HR Glossary

What is an SDI Tax?

Gain knowledge of state disability insurance tax. Discover the different rates and types of SDI tax plans and how they can impact you.
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State disability insurance (SDI) tax is something that all employees in states with disability insurance programs must pay. The money from the SDI tax is transferred directly to the fund from which the state’s disability insurance is funded.   

If an employee cannot work due to a physical or mental disability, the SDI tax fund will assist them. Moreover, the tax also contributes to paid family leave benefits. These benefits kick in when an employee leaves work to care of a sick family member or bond with their new child.  

An SDI tax also covers the recently unemployed. If a person loses their job, this fund can assist in covering the cost of unemployment. However, the person needs to be actively looking for work to qualify for SDI payments.  

Also, if a person is sick from COVID-19, they may be eligible for SDI benefits. Or, if they are caring for someone ill due to COVID-19, they may be eligible for paid family leave.  

Many states levy an SDI tax, but not all of them refer to it as such. Some states refer to the tax as temporary disability insurance (TDI). California is the only state with a tax specifically called SDI. 

Which States Have an SDI Tax?

There are six states currently that have an SDI or TDI tax:

  • California
  • Hawaii
  • New Jersey
  • New York City
  • Puerto Rico
  • Rhode Island
sdi tax

What is the SDI Tax Rate?

The rate that an employee can see deducted on their pay stub is determined by their state and the region’s current tax rates. Typically, the tax rate ranges from 0.25% to 1.5%.   

An employee’s wages can only be taxed up to a certain amount. After an employee has earned the maximum rate in a year, the rest of their earned wages are exempt from taxation.   

For example, employees who pay between $1,000 and $2,000 do not have to pay any more SDI tax for the year.  

Here are the current tax rates for SDI in the states and regions employees are obligated to pay them:

1) SDI Tax Rate for California

The SDI tax rate in California is 1.20% of the taxable wages per year. The maximum yearly tax per employee is $1,539.58. See: California Tax-Rated Employers page. 

2) SDI Tax Rate for Hawaii

Companies in Hawaii have the option to cover TDI for their employees or withhold up to 0.5% of an employee’s weekly wages. This adds up to a maximum of $5.60 per week, or $291.20 per year. See: Hawaii Tax Rate Schedule. 

3) SDI Tax Rate for New Jersey

The employee contribution rate for temporary disability in New Jersey is 0.47% of the taxable wage base, which is $138,200.  

This equates to a maximum annual contribution of $649.54. See: New Jersey Tax Rate Information, Contributions and Due Date.

4) SDI Tax Rate for New York

New York employers have two choices when it comes to state disability insurance (SDI) coverage. They can either fully cover the cost or opt to withhold a percentage of their employees’ wages. The permissible amount to be withheld is 0.5% of the paycheck, no more than $0.60 per week.

5) SDI Tax Rate for Puerto Rico

The current interest rate is 0.60%. The employer and the employee bear an equal share of the tax burden.  

The disability insurance tax is levied on the first $9,000 in salaries paid to an employee by an employer during the calendar year.  

Any additional compensation paid to the employee by the same employer after that year is exempt from tax.

6) SDI Tax Rate for Rhode Island

As of January 1, 2021, the current withholding rate is 1.3% of the first $74,000 earned.  

Employee’s age 14 and 15 are exempt from TDI tax.  

Moreover, employees may be eligible for a TDI tax refund if they worked for more than one Rhode Island employer in a calendar year and their total wages are more than $71,000. 

How Much Does SDI Tax Take Out of a Paycheck and Is Anyone Exempt?

SDI taxes are paid on income up to certain amounts, dependent on state.

SDI Tax

Who Is Required to Pay SDI Tax?

In most cases, employers don’t pay SDI tax, but employees do.   

In the business world, not everyone is easily classified as an employer or an employee. Self-employed people are technically both employers and employees. Therefore, they are not required to pay the tax. However, if they want disability coverage, they can enroll in various state insurance programs.   

In addition, even if a person hires employees on behalf of another, they are still considered an employee for tax purposes. 

Who Is Not Covered by SDI Tax?

Here are the employees that can’t benefit from SDI tax:

  • Most government employees, such as federal, state, county, or city employees
  • Domestic workers
  • Employees of the Interstate Railroad
  • Some members of non-profit organizations
  • Self-employed individuals and small-business owners who do not pay for elective coverage

Types of SDI Tax

There are three SDI tax plans:

1. State Plan

This plan includes paid family leave.

2. Voluntary Plan

Some companies provide voluntary plans, which include coverage almost as good as the state plan and at least one feature that the state plan does not.  

However, the private plan can’t be more costly than the state plan, and it must be approved by a majority of the employees.  

Find out more about voluntary plans. 

3. Elective Coverage

Although some of the rules are not the same if a person is self-employed or owns a business, they can purchase elective coverage. 

For example, elective coverage is only available for 39 weeks, and premiums are calculated as a percentage of their previous year’s profit.  

Find out more about elective coverage. 

Conclusion

SDI and TDI taxes vary by state, and rates can change every year. Each state has its own rates and policies in place, so always consult state government resources for the most up-to-date information.

Written by SHORTLISTER EDITORIAL TEAM

Sources

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