If you have RSUs and live in California, the standard tax withholding rarely covers what you actually owe. For high earners, that could mean an additional tax payment of 5-6 figures plus thousands in penalties unless you take action to plan for it.
Here's why this happens, what you can do about it, and how we plan with clients to minimize taxes and avoid unexpected penalties.
When your RSUs vest, the value of those shares is taxed as ordinary income. For a public company, the taxable amount is the stock price on the vest date multiplied by the number of shares vested.
That RSU income is combined with your other ordinary income (salary, bonus, commissions) and reported on your W-2 at year end. Together, these make up your total compensation income.
Your employer is required to withhold tax on vesting RSUs at the following rates:
The key thing to understand is that the 22% federal rate is a flat statutory rate — not your actual effective rate. For a tech employee earning more than $250K, your effective rate is almost certainly higher, which means you're under-withheld from the moment your RSUs vest.
Some employers allow you to elect a higher supplemental withholding rate beyond the standard 22%. This can be an effective way to close the gap before it becomes a problem.
For most of my clients, underwithholding on RSUs is primarily a federal issue. California withholding is typically more accurate, but on the federal side, the gap between what gets withheld and what you actually owe can be 10 to 15% of total RSU income.
The first step is the blocking and tackling of tax planning. Lower your overall taxable income and you lower the effective rate applied to your RSUs.
This may seem straightforward, but the savings add up fast. A couple who both max out their 401(k) and HSA contributions can reduce their taxable income by more than $57,000 in 2026.
If the difference between your RSU withholding and your actual tax liability is large enough, you'll trigger an underpayment penalty unless you plan for it. There are two main ways to bridge the gap.
Increase supplemental withholding at the source
Many employers allow you to increase your withholding rate on supplemental wages — RSU vests and bonuses — above the standard 22%. You can often elect a higher rate, up to 37%, that more closely matches your actual effective tax rate.
For clients who would rather not manage quarterly payments, this is the cleanest solution. More tax withheld at vest means less to pay in April.
This approach is especially valuable for tech employees in high cost-of-living areas where most of their take-home salary goes toward living expenses. Covering the additional tax through higher RSU withholding keeps your regular paycheck available for day-to-day needs.
Quarterly estimated payments
When higher withholding isn't available or doesn't fully close the gap, we layer in quarterly estimated tax payments. The due dates are April 15, June 15, September 15, and January 15 of the following year.
The safe harbor framework
The key question isn't just "how much do I owe?" — it's "how much do I need to pay in to avoid a penalty?" The IRS and California each offer two safe harbor options:
Note: California does not allow the prior year safe harbor if your AGI exceeds $1M. In that case, you must use the current year 90% method.
We model both options each year. If your income is relatively stable or increasing, the prior-year safe harbor is often the simpler path. If your income drops, however, the 110% prior-year option may not work, and targeting 90% of current-year tax becomes the priority. This most commonly happens due to lower RSU share vesting from an expiring grant, a decline in stock price, or a large capital gain from a stock sale in the prior year that inflated your baseline.
The planning insight: you don't have to prepay everything
Once you've hit a safe harbor threshold through some combination of withholding and estimated payments, any remaining balance can sit in a high-yield savings account or short-term treasury position until April 15. We calculate the exact threshold, make sure you hit it, and let the rest work for you in the interim.
The main forms of itemized deductions for high earners are state and local taxes, mortgage interest, and charitable contributions.
State and local (SALT) taxes
SALT taxes (state income tax and property taxes) are a federal itemized deduction, but the deduction is capped at $40,400 in 2026. For taxpayers with income above $505K (in 2026), the deduction phases down to $10,000. For many high-income employees, the net result is a $10,000 SALT deduction on their federal return.
Mortgage interest
Mortgage interest is deductible on up to $750,000 of principal mortgage debt. For high-income homeowners in high cost-of-living areas, that limit often means they're already at the maximum deductible interest.
Charitable contributions
For many high-income tech employees, charitable giving represents the biggest remaining opportunity for additional deductions — but how you give matters.
Cash contributions are the least tax-efficient option. You get a deduction at your marginal rate — that's it.
Donating appreciated stock, shares from prior RSU vests that have grown, or other long-term holdings — is significantly better. You get the same fair-market-value deduction as a cash gift and you avoid the capital gains tax you'd owe if you sold the stock yourself. For a California resident in the top brackets, that can save 30% or more of the embedded gain.
Donating appreciated stock to a donor-advised fund (DAF) offers the same tax treatment with one important added benefit: it decouples the timing of your deduction from the timing of your charitable distributions. In a high-income year (a large RSU vest, a tender event, an IPO, etc) you can fund the DAF and take the deduction now, then distribute to your chosen charities over the following years.
Another option is bunching donations. Instead of giving $20,000 every year, you give $80,000 to a DAF every four years. In the giving year, you itemize and take a larger deduction. In the off years, you take the standard deduction. For people without a mortgage, where itemized deductions often don't exceed the standard deduction, bunching is often the difference between getting a real tax benefit from charitable giving and getting none at all.
For tech employees, ordinary income from employer compensation — salary, bonus, and RSU vesting — is usually the dominant source of income. But for clients with meaningful investment portfolios, managing how capital gains, dividends, and interest are taxed can save tens of thousands of dollars per year.
Tax-loss harvesting
When positions in your portfolio have declined in value, selling them to realize a capital loss lets you offset capital gains elsewhere. Losses in excess of gains can offset up to $3,000 of ordinary income per year, with any remainder carried forward indefinitely.
The key is doing this systematically and year-round — not just in December. Done well, tax-loss harvesting doesn't meaningfully change your market exposure, since you reinvest proceeds into a similar (but not identical) position to stay invested while banking the loss.
For clients who hold concentrated company stock alongside a diversified portfolio, harvesting losses in the diversified portion can help offset gains realized when selling the concentrated shares.
Asset location
Not all investments generate the same type of income, and the type matters. Interest income from bonds and money market funds is taxed as ordinary income — in California, that can mean a combined marginal rate above 50% for high earners. Long-term capital gains and qualified dividends are taxed at lower federal rates (0%, 15%, or 20% depending on income), though California taxes them as ordinary income regardless.
The practical implication: asset location matters. Tax-inefficient assets — bonds, REITs, high-turnover funds, high-dividend stocks — generally belong in tax-deferred accounts like your 401(k) or IRA, where income compounds without annual tax drag. Tax-efficient assets — broad index funds, low-dividend stocks, municipal bonds — can sit in taxable accounts. High-growth-potential investments like small-cap or emerging market funds are often best held in a Roth IRA for maximum tax-free growth.
Municipal bonds
Interest from municipal bonds is exempt from federal income tax and, for California residents, also exempt from California state tax when the bonds are issued by California municipalities. For a client in the top federal bracket and California's 13.3% top rate, a California muni yield of 3.5% can be equivalent to a taxable yield of 6% or more on an after-tax basis.
Munis aren't right for everyone — the advantage diminishes at lower income levels — but for clients already pushed into the top brackets by RSU income, allocating a portion of fixed income to California munis is often the highest after-tax yield available in that asset class.
Once an RSU vests, it converts to a share of company stock. From there, you have three paths:
Sell immediately — either through an automatic sale program your employer offers or by manually selling outside blackout periods. This typically results in no additional capital gains since the sale and vest occur simultaneously.
Hold and sell later — your cost basis is the vest-day price on which you were already taxed. If you hold more than a year past vest, any subsequent gain is taxed at long-term capital gains rates.
A combination — sell enough to cover taxes and diversify, hold the rest.
The right answer depends on your existing concentration in company stock, your cash needs, and your conviction in the company.
For many clients with significant employer equity already, selling at vest and diversifying is the right move. It doesn't create additional capital gains and frees up cash to build toward your broader financial goals.
Financial advisor for tech professionals & entrepreneurs