---
title: Withholding gap — what it means and why it matters | Allocate AI
description: The difference between the tax your employer took out during the year and the tax you actually owe, which becomes a bill or a refund in April.
canonical: https://allocateai.io/glossary/withholding-gap
site: Allocate AI — https://allocateai.io
---

# Withholding gap

The difference between the tax your employer took out during the year and the tax you actually owe, which becomes a bill or a refund in April.

A withholding gap is the mismatch between what was withheld from your pay and what your tax return says you owe. When withholding falls short, you write a check in April and may owe an underpayment penalty. When it runs over, you get a refund, which means you made an interest-free loan to the government all year.

Gaps come from a few predictable places. Bonuses and RSUs are withheld at a flat 22% (2026), which undershoots anyone in a higher bracket. Two earners in one household each get withheld as if they were the only income. Side income, investment gains, and ESPP sales have no withholding at all.

A concrete case: someone earns $180,000 in salary and $120,000 in RSUs. Salary withholding is roughly right. The RSUs are withheld at 22%, or $26,400, but at a 32% to 35% marginal rate the tax on them is $38,000 to $42,000. The gap is $12,000 to $16,000, due in April, plus a possible penalty if it was not covered by estimated payments.

The common mistake is finding out in April. The cure is a mid-year check: compare year-to-date withholding on a pay stub against a rough projection of the full-year tax, and close any gap through extra W-4 withholding or an estimated payment. The IRS safe harbor, paying at least 100% of last year's tax (110% if your income was above $150,000), avoids the penalty even if you still owe the balance.

[Try the RSU Tax Calculator →](https://allocateai.io/calculators/rsu-tax)

## Related terms

- [Supplemental wages (and supplemental withholding)](https://allocateai.io/glossary/supplemental-wages) — Pay that is not regular salary, like bonuses, commissions, and vested stock, which the IRS lets employers withhold on at a flat 22% rate (2026).
- [W-4 (withholding form)](https://allocateai.io/glossary/w-4) — The form you give your employer that tells them how much federal income tax to take out of each paycheck, based on your filing status and other income.
- [Estimated taxes (quarterly payments)](https://allocateai.io/glossary/estimated-taxes) — Tax payments you send directly to the IRS four times a year when withholding will not cover what you owe, common with big equity gains or side income.
- [RSU (restricted stock unit)](https://allocateai.io/glossary/rsu) — A promise from your employer to give you shares of company stock on a future date, as long as you are still there when that date arrives.

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Allocate AI is a budgeting and financial-planning app: link your accounts, say what you want in plain words, and it writes the plan and stages every change for your approval. Read more at https://allocateai.io or see all pages in https://allocateai.io/llms.txt.