Are you a sole shareholder (or the only other shareholder of your company is your spouse) of a California corporation? Are you earning W2 wages and paying the State Disability tax (SDI)? Did you know you can opt out and keep additional funds in your pocket?
Disability insurance provides a partial wage replacement to eligible employees in the event of a non-work-related illness, injury, or pregnancy. Through 2023, the disability rate was charged on wages up to a maximum limit.
However, as of January 1, 2024, California’s SDI tax of 1.1% will now apply to all employee wages without a cap, raising the top tax rate for wage earners to 14.4%. Previously, the tax was capped at $153,164. This change effectively increases the tax by 1.1% on wages exceeding the 2023 cap.
Opting out means forfeiting State disability and Paid Family Leave (PFL) compensation, so the potential savings should be weighed against the value of these benefits. You may find the cost savings outweigh the SDI benefits, particularly if you have private disability insurance coverage in place.
To opt out, you and your qualifying spouse must file a one-page statement with the Employment Development Department (EDD), and the exclusion becomes effective from the first day of the filing quarter.
If you don’t meet the requirements to be excluded from paying SDI, you might consider joining a voluntary plan (VP) instead, especially if you have highly compensated employees. A VP must provide better coverage without additional cost to the employees.
If enrolled in a voluntary plan, your company pays a quarterly assessment to the EDD based on the taxable wages of employees participating in the plan and other factors.
If your exclusion is approved, be sure to inform your payroll service so the SDI deduction can be ceased.
If you are looking for a solution that can assist you with this and other payroll issues, we are here to help. You can reach out to us at 310-534-5577 or [email protected].
California Top Tax Rate for Wage Earners Increased to 14.4% – NKSFB, LLC
