Supplemental wages

The spread on an NSO exercise and income from restricted stock as it vests are supplemental wages too, and the regulation names both. Income from selling ISO or ESPP shares is different: your employer does not have to withhold income tax from it.

Below $1 million a year, your employer can choose between two methods. The flat rate method requires the payment to be stated separately from your regular pay. Income tax must also have been withheld from your regular pay this year or last. The aggregate method adds the payment to a regular paycheck and withholds on the total. Social Security and Medicare are withheld under either method. Social Security withholding stops once your 2026 wages from the employer reach $184,500.

The 37% applies only to the part of the year’s supplemental wages above $1 million. Once you pass that line, each later payment is withheld at 37% in full.

Flat withholding at 22% is only a prepayment, and it can fall short of your tax. In 2026 the 22% bracket ends at $105,700 of taxable income for single filers and $211,400 for joint returns. Above that, 22% is less than the tax on each extra dollar. Unless other withholding or estimated payments cover the gap, the balance is due when you file.