Why your bonus looks over-taxed (and why RSUs are usually under-taxed)

Open a bonus paystub and it looks like the government took nearly half. Cue the office wisdom: 'bonuses are taxed higher.' They aren't. Bonuses are taxed exactly like salary when you file — what's different is the withholding, a temporary estimate. Meanwhile, RSU vests quietly have the opposite problem: the withholding is often too LOW, which is how tech employees end up owing five figures in April.

Withholding is not tax

Your actual tax is computed once a year on your 1040, where a dollar of bonus and a dollar of salary are identical. Withholding is just a pay-as-you-go deposit. Over-withhold and you get a refund; under-withhold and you owe (maybe with penalties). Everything confusing about bonuses and RSUs lives in the withholding layer, not the tax layer.

The 22% flat rate on 'supplemental wages'

Bonuses, commissions, severance, and RSU vests are 'supplemental wages.' Most employers withhold a flat 22% federal on them (37% on amounts above $1 million in a year), regardless of your bracket. Stack Social Security, Medicare, and state tax on top and 35–45% of the check disappears — which is why the paystub feels brutal even though your real rate may be lower.

RSUs: the under-withholding trap

When RSUs vest, the market value of the shares is ordinary W-2 income, and employers typically 'sell to cover' at the same 22% flat rate. But people with meaningful RSU income are usually in the 32–37% brackets. The 10–15 point gap between what was withheld and what you owe becomes a surprise bill — and the more your RSUs are worth, the bigger the gap.

Two more RSU facts worth engraving

• Your cost basis in vested shares is the price at vesting — that value was already taxed as W-2 income. When you sell, you only owe capital gains on movement AFTER vesting. (Brokers sometimes report $0 basis on the 1099-B; fix it or you'll be taxed twice.)
• Holding vested RSUs is identical to buying your company's stock with cash that day. 'I'll wait for long-term gains' only applies to the growth after vesting — there's no tax reason to stay concentrated in your employer.
• Sell-to-cover happens automatically, but it covers withholding, not your true liability. The difference is your job.

What to actually do

1. Stop planning around the bonus paystub — your real rate is set at filing, not at withholding.
2. If your marginal federal rate is above 22% and you get bonuses or RSUs: add W-4 line 4c withholding or pay quarterly estimates to close the gap.
3. Check the safe harbor: withhold at least 110% of last year's total tax (high earners) and April can't hurt you, whatever your equity does.
4. After each vest, verify the shares' cost basis and decide deliberately whether to keep holding employer stock.
5. If your marginal rate is below 22%, relax — your bonus over-withholding is a forced savings account that pays out at refund time.

Your gap at a glance

The aggregate method: when the paycheck math looks even weirder

Not every employer uses the flat 22%. Some payroll systems use the 'aggregate method' instead: they add the bonus to your regular paycheck, annualize the combined total, and withhold as if you earned that much every period. A $20,000 bonus landing in the same check as a $5,000 salary payment gets withheld as if you earn $300,000 a year — which can shove the withholding rate far ABOVE your real bracket. It self-corrects at filing time like everything else in withholding, but it explains the occasional horror-story paystub where half a bonus disappears. If your employer offers a choice (some do, quietly), the flat method is more predictable for modest earners; high earners under-withheld by the flat 22% might actually prefer aggregate. Either way, the annual tax is identical — only the timing of your money changes.

One planning upside of bonus timing: because supplemental income is real income in the year received, a December bonus versus a January bonus lands in different tax years. If you have any influence over timing — common for year-end bonuses and some vest schedules — aim income at the year with more bracket headroom: a sabbatical year, a year with a big 401(k) increase, or before a spouse returns to work.

The bottom line

There is no special bonus tax. There is a flat 22% withholding rule that over-collects from modest earners (refund later) and under-collects from high earners (bill later) — and RSU holders sit squarely in the second group. Know your real marginal rate, compare it to 22%, and close the gap during the year. April should never be a surprise you could have calculated in June.