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:
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.
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:
As of this writing, the following states require employers to offer state (or temporary) disability insurance:
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:
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:
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.
|Employee SDI Contribution
|Taxable Wage Base
|New York (for employers who choose to share the cost with employees)
|0.5%, up to $0.60 per week
|Hawaii (for employers who choose to share the cost with employees)
|Up to 0.5%, with a weekly contribution cap of $6.00
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.
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.