in your pay signals that this gap is widening, yet you’re still responsible at tax time. In this scenario, the cumulative shortfall reaches $63,700 over four years.

How to know if underwithholding is likely for you

Underwithholding becomes more likely when RSUs make up a large portion of your compensation, and you expect to be in a higher tax bracket, such as 32%, 35%, or 37%. The risk increases when your company’s stock has appreciated significantly since the grant date, because each vest produces more taxable income while the withholding rate stays the same.

You may also face a shortfall if you rely exclusively on your employer’s default withholding without making estimated payments or adjusting W-2 withholding during the year. A vesting schedule with large or frequent vesting periods can amplify the issue, especially when multiple vesting periods align with periods of strong stock performance.

If any of these patterns apply to your situation, it’s worth reviewing your tax plan early so the surprise doesn’t come as a surprise when you file your return.

Seven steps you can take to avoid a tax surprise

1. Project your total income for the year

Include salary, projected vesting value, bonuses, and other compensation. This helps you understand your true tax bracket early.

2. Estimate the shortfall on your RSU income

Compare your actual marginal tax rate with the 22 percent (or 37 percent) withholding rate, then multiply that difference by your projected vesting income.

3. Meet safe harbor early

Safe harbor protects you from penalties even if your withholding is low. You can meet it by paying 90 percent of your projected tax liability or 110 percent of last year’s total tax.

4. Make quarterly estimated payments

If your stock value has jumped or you have large vest events, quarterly payments help you stay on track.

5. Adjust your W-2 withholding

Increase payroll withholding to automatically cover the shortfall.

6. Set aside a portion of each vest

Treat vesting events as checkpoints to assess cash flow and prepare for taxes.

7. Reassess every year

Your stock price, income, and vesting cadence will change. Your tax strategy should adjust to them.

Why planning matters for you

Tax surprises rarely come from a single vest; they build quietly over time when withholding is treated as a background process rather than an intentional part of your financial plan. When you stay in front of your RSU tax exposure, you may gain clearer cash flow, fewer surprises, and more control over how your equity compensation supports your long-term goals.

Your company’s stock may rise quickly, but your tax planning doesn’t need to chase it. A steady, proactive approach may help provide a stronger foundation to work from.

Move forward with more clarity

Rising stock prices increase the value of your RSUs, but they also increase the tax exposure tied to each vest. When you understand how withholding works and take small, practical steps throughout the year, you stay in control of your financial picture.

If you want help building a tax-aware RSU plan that fits your income, your vesting cadence, and the future you’re working toward, we’re here to support you.

About the Author: Bryce Baker, CFP®, is a Lead Advisor at Brighton Jones. He helps high-income professionals and families design tax-efficient investment strategies and retirement plans aligned with their values and long-term goals.

This content is for informational and educational purposes only and should not be construed as individualized advice. For individualized advice tailored to your specific circumstances, please consult with your adviser.