Governor Newsom signed Senate Bill 951 (SB 951) on September 30, 2022, which will remove the wage cap on income subject to California's State Disability Insurance (SDI) tax beginning January 1, 2024. This change aims to phase in increases over the next three years in the percentage of earnings that low-wage workers receive while out on paid family leave or disability.
Current Program
California's SDI program funds the State Disability Insurance program, which pays for paid family leave and disability insurance. The SDI program was initially created to provide employees a modest payment when the employee was off work due to injury, illness, or parental leave following the birth of a child.
Paid leave for disability or parental leave is funded through the SDI contribution rate that is withheld on employee wages subject to the taxable wage. Both the SDI contribution rate and the taxable wage limit are adjusted annually by the California Employment Development Department (EDD). The SDI contribution rate has varied slightly over the past few years as follows:
Year | Withholding Rate | Taxable Wage Limit | Maximum SDI Tax |
2018 | 1.00% | $114,967 | $1,149.67 |
2019 | 1.00% | $118,371 | $1,183.71 |
2020 | 1.00% | $122,909 | $1,229.09 |
2021 | 1.20% | $128,298 | $1,539.58 |
2022 | 1.10% | $145,600 | $1,601.60 |
Effect of Senate Bill 951
SB 951 seeks to increase the benefits paid to three categories of employees:
- Individuals taking time off for parental leave following the birth of a child
- Individuals taking time off to care for ill family members
- Individuals taking time off to participate in qualifying events due to family members being deployed for military duty
This new law will phase in increased wage replacement for lower-income workers during their participation in the program. Starting in 2025, workers who earn 70% or less of the state's average wage will be eligible to receive 90% of their wages under the paid family leave and disability programs. Low-wage earners are eligible for these programs for 70% of their regular wages. Per the bill's proponents, under the current program, many of the lowest wage earners could not afford to go on parental or family leave if they received only 70% of their wages while on leave.
To pay for these increased benefits, beginning January 1, 2024, SB 951 will eliminate the taxable wage limit on employee wages subject to the annually determined SDI withholding rate. Although the 2023 rates have not yet been determined, the payroll tax will increase all wages above the 2022 wage cap of $145,600. This change will affect only California wage earners who earn more than the current wage cap of $145,600, as it will impose the SDI withholding rate on wages that exceed the SDI taxable wage limit. At current SDI withholding rates, this will increase California's highest personal income tax burden to a total of 14.4% as follows:
- 3% highest personal income tax bracket
- 1% mental health services tax for earners with wages above $1 million
- 1% CA SDI tax on all wages
The new withholding rules will start on January 1, 2024. However, the new paid leave benefits will not be fully phased until January 1, 2025.
Planning Opportunities
There is a planning opportunity for individuals who are a corporation's sole shareholder to elect from SDI benefits and the withholding required by filing California EDD form DE 459 (Sole Shareholder/Corporate Office Exclusion Statement). A spouse may also elect from the SDI withholding on the same form, but to do so, the spouse must be a corporate officer and shareholder.
An alternative planning strategy may be for a partner to receive guaranteed payments in place of wage distributions.
If you need additional information regarding this change in California payroll taxes, please get in touch with one of the following HCVT state and local team members for assistance.
Douglas Andersen | 562.216.5512 | douglas.andersen@hcvt.com
Jess Penilla | 657.205.3665 | jess.penilla@hcvt.com
