California SDI Wage Base Eliminated In 2024
- Jan 17, 2024
California Senate Bill 951 (SB 951) went into effect on January 1, 2024 and removed the cap on taxable wages for contributions to the State Disability Insurance. This means that there will be a flat 1.1% California tax applied to all wages due to this increase.
The wage base limit for this tax in 2023 was $153,164 and the net percentage of the tax varied from 0.9% to 1.1% due to the way the SDI contributions were calculated. Using the new formula, the tax will be 1.1% and apply to all wages. Now is a great time to consider alternatives like voluntary program State Disability Insurance (VP SDI) that may be better suited for your business than directly paying SDI taxes to California.
Voluntary Program State Disability Insurance
In California, employers can choose to create a voluntary program, where instead of remitting the SDI tax to the state they can invest it in a trust fund that will pay for any disability claims made by the employees.
This gives employers the flexibility to create a plan that will reduce the tax burden on employees and be more flexible then what SDI offers. However, the voluntary program has some limitations, including:
- It must offer the same or better benefits as SDI.
- At least one benefit must be better than SDI.
- It cannot cost more than SDI.
- It must match any increase in benefits enacted by legislation.
Federal Tax Considerations
On Jul. 11, 2023, Rep. Brendan Boyle introduced the Medicare and Social Security Fair Share Act, which proposes to increase the base wage limit for FICA taxes from $168,600 to $400,000. Even though this bill has not yet been passed by the House of Representatives, it gives insight into what Congress is considering about payroll taxes.
The removal of the base wage limit for the California SDI tax has opened a window for Congress to determine how this will affect taxpayers, as well as beneficiaries of SDI benefits. The current system is regressive where most of the burden is placed on lower tax brackets. However, the proposed increased of the base wage limit will result in a net tax increase for all taxpayers earning between $168,600 and $400,000.
Currently, FICA taxes are set at 6.2% for both employees and employers up to $168,600 of wages. Employers and employees must also pay a 1.45% Medicare Hospital Insurance tax each with no wage limitations. Furthermore, high-wage income earners must also pay an additional Medicare Tax of 0.90% for a total tax of 2.35% for employees. This applies to single taxpayers with earnings above $125,000 or married filing jointly taxpayers earning more than $250,000.
Next Steps for Your Organization
The recent changes in California Senate Bill SB-951 necessitate an evaluation of your organization’s approach to SDI taxes. A State & Local Tax team can guide you in making informed decisions, and optimizing your financial strategy.
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Sergio Fuentes is a Tax Staff II in the firm's Private Client Services Group. Sergio provides tax services and primarily works with high-net-worth individuals and closely held businesses.
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