RSU and NSO Tax Withholding: Should You Choose 22% or 37%?

Your RSUs are about to vest, or you are about to exercise nonqualified stock options (NSOs), and a question pops up in your equity portal:
 

Do you want federal income tax withheld at 22% or 37%?
 

Which one do you choose?
 

At first glance, this feels like it should be easy. Choose 22% and keep more company stock.

Choose 37% and play it safe.
 

But is 37% really safer? And what happens if 22% is not enough?
 

This is a newer choice that is currently available to employees at only a handful of companies.

Most employees still do not get to choose the withholding rate applied to their RSU or NSO income. But if your company gives you the option, that one click can make a meaningful difference.
 

Choose 22% without looking at the full picture, and you could end up with a large tax bill. Choose 37% when you did not need that much withheld, and you could give up more company stock than necessary. You may get the excess money back as a tax refund, but only after giving the government an interest-free loan for months.
 

I have recently walked several clients through this exact decision. The election screen looked almost identical for each of them, but the right answer was not.
 

Why? Because your tax return, your available cash, your feelings about the company stock, and your financial goals are not sitting inside that little election box.
 

So, before you click 22% or 37%, let’s sit down and talk through what the choice actually means.

First, Why Are Taxes Withheld When RSUs Vest or NSOs Are Exercised?

When restricted stock units, or RSUs, vest, the value of those shares is generally treated as compensation and added to your taxable wages.
 

Yes, you are receiving stock instead of cash, but the IRS still treats the value as income.
 

Let’s say 1,000 shares vest when the stock is worth $50 per share. You now have $50,000 of additional W-2 income. Your employer has to collect federal and state income tax withholding and applicable payroll taxes on that income, even though no cash was deposited into your checking account.

Similarly, with NSOs, the spread, or the difference between your exercise price and the fair market value of the stock, is generally treated as compensation when you exercise and reported on your W-2.

In both cases, your employer is generally required to collect applicable tax withholding on the compensation income.
 

Since you aren't receiving a cash bonus, how do you pay taxes when you were paid in stock?
 

Most companies handle this through a sell-to-cover or withhold-to-cover transaction. They sell or withhold a portion of your newly vested or exercised shares and use that value to cover the required taxes. You receive the shares that are left. With NSOs, you may also need to fund the exercise price.
 

If you want a refresher on how RSUs are taxed at vesting and again when you eventually sell the stock, read 5 Must-Know Facts About RSUs Before You Cash In.

Why Does 22% Show Up So Often?

RSU and NSO income is generally processed through payroll as supplemental wages.
 

Under the IRS flat-rate method, an employer may withhold federal income tax at 22% on separately identified supplemental wages when the employee’s total supplemental wages for the year do not exceed $1 million.
 

If your supplemental wages exceed $1 million during the calendar year, the amount over $1 million is generally subject to mandatory federal withholding at 37%.
 

The key words here are tax withholding.
 

For years, employees like you generally were not given a choice. Federal income tax was withheld under the company’s payroll procedures, often at 22% or, when the mandatory rule applied, 37%.

Some companies today are giving employees a choice. Not all. Just some.

Unfortunately, if your company only offers these two elections, you generally cannot type in 30% simply because you believe that is closer to your tax rate. You have to choose between the options your employer provides.
 

Here's the thing: 22% is not necessarily your tax rate. 37% is not necessarily your tax rate either.

Both are amounts being prepaid toward the final tax calculated on your tax return.
 

These percentages also don't fully represent all taxes withheld because you may have state income tax and applicable FICA taxes withheld as well.
 

So, what is your tax rate? It can honestly vary from year to year. In a year with large NSO exercises or significant RSU vesting income, your marginal and effective tax rates may both be higher than normal.

Your final tax bill may be completely different from the person in the next cubicle or even the manager of your team. It factors in all of your income, deductions, and credits. That includes your salary, bonus, RSU income, NSO exercise income, your spouse’s income, investment income, business or rental income, estimated payments, and all the tax already withheld.
 

Your company equity portal knows how many shares are vesting. It does not know your entire tax situation.

What Does It Mean If Your Company Lets You Choose 22% or 37%?

Some companies now let employees request a higher amount of federal income tax withholding before an RSU vest or an NSO is exercised. The choice often appears as 22% or 37%.
 

Does choosing 37% mean your RSU or NSO compensation is taxed at 37%?
 

No.
 

It generally means you are asking the company to collect more federal income tax and, depending on the company’s process, sell or withhold more of your shares to cover it.
 

Does choosing 22% mean you are only taxed at 22%?
 

Also no.
 

It simply means less federal income tax is being prepaid at vesting or exercise. If your actual tax is higher, you still owe the difference.
 

Think of withholding as a deposit. Your tax return is where we get the final bill and compare it with everything you already paid.

Why 22% Is Often Not Enough

Many employees receiving substantial RSUs or exercising valuable NSOs are already in a federal marginal tax bracket higher than 22%.
 

Maybe your salary is already significant. Maybe your spouse also earns a high income. Maybe you receive a bonus, investment income, rental income, several RSU vests, or a large NSO exercise during the year.
 

Now add another $100,000 of RSU income or NSO exercise compensation.
 

If your employer withholds 22%, that is $22,000 of federal income tax withholding. But if that additional income falls in your 32% marginal tax bracket, the approximate federal tax attributable to that income may be closer to $32,000.
 

That leaves a possible $10,000 gap.
 

This is a simplified example, but you can see the problem. That gap does not disappear simply because your employer called 22% withholding.
 

You may need to cover it by choosing higher equity compensation withholding, requesting additional withholding from your regular paycheck, making an estimated tax payment, or using a combination of these options.
 

You may also need to consider whether you have paid enough to meet a federal or state safe harbor and reduce your exposure to underpayment penalties.
 

The goal is to find the gap while you still have time to plan for it, not when we are preparing your return and telling you how much is due.

But 37% Is the Safer Choice, Right?

Not automatically.
 

Choosing 37% may reduce the chance that you are underwithheld, but it can also be way too much.
 

Using that same $100,000 of RSU or NSO compensation:

• Federal withholding at 22% would be $22,000

• Federal withholding at 37% would be $37,000

• The difference is $15,000

If shares are being sold or withheld to cover the taxes, choosing 37% means giving up approximately $15,000 more in stock value for federal withholding than you would under the 22% election.
 

Will you get the extra money back if you overpaid? Most likely, once the tax return is filed and everything is reconciled.
 

But what do you get back?
 

Dollars. Not the shares you gave up.
 

If the company stock increases while you wait to file your tax return, you do not participate in that growth on the shares that were sold or withheld. The government is not going to return those shares to you. You generally just receive a refund of the overpaid tax, without being paid for the investment opportunity you gave up.
 

Of course, the stock could also decline. In that case, selling more shares at vesting may have reduced your investment risk.
 

That is why this is not only a tax decision. It is also a cash-flow and investment decision.

Two Recent Clients Chose to Pay Cash and Keep More Shares

Two separate clients recently came to me before making the election because keeping more company stock was the goal.
 

Their plans allowed the taxes to be funded with cash instead of automatically selling or withholding as many shares. So, was paying cash the obvious answer?
 

Not yet.
 

For each client, we looked at projected household income, other tax withholding, future equity events, estimated tax payments, and cash available. We also talked about how much of the client’s income and net worth was already tied to the same company.
 

After seeing the numbers and understanding the tradeoffs, both clients chose to pay cash and keep more shares.
 

That choice worked for them because it matched their goals, and they had enough cash available without hurting their emergency funds or other financial priorities.
 

Would it be the right choice for everyone? Absolutely not.
 

Here is the question I asked the client, and it is the same question I would ask you:
 

If this cash were sitting in your bank account today, would you use it to buy more shares of your employer’s stock?
 

Paying cash to avoid selling shares can have a very similar economic effect.
 

If your honest answer is no, then we need to talk about why you are using cash to keep every possible share.

Another Client Chose 37% Because It Felt Safer

Another client felt pressure to make the decision quickly. There was a deadline in the equity portal, the choices were 22% or 37%, and 37% sounded safer.
 

Who wants an unexpected tax bill? Choosing the higher number felt responsible.
 

But when we later reviewed the full-year tax projection, the client had significantly overwithheld.

More company stock had been surrendered for taxes than was actually needed.
 

Will the client recover the excess tax as a refund? Yes, assuming there are no other tax balances that use the overpayment.
 

But the shares are already gone.
 

The client did not make a reckless choice. The client was trying to be cautious without having enough information. The real problem was assuming that the highest available withholding percentage was automatically the safest choice.
 

This is exactly why I do not want you making this decision based only on how the two buttons are labeled.

What If You Can Pay the Taxes With Cash?

Some equity plans allow you to provide cash for the withholding instead of selling or surrendering as many shares. Other plans require a sell-to-cover or net settlement and do not offer a cash option.
 

If your plan allows cash, keeping more stock may sound attractive. But let’s slow down for a minute.
 

Ask yourself:

Do You Have Enough Cash?

Will paying the taxes reduce your emergency fund or leave you short for another goal?
 

Are you making yourself stock rich and cash poor just to say you kept every share?

How Much Company Stock Do You Already Own?

Your paycheck, benefits, career, and investments may already depend on the same company.

Paying cash to keep more shares increases that concentration.
 

Do you have other investments that allow you to be diversified or are all your eggs in one basket?

What Else Could the Cash Do for You?

Could it pay down high-interest debt? Build a diversified portfolio? Help with a home purchase?

Fund a business or another goal? Invest in Oil and Gas or Solar where a tax credit or tax deduction can offset your pending tax bill?
 

There is an opportunity cost to using the cash here.

Do You Actually Want More of This Stock?

Not because you earned it. Not because selling feels disloyal. Not because you hope the price goes up.
 

Would you intentionally buy it today?
 

That answer matters.

Remember, 22% and 37% May Not Be the Total Withholding

The 22% or 37% election usually refers only to federal income tax withholding.
 

Your RSU vest or NSO exercise may also be subject to:

• Social Security and Medicare tax

• State income tax withholding

• Local income tax withholding

• Other payroll deductions required by your employer or location

So, if you choose 37%, do not assume that only 37% of the vest or exercise spread will be needed. The total cash required or value of shares sold or withheld may be higher once the other taxes are added. With NSOs, you may also need cash for the exercise price itself.
 

Read the details on the election screen carefully. If it is not clear which taxes are included, ask your company or plan administrator before the deadline.

How Do You Actually Make the 22% Versus 37% Decision?

We run the numbers with our clients.
 

Before making the election, we would want to know:

1. What salary, bonus, RSU income, NSO exercise income, spouse’s income, and other taxable income do you expect for the full year?

2. What deductions and tax credits may apply?

3. How much federal and state tax has already been withheld?

4. Are more RSU vests, NSO exercises, or bonus payments coming before year-end?

5. Have you made any estimated tax payments?

6. Are you on track to meet the federal and state safe-harbor rules?

7. How many shares would be sold or withheld under each election?

8. Does your plan allow you to pay the withholding or NSO exercise price with cash?

9. How much company stock do you actually want to keep?

10. What would each choice do to your available cash and other financial goals?

Once we see the whole picture, your options, pardon the pun, become much clearer.
 

Maybe you choose 22% and make an estimated tax payment for the difference. Maybe you increase the withholding from your regular paychecks. Maybe 37% really is appropriate because you are already projected to owe a significant amount. Maybe you pay cash because retaining more stock is an intentional part of your investment plan.
 

Or maybe selling shares is exactly what you want because you are already overexposed to your employer’s stock.
 

There is no universally safe button. The safer decision is the informed one.

One More Equity Compensation Tax Trap to Remember

The withholding election is not the only place employees lose money with RSUs or NSOs.

When your RSUs vest, the value included in your W-2 generally becomes your cost basis in the shares. With NSOs, your basis generally includes the exercise price you paid plus the spread already reported as W-2 compensation. When you later sell the shares, the brokerage statement may show an incorrect or missing basis. If that is not corrected on your tax return, you could pay tax twice on the same income.
 

For RSUs, I walk through that problem in RSU Tax Tips: Avoid Double Taxation.
 

The important point is that both RSUs and NSOs can create two separate tax events:

1. Ordinary compensation income when RSUs vest or NSOs are exercised

2. A capital gain or loss when you later sell the shares

Do not assume your brokerage statement got the second part right.
 

If this article is speaking to you, it is time to get a tax professional who understands equity compensation on your team. This is not the time to self-file!

The Bottom Line

For many employees with substantial equity compensation, 22% is not enough.
 

But that does not make 37% the right answer by default.
 

The choice may look simple on the screen, but it can leave you with fewer shares, a large tax bill, or a big refund after the government held your money for months.
 

Before your next major RSU vest or NSO exercise, look at the decision as part of your full tax and financial picture. How much tax will you actually owe? For an NSO exercise, how much cash will you need for both the exercise price and the taxes? How many shares do you want to keep? Are you comfortable holding more company stock? Are you trying to avoid a tax bill, meet a safe harbor, or both?
 

Once shares have been sold or withheld, a future tax refund cannot recreate the exact investment position you gave up.

Book an Equity Comp Consult Before You Make the Election

Do you have an RSU vest coming up or plan to exercise stock options, but feel like you are being asked to make a major decision with two little buttons and not enough information?

Book an Equity Comp Consult. We will sit down one-on-one and talk through your unique goals, financial situation, tax picture, available cash, upcoming equity events, and the amount you have already paid toward taxes.
 

What makes this consultation different?
 

Equity compensation is one of my tax specialties, but my experience is not limited to studying the tax rules or preparing returns after the decisions have already been made.
 

Before opening my CPA firm, I spent years working inside startup companies. I understand what it feels like to believe in the company you are helping build and to view its stock as part of your future.
 

I have also been in your shoes. I personally received both incentive stock options, or ISOs, and nonqualified stock options, or NSOs. I made decisions about my own equity and paid taxes based on those decisions. I understand that these choices are not just numbers on a spreadsheet. They involve your career, your cash, your confidence in the company, your family’s goals, and the possibility that the stock may become a meaningful part of your wealth.
 

That combination is unique. You are getting guidance from a CPA who specializes in equity compensation taxation and has personally experienced startup equity from the employee’s side of the table.
 

This consultation is not about automatically telling you to choose 22% or 37%. It is about helping you understand what each choice means for you, so you can make an informed decision with an expert before the election deadline.
 

You are not in this alone. Make an informed decision today with a clear projection of how much stock or cash could be in your account tomorrow.
 

This article is for general educational purposes only and is not individualized tax, legal, or investment advice. Tax rules, company plans, and individual circumstances vary. Consult your tax and financial advisors before making an election.