What Is SDI Tax?

For employers, payroll taxes are par for the course — including state disability insurance (SDI) tax if your employees work in certain states. SDI tax is one of the lesser-known payroll taxes, and this article is designed to help you understand what it means for employers. We provide answers to the following questions:

• What is state disability insurance?
• What is SDI tax?
• Which states require it?
• How much is it?
• How is SDI tax remitted?

What is state disability insurance?

To comprehend state disability insurance tax, it helps to know about state disability insurance (SDI).

SDI should not be confused with workers' compensation.

State disability insurance is a form of insurance that provides short-term partial wage replacement to eligible workers who are unable to work because of a non-work-related injury or illness. The injury or illness must be a physical or mental impairment that prevents the worker from doing their regular job. SDI should not be confused with workers’ compensation, which covers work-related injuries and illnesses. Each state administers their own SDI. If your employees work in a state with an SDI program, you must offer them SDI coverage. In most states, employers can provide SDI through a private insurer or a self-insured plan. Who pays for SDI coverage varies by state. For example, the employer or the employee may be allowed to pay the entire cost of SDI coverage, or the employer and the employee might be permitted to share the cost.

What is SDI tax?

SDI tax is the amount that workers pay toward the SDI program via wage/payroll deduction. The money is used to pay SDI benefits to eligible workers.

Rules and requirements vary depending on your state.

State governments regulate SDI tax, including:

• What constitutes an injury or illness for SDI purposes
• Eligibility requirements for SDI benefits
• Application process for workers seeking SDI benefits
• Duration and amount of SDI benefits
• Which employees are excluded from SDI tax and benefits
• The maximum amount that can be withheld from employees’ wages for SDI purposes
• Which employers can opt-out of the SDI program

Which states require SDI tax?

As of this writing, the following states require employers to offer state (or temporary) disability insurance:

• California
• New York
• New Jersey
• Rhode Island
• Hawaii

Puerto Rico, as well, has a temporary disability insurance program. If your employees work in the following states, you must withhold SDI tax from their wages:

• California
• New Jersey
• Rhode Island

If your employees work in the following states, you can cover the entire cost of SDI coverage, or you can choose to withhold an amount from employees’ wages to help cover the cost:

• New York
• Hawaii

How much is SDI tax?

Below are the employee contribution amounts for 2022. Most states also have a taxable wage base, which represents the maximum amount of wages that you may pay tax on for SDI purposes in a specified period.

 Make sure you know what constitutes “taxable wages” when withholding SDI tax from employees’ wages. Payroll software can simplify tax withholding by ensuring the tax rate, taxable wages, and deduction amounts are correct.

How is state disability insurance tax remitted?

This varies by state. For example, state disability tax insurance withholding is mandatory in California. So, if your employees work in California, you must remit their SDI tax withholdings to the California Employment Development Department, which oversees the state’s SDI program.

You need to consider where your employees are located, not just where your business is located.

However, if you have employees in Hawaii, you should submit SDI tax withholdings to your SDI carrier (instead of the state) because Hawaii does not mandate this tax. Hawaii simply requires employers to offer SDI coverage plus limits how much employers can withhold from employees’ wages for SDI coverage. Note that TriNet payroll remits state disability insurance tax withholdings to all states that mandate it.

This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.

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