The most common money surprise after a liquidity event isn't a bad investment. It's a tax bill that's much larger than expected, because less tax was withheld than was actually owed.
How RSU withholding works
When RSUs vest, their value counts as wages. Employers generally withhold federal income tax at flat supplemental rates: 22% on supplemental wages up to $1 million in a year, and 37% on amounts above that. Many companies handle this by holding back some of the vesting shares, often called sell to cover or net settlement.
Where the gap comes from
Those flat rates don't reflect your actual tax rate. If a large vest pushes your income into the 32%, 35%, or 37% federal bracket, withholding at 22% leaves a gap. State taxes can add to it. The shortfall shows up when you file.
An example
Say $600,000 of RSUs vest in one year on top of your salary, and federal tax is withheld at 22%, or $132,000. If most of that income is taxed at 35% to 37% on your return, the federal tax on it could be roughly $210,000 to $220,000, leaving about $80,000 to $90,000 to pay at filing time. This is illustrative, and your numbers will differ, but gaps of this size are common.
Double-trigger RSUs can make it larger
If your RSUs are double-trigger, several years of vesting can land at once when a liquidity event happens. That can mean one very large income year, and one very large gap.
How to plan for it
- Estimate your full-year tax, not just what's being withheld
- Make estimated tax payments during the year, or increase withholding where your plan allows
- Set aside cash or sale proceeds for the difference as soon as shares vest
- Ask a tax professional about safe harbor rules, which can help you avoid underpayment penalties