Effective January 1, 2024, the California State Disability Insurance (SDI) tax (currently set at 1.1% for 2024) applies to an employee’s total wages rather than being capped at a specified amount. For 2023, the maximum wage base that the tax could be applied to was set at $153,164. This change can make the 2024 California top tax rate for wage earners 14.4%.
Elimination of the wage base essentially amounts to a 1.1% tax increase on wages above the 2023 $153,164 wage base. However, California employers may consider participating in a voluntary plan (VPDI – see https://edd.ca.gov/en/disability/Employer_Voluntary_Plans/ ) instead of the SDI program, especially if they have a number of highly compensated California employees.
Also, sole shareholders are allowed to elect out of SDI. Note: the election out of SDI does not apply to an LLC member even if the LLC has elected to be taxed as a corporation for income tax purposes.
Here’s how it works: You can claim the exclusion by filing a simple one-page statement with the California Employment Development Department (see www.edd.ca.gov/pdf_pub_ctr/de459.pdf ). Your exclusion will be effective in the calendar quarter filed (first day of the quarter the election is made). Now is a good time for you to consider filing for this exclusion. Many single shareholder corporations, pay a large bonus to their officer/shareholder before year end.
Of course, by electing to be excluded from SDI, you will not be eligible for State disability benefits. Employees covered by State Disability Insurance (SDI) are also covered by Paid Family Leave (PFL) insurance. Therefore, before making the election you should consider the expected value of any potential benefits. Most shareholder/officers will find that the cost savings significantly exceeds the value of the potential SDI benefits, especially if they have private disability insurance.
There’s more – if your spouse is also a shareholder and officer, either or both of you may file for the exclusion! If your spouse is not a shareholder of record, he or she could still be considered a shareholder if the stock is community property. If the stock is your separate property, then your spouse would not qualify for the exclusion. In addition to being a shareholder, your spouse must be a legally appointed officer to qualify for the exemption.
See www.edd.ca.gov/disability for more information on the SDI program.
To be excluded from SDI for the remainder of 2024, we recommend notifying your payroll service and filing the statement before your next payroll is processed.
This is just one of the many little-known ways you can realize significant savings with careful tax planning. If you need help making this election or with your 2024 tax planning, give us a call or contact us at taxinsights@nksfb.com or Richard Welling at rwelling@nksfb.com.
