If you’re a business owner in the state of California, there are several taxes and regulations that need your attention. It’s critical that you pay attention to the rules and comply with the taxing agencies, or you may end up owing the state money down the road. As a tax attorney that works with California business owners, I’m often asked about SDI and is SDI reportable for tax purposes.
California State Disability Insurance (SDI) is a partial wage-replacement insurance plan for California workers, administered by the Employment Development Department (EDD). The SDI program is required and funded through employee payroll deductions. Employers are required to withhold SDI money from employee paychecks. For an employee, SDI withholding appears on the pay stub as “SDI” and under the taxes and withholdings section.
The purpose of SDI is to provide funding to California employees who either 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.
Do I have to report SDI on my taxes?
Generally, 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 SDI and California tax rules 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.