TL;DR Answer Box
Your bonus is not fully taxed yet. If your household income is north of ~$400,000 and you’re receiving bonuses and/or RSU vests, the default 22% federal “supplemental withholding” is often below your true marginal rate. That mismatch is why April surprises happen.
Fix it with three levers: (1) increase W-4 withholding on base pay, (2) top up with an estimated payment if needed, and (3) sell enough shares at/near vest to cover taxes and reduce concentration risk.
Last updated: January 23, 2026
Introduction
☕ Good morning SenseMakers!
Your year-end bonus is about to hit your bank account. You see the number, then you scroll down to the withholding summary. Federal income tax withheld: 22%. Social Security and Medicare: another chunk. State tax: more gone. The total line shows something north of 40% disappeared before the money ever touched your account.
You think, “Well, that’s brutal, but at least I’m covered for taxes.”
Except you’re probably not.
If you’re a high-earning executive with bonuses, RSUs, or both, and your household is pulling in north of $400,000, that 22% federal withholding is often too low. Last April, you might have written a check for $30,000, $50,000, or more at tax time and wondered how that happened when “so much was already taken out.”
Here’s the thing: your paystub shows what your company withheld. It does not show what you actually owe. And for most high earners with variable pay, those two numbers live in different zip codes.
By the end of this article, you’ll know why the withholding gap exists and the three moves that close it before next April surprises you again.
🎯 Why Your Paystub Lies: Supplemental Withholding in Plain English
When your company processes a bonus or an RSU vest, it treats that income as “supplemental wages”—IRS language for pay that’s not part of your regular salary (commissions, bonuses, and equity vesting).
Most companies default to a flat withholding method on supplemental wages: 22% federal up to $1 million of supplemental wages for the year (and a higher flat rate above that threshold).
That 22% feels high when you see it on the stub—but it has nothing to do with your actual tax situation.
- It doesn’t know your spouse also received a big bonus.
- It doesn’t know you vested $200,000 in RSUs last month.
- It doesn’t account for a household sitting in the 35% or 37% marginal bracket.
- It doesn’t factor state income taxes (often another 5%–13% depending on location).
The withholding system is built for administrative simplicity—not tax accuracy. Your company withholds what the rules require as a baseline. The rest is on you.
Concrete example: You vest $100,000 in RSUs in February. Your employer withholds 22% federal, plus Social Security, Medicare, and state tax. On the surface, it looks like you’re covered. But if your marginal federal rate is actually 35%, you’re short roughly $13,000 in federal tax alone—before state.
📍 The Three Levers You Actually Control
You can’t control the statutory supplemental withholding rate. You can control your plan. There are three practical tools for closing the withholding gap—and the best approach for most high earners uses all three strategically.
Lever 1: Adjust W-4 Withholding on Regular Pay
Your regular paycheck withholding is based on the W-4 you filed with your employer. Many high earners can reduce April surprises by adding extra withholding per paycheck (a specific dollar amount).
For households with two high earners or meaningful variable pay, targeting roughly 110% of last year’s total tax through combined withholding is often a clean way to satisfy safe-harbor rules and reduce underpayment penalty risk (coordinate with your CPA).
Lever 2: Estimated Tax Payments (When Payroll Can’t Catch Up)
If boosting paycheck withholding won’t close the full gap, you can make estimated tax payments directly. These are flexible, one-time payments you can time around big income events.
Nuance that matters: the IRS generally treats paycheck withholding as paid evenly throughout the year (even if you increase it late). Estimated payments count based on when you actually make them. That’s why many executives prefer the W-4 lever first.
Lever 3: Equity Sales for Cash and Diversification
When RSUs vest, you get hit with two issues at once: (1) taxable income and (2) more concentrated company stock—aka concentration risk.
Selling enough shares at or shortly after vest to cover taxes and return to a target equity allocation can solve both problems. If blackout windows apply, a rules-based approach—often via 10b5-1 plans—removes guesswork and prevents “open window scrambling.”
💰 Two Projection Checkpoints That Keep You Out of Trouble
You don’t need monthly tax projections. You need two clean checkpoints each year—timed around when your income picture changes and when you still have time to adjust.
Checkpoint 1: Post-bonus / early vest season (January or February)
Right after your bonus hits or your first RSU vests, gather paystubs, your vest schedule, and a current estimate of household income. Run a projection with your CPA/planner to answer one question: are you on track to meet safe harbor?
Checkpoint 2: Midyear review (June or July)
By midyear, you have real data. Update your projection. Adjust W-4 withholding or make another estimated payment if needed. This is also a natural time to evaluate whether a Roth conversion fits your year if income ends up lower than expected.
⏱️ Connect This Year’s Bonus to Your Broader Plan
A bonus or RSU vest isn’t just a tax event—it’s a planning moment.
When that money hits your account, assign it deliberately across time horizons so you’re never forced to sell long-term investments in a downturn just to fund a near-term need.
At Tailored Wealth, we organize money into four liquidity bands:
- Very near term (0–2 years): emergency fund, known expenses, planned projects.
- Short term (3–5 years): down payments, sabbaticals, mid-range goals.
- Mid term (6–10 years): college, work-optional experiments, phased transitions.
- Long term (10+ years): retirement and legacy planning.
Near-term dollars stay liquid. Mid and long-term dollars move into diversified portfolios aligned with those timelines (see: asset location strategy for high earners).
This is the heart of Life Driven Investing: your portfolio serves your plan—and your plan serves the life you want.
🧠 Making Sense of Your Money on Bonus and RSU Taxes
Before: You see big withholding on your bonus/RSU stub and assume you’re covered. April comes and you owe $40,000 you didn’t expect.
After: You treat bonus and vesting season as a predictable annual event with a clear plan. You run projections in January and July. You use a mix of extra W-4 withholding, estimated payments, and equity sales to close the gap. When you file, the result is expected and intentional.
Next week, we’re zooming out and building a full-year executive equity + bonus calendar (grant dates, vests, blackout windows, checkpoints, and year-end actions) so nothing falls through the cracks.
As always, if you have questions about how this applies to your situation, simply reply to this email.
Until next week, I hope this helps you to Prioritize Your Version of a Rich Life.
Key Takeaways
- Default 22% supplemental withholding is often too low for high-income households with bonuses/RSUs.
- Close the gap with three levers: W-4 adjustments, estimated payments, and systematic equity sales.
- Use two checkpoints (early year + midyear) to stay ahead of penalties and April surprises.
- Turn bonus/vest proceeds into a planning moment by assigning dollars across time horizons.
Facts/FAQ
Why is my bonus/RSU withholding only 22% federally?
Many employers withhold supplemental wages using a flat rate method that is simple to administer. Your actual tax owed depends on total household income, deductions, and state taxes.
Is “high withholding” on my paystub proof I’m covered?
No. Your paystub shows what was withheld, not what you ultimately owe. With variable comp, the gap between those two numbers is common—and fixable.
What’s the simplest way to avoid underpayment penalties?
For many high earners, increasing W-4 withholding on regular pay is the cleanest tool because withholding is generally treated as if paid evenly throughout the year. Coordinate targets with your tax pro.
Should I sell RSUs immediately at vest?
Many executives sell at/near vest to cover taxes and reduce concentration risk—especially if company stock is already a large percentage of net worth. Your best approach depends on goals, tax posture, and trading restrictions.
What if I have blackout windows or executive trading restrictions?
That’s where rules-based selling (often via a 10b5-1 plan) can help automate diversification and remove decision stress during open windows.
Internal Links
- Equity vesting (video)
- Concentration risk
- 10b5-1 plans
- Roth conversion (video)
- Diversified portfolios (asset location)
- Life Driven Investing (video)
External Links
CTA
If you want to eliminate the bonus/RSU tax surprise, start with a simple system: two projections per year and a three-lever withholding plan that fits your household.
If you want help mapping your bonus + vest schedule into a rules-based plan (withholding targets, estimated payments, and a diversification cadence), take the Financial Stress Test and we’ll use the results to build a one-page action plan.
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Disclaimer
This content is for educational purposes only and is not tax, legal, or investment advice. Tax rules vary by state and change over time. Consult your CPA and other professional advisors regarding your specific situation.