RSU tax mistakes: five that turned a $400,000 vest into a $60,000 April bill

What happens to your taxes the day RSUs vest?

RSUs are taxed as ordinary wage income on the day they vest, based on the shares' market value that day, and the amount shows up in Box 1 of your W-2. The vest-date value then becomes your cost basis, so only later price movement counts as capital gain or loss.

Selling within a year of vesting doesn't change the vest income; any gain after that date is taxed at ordinary rates. Payroll usually withholds federal tax on a vest at the flat supplemental rate, 22 percent in recent years (check the current IRS rate), and switches to a mandatory 37 percent only on supplemental wages above $1 million in a calendar year. In tax year 2026 the 37 percent rate starts above $640,600 for single filers and above $768,700 on a joint return. An executive earning $700,000 in salary and bonus is already past that line, so every vest dollar is taxed at 37 percent while payroll withholds 22 percent.

Filing status moves that line. Peggy, a hypothetical 63-year-old widow, now files single, and the 37 percent rate reaches her about $128,000 of income sooner than it did on a joint return. Shares she holds at death would pass to her son with a stepped-up basis, but RSUs that vest because of her death are still ordinary income to the estate or heir.

Peggy's last vest before retirement: RSU tax mistakes, year by year

Peggy (hypothetical, round numbers) is a senior vice president of sales at a consumer goods company, retiring this year, and $400,000 of RSUs vest in her final working year. Her $700,000 of salary and sales bonus already sits above the 37 percent threshold, so the whole vest is taxed at 37 percent, which is $148,000. Payroll withheld 22 percent, which is $88,000. That leaves a $60,000 gap, and mistake one is treating the shares sold to cover taxes as the full tax.

Mistake two comes from taking generic advice too literally: "meet the 110 percent safe harbor and you're fine." Reading the safe harbor as protection from the whole bill ignores what it does; it only removes the underpayment penalty. Peggy's withholding beats 110 percent of last year's tax, so no penalty applies, yet the $60,000 is still due in April, after her last paycheck. In a working year she could raise withholding on the next check; retired, she has no next check to raise.

Mistake three is paying from the wrong account. If Peggy draws the $60,000 from her 401(k) or IRA at an assumed 24 percent rate, she needs about $79,000 ($60,000 ÷ 0.76) and creates roughly $19,000 of extra tax. Paying from taxable cash costs exactly $60,000. Before suggesting any change to her sell-to-cover election, Scotia Wealth Management reads her last three vest confirmations against the W-2 so it can see what was actually withheld.

Then there's what can go wrong after the vest. Tax is fixed on the $400,000 vest value, so if she holds the shares and they fall 25 percent to $300,000, she still owes on $400,000, and a net capital loss offsets only $3,000 of ordinary income annually. Share prices fall as well as rise, and holding company stock can lose money, principal included. The fix is plain: set the 15 percent, $60,000, aside in cash on the vest date. A change in the law could move the supplemental or top rate, so recheck both each year.

When do RSU tax cutoffs fall, from the vest date to April?

The cutoffs run in calendar order from the vest dates on your grant schedule to April 15. Your final December paycheck is the last chance to raise payroll withholding, and the IRS treats withholding as spread across all twelve months no matter how late in the year it is taken.

January 15 is the deadline for the prior year's last quarterly estimate. W-2s arrive by January 31, and brokers send 1099-Bs by mid-February, with corrected forms sometimes in March. April 15 is the filing cutoff and also the first-quarter estimate for the new year, followed by June 15 and September 15.

What happens if the 1099-B basis or your estimates are wrong?

Wrong basis or wrong estimates both cost real money: a 1099-B filed as printed can tax the same vest income twice, and estimates built on last year's tax can lock up cash you don't need to send. Both errors are fixable, but only if you catch them before the return goes out.

Mistake four is filing the 1099-B as printed when it shows zero basis for shares sold at vest. On $400,000 of shares sold within a year at an assumed 37 percent rate, that taxes the same income twice, about $148,000 of extra tax. The fix is the vest-date value entered on Form 8949 with an adjustment. The table's "where to find it" column is what saves time in February; start with the basis row.

Mistake five shows up after retirement: basing Year 2 estimates on 110 percent of Year 1's tax. With an assumed Year 1 tax of $380,000, that's $418,000, while 90 percent of an assumed $70,000 Year 2 tax is $63,000. The prior-year method would tie up $355,000 more cash than needed until the refund. Run the checklist and questions below against your own accounts.

This page covers federal income tax on RSUs only. It doesn't model state tax, the extra 0.9 percent Medicare tax on wages above $200,000 or the NUA choice for her 401(k) shares, and executives whose supplemental wages top $1 million in a year already have 37 percent withheld on the excess.

• Compare total federal withholding in W-2 Box 2 with 37 percent of your vest income if you're above the threshold.
• Check every RSU sale on the 1099-B against the vest confirmation's value.
• Confirm which safe-harbor method your next estimate uses.
• List next year's vest dates next to the estimate cutoffs.
• Ask the equity plan administrator whether you can elect a higher withholding rate on vests.
• Ask your CPA whether this year's estimates should use 90 percent of this year's tax or 110 percent of last year's.
• Ask an advisor which account pays the April bill without adding taxable income.

Where Scotia Wealth Management starts in your RSU records

The first thing we look at is the gap between the vest income in W-2 Box 1 and the federal tax withheld on it, then the basis reported on each 1099-B sale. Scotia Wealth Management then checks which account would pay any shortfall, since after the paychecks stop the source of that cash changes the bill. If your equity pay is already handled well, we say so and leave it alone.