Calculation Methodology & Tax Engine Architecture

1. The Statutory Supplemental Withholding Spread

Under Internal Revenue Code (IRC) § 3402(g) and Treasury Regulation § 31.3402(g)-1, Restricted Stock Units (RSUs) are defined as supplemental wages rather than regular compensation.

When an employer vests equity and executes an automatic "sell-to-cover" transaction:

• Flat Federal Supplemental Rate (≤ $1,000,000): Employers are legally permitted to withhold federal income tax at a static flat rate of 22% for cumulative supplemental wages up to $1,000,000 within a tax year.
• Mandatory Top Federal Rate (> $1,000,000): Any supplemental wages exceeding $1,000,000 must be withheld at the maximum statutory rate of 37%.
• The True Progressive Spread: For high-earning tech employees whose combined base salary and equity vests enter the 32%, 35%, or 37% tax brackets, the employer's 22% default withholding generates an automatic 10% to 15% underwithholding gap on every dollar vested.

2. 2026 FICA & Payroll Tax Logic

Payroll taxes on RSU vests do not follow annual income tax brackets; they follow statutory Social Security and Medicare thresholds:

• 2026 Social Security Wage Base ($184,500): Social Security tax is 6.2% on wages up to $184,500. Our deterministic engine models base salary first: if base salary meets or exceeds $184,500, the Social Security liability on vesting equity is exactly $0. If base salary is below $184,500, only the remaining headroom up to $184,500 is taxed at 6.2%.
• Medicare Tax (1.45% Uncapped): Medicare tax applies to 100% of all earned wages and equity vests with no statutory dollar cap.
• Additional Medicare Surtax (0.9%): Enacted under the Affordable Care Act, an additional 0.9% surtax applies to wages exceeding $200,000 for single filers ($250,000 for married couples filing jointly).

3. State Supplemental Withholding Schedules

Different states enforce disparate rules on supplemental equity withholding:

• California: Mandates a flat 10.23% supplemental wage withholding rate (plus SDI where applicable). However, California's progressive top marginal bracket reaches 13.3% for incomes exceeding $1,000,000, producing a state-level shortfall.
• New York: Supplemental withholding is set at 11.70%. New York State top marginal brackets reach 10.9%, and combined with New York City resident income tax (up to 3.876%), total local liability can reach 14.77%.
• Washington: Washington state levies 0% personal earned income tax. RSUs are taxed as ordinary earned wage income at vest, not capital gains. Consequently, Washington tech employees owe 0% state income tax upon vest (though post-vest share price growth may trigger the 7% WA Capital Gains Excise Tax if sold at a gain above the statutory deduction).
• Texas & Florida: 0% state personal income tax.

4. Incremental Shares to Sell & Safe-Harbor Liquidation

To prevent IRS underpayment penalties under IRC § 6654 (safe-harbor rules requiring 110% of prior year liability or 90% of current year liability), tech workers must remit quarterly estimated payments or liquidate additional shares at vest.

By selling these incremental shares on the date of vest (or using designated cash reserves), employees lock in tax coverage at the exact vesting fair market value (FMV), insulating their financial position against post-vest share price depreciation.