Happy New Year from California. As a reminder, starting January 1, 2024, changes to California’s state disability insurance (SDI) program will effectively increase taxes for employees working in California by 1.1% on income over $153,164. This is the result of both the elimination of the taxable wage limit (which was $153,164 in 2023) and an increase in the California SDI rate, from 0.9% in 2023, such that SDI will apply on all wages at a rate of 1.1% in 2024. Employers are not required to contribute to SDI but they have an obligation to withhold and report the SDI taxes to the SDI program unless they have made arrangements to self-insure short-term disability benefits in California by setting up a voluntary disability plan. Since SDI generally applies to an employee’s full wages, the impact of this change is not limited to employees with higher base pay, and employers may want to consider how to communicate the change to employees with overall compensation above the pre-2024 wage limit, including explaining that SDI tax will be withheld from both base pay and additional forms of compensation, including bonus payments, equity incentives, deferred compensation, etc. In addition, an employee who is also the sole shareholder (not including a spouse) of a corporation may wish to evaluate whether it makes sense to take advantage of the option to opt out of the SDI program and obtain individual disability insurance instead.
Currently, only five states, including California, offer disability programs; however, a number of states have started to provide other types of programs which are funded by payroll taxes, such as paid family leave and long-term care. It is too early to know if the elimination (or absence) of a taxable wage limit for assessment of these taxes will become a trend, but it is something to keep an eye on as these types of programs take off.
