If you're a first-time founder, it's easy to get overwhelmed with the responsibilities and obligations of building a startup. The SDI tax is one of those lesser-known ones, since only a handful of states require it.
But with this guide, you'll learn everything you need to know about this payroll tax, including:
- What is the SDI tax?
- Which states have an SDI tax?
- Stay on top of your SDI taxes with Warp
What is the SDI tax?
State disability insurance, or SDI for short, funds short-term partial wage replacement benefits for employees who need to recover from a non-work-related injury, illness, or health condition that prevents them from doing their jobs. This way, employees who need temporary disability benefits can access them and receive financial support while they recuperate.
As you'll see later in this blog post, not all states have a disability insurance program. The states that do have an SDI program fund these benefits through a payroll tax levied on employees (and sometimes employers, too). This type of tax is different from workers' compensation insurance and unemployment insurance, which are funded solely by employers.
Keep in mind that California is the only state with an SDI tax specifically. Every other state with a similar program refers to it as temporary disability insurance (TDI), although it functions much the same way California's SDI program does.
If your business is located in a state that levies an SDI tax, you must offer SDI benefits to all eligible employees. You can do so through your state's plan or a private insurer, as long as it meets certain requirements. If you work with a private insurer to obtain disability insurance coverage for your employees, this is known as an alternative voluntary plan.
What's the difference between a state plan and an alternative voluntary plan?
With an SDI plan operated by the state, employees pay into the benefits program through mandatory payroll deductions. These contributions go into the state's general fund, where employees in need can then file a claim to receive benefit payments.
In states with an SDI mandate, employers can offer an alternative voluntary plan to their employees as long as it meets the state's minimum SDI requirements. However, you must get approval from the majority of your employees before implementing one of these plans at your organization.
Employee payroll deductions for a voluntary plan must be the same or less than the maximum amount the state deducts as part of its SDI plan. These funds then go to the private insurer that administers the alternative plan for use in benefit claims payments.
Who is eligible for SDI benefits?
As mentioned earlier in this blog post, the SDI tax pays for wage replacement benefits for eligible employees who cannot work due to a non-work-related health condition.
It's different from long-term disability benefits, which provide benefit payments to workers with disabilities that last months or even years. In contrast, short-term disability insurance covers employees who need several weeks for their recovery but may not have the sick leave or vacation time for it.
The specific health conditions covered under SDI vary by state, but they generally include the following:
- Physical or mental illnesses that take time to recover from
- Recovery from invasive and medically necessary surgical procedures
- Pregnancy and childbirth
- Injuries from an accident
- Treatment for drug or alcohol abuse
To determine whether an employee is eligible to receive disability benefits, states will use what's called a base year (or base period). The base year typically refers to the first four of the last five calendar quarters before the employee files a claim.
The wages the employee earns during this time period determine whether they're eligible for disability benefits. If they are eligible, this time frame is also used to calculate the benefit amount for their claim.
Which states have an SDI tax?
Only five states administer an SDI or TDI program: California, Hawaii, New Jersey, New York, and Rhode Island. Puerto Rico oversees its own TDI program as well.
Each jurisdiction has its rules and regulations governing how the program operates. For instance, tax rates differ between jurisdictions. Each program also sets a taxable wage base, the maximum amount of earned income that employees pay SDI taxes on. Once an employee hits that threshold, the rest of their income is exempt from SDI contributions for the rest of the year.
We'll take a closer look at each jurisdiction's temporary disability benefits program below:
California
California's SDI program is operated by the Economic Development Department, or EDD.
In 2024, the SDI withholding rate is 1.1% of an employee's income. Starting January 1, 2024, the state removed the taxable wage base and maximum withholding amount for employees subject to SDI contributions. This means the 1.1% SDI tax will be applied to all of an eligible employee's income.
Hawaii
Hawaii's TDI program is administered by the state's Disability Compensation Division (DCD).
Employers can choose between covering TDI for their workers or withholding up to 0.5% of an employee's weekly wages (up to $1,374.78 per week) to help fund TDI benefits.
New Jersey
New Jersey's Department of Labor and Workforce Development (DLWD) manages the state's TDI program.
In contrast to the other jurisdictions that mandate an SDI tax, employers in this state are solely responsible for contributing to the state's disability insurance fund. Employers are assigned a tax rate based on their employment experience, and new employers start with a tax rate of 0.5%. The taxable wage base in 2024 is $42,300.
New York
In New York, the Workers' Compensation Board (WCB) oversees the state's TDI program.
Employers can fully cover disability benefits themselves or deduct up to 0.5% of employee wages (no more than $0.60 a week) to help cover the cost of benefits.
However, because these companies shoulder most (or all) of the cost of these benefits, any benefit payments received by eligible employees are subject to Federal Insurance Contributions Act (FICA) taxes.
Rhode Island
Rhode Island's Department of Labor and Training (DLT) manages the state's TDI program.
In 2024, the TDI tax rate is 1.2% on the first $87,000 earned by eligible employees. According to the DLT, employees can also receive wages, sick leave pay, or vacation pay while receiving TDI benefits.
Puerto Rico
Puerto Rico's TDI program is called "Seguro por Incapacidad No Ocupacional Temporal" (SINOT), which translates to "Temporary Non-Occupational Disability Insurance."
Both employees and employers contribute to the disability insurance fund. Employers must pay at least 0.3% of the 0.6% tax, although they can contribute more if they wish. The tax is levied on the first $9,000 of the employee's income in a calendar year.
Below is a chart that breaks down some of the most important details about each jurisdiction's SDI program.
| State | Contributions | Employee contribution | Employer contribution | Taxable wage base | Are benefits taxable? |
|---|---|---|---|---|---|
| California | Employee only | 1.1% | n/a | n/a | No |
| Hawaii | Split between employer and employee | 50% of cost but no more than 0.5% of covered weekly wages | 50% of 1% of employee's taxable wages | $1,374.78 (weekly) | Depends on how much employer and employee contributed to the cost |
| New Jersey | Employer only | None | New employers pay 0.5% of taxable wages with state plan; experience rates for other employers range from 0.1% to 0.75% | $42,300 for employers | No |
| New York | Split between employer and employee | 0.5% up to maximum contribution limit, if employer opts to split the cost of benefits | The remainder of the benefit costs | None | Depends on how much employer and employee contributed to the cost |
| Rhode Island | Employee only | 1.2% | None | $87,000 | No |
| Puerto Rico | Split between employer and employee | 0.3% | 0.3% | $9,000 | Yes |
Stay on top of your SDI taxes with Warp
When determining your SDI and TDI tax liability as an employer, it's not enough to consider the state where your business is located. You must also take into account the states where your employees work and reside.
Say you have employees in California. You'll need to calculate, deduct, and pay SDI taxes to the EDD on behalf of those workers, even if your business is out of state.
And because the party responsible for paying these taxes also varies by state, SDI requirements can make running a startup challenging, especially for first-time founders.
Payroll software like Warp can simplify how you handle payroll taxes by managing all of these compliance tasks for you. Not only will our platform register your startup for the appropriate taxes in the proper states as needed, it will also automate your tax contributions, deductions, and filings all year round, so you never have to lift a finger.
Request a demo today to learn how Warp can help you manage your tax obligations and free up more time for scaling your startup.
