When it comes to California tax returns, there are a lot of questions about what expenses are deductible and what are not. One area that is often asked about is the Voluntary Plan for Disability Insurance (VDPI). Let’s look at what the VDPI is and whether it’s considered deductible on Schedule A for your tax return.
Despite its name, VPDI is not actually an optional expense. Employees are required to pay into either the state disability insurance plan (SDI), or a plan that the employer provides through a self-insured private disability plan. That provide disability plan is the VPDI expense. The amount that is deducted is approximately 1% of the employee wages.
Employers are required to pay into SDI or VPDI so employees can receive partial compensation should they need to take family leave or personal medical leave. Workers covered by SDI have two benefits available to them: Disability Insurance (DI) and Paid Family Leave (PFL). These funds provide monetary support while a worker cannot earn their typical wage, either due to on-the-job injury, sick leave, maternity leave, or family medical leave.
Generally, VPDI contributions are not considered tax deductible on your federal tax return. However, some individuals can take a credit if they meet the following conditions:
- You had two or more California employers
- You received more than $118,371 in wages in calendar year 2019
- The amounts of SDI and/or VPDI appear on your W-2
Generally, VPDI and/or SDI benefits are not taxable by the state of California or the IRS. The one case in which they may be taxed is when employees receive SDI benefits in place of unemployment compensation and for a person who is not eligible for Unemployment Insurance (UI) benefits only because of the disability. An employee will know they need to pay taxes on SDI compensation when they receive a Form 1099-G, which will indicate whether there is an amount that’s taxable. As such, if an employee does not receive a 1099-G, they can assume they do not owe taxes on the SDI income they received.
Navigating VPDI can be difficult for employees and small business owners. It’s best to consult with a tax professional or experienced tax attorney when it comes to all matters of employee compensation and taxes.
Allison Soares is a partner and tax attorney at Vanst Law. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.