SDI Tax: What It Is and What to Withhold

Almost everything written about SDI tax is really an article about California, wearing a national headline. That is understandable, since California is the only place where the tax is actually called SDI, but if you employ someone in New Jersey, New York, or Hawaii, those guides describe rules that do not apply to you. This one covers all six jurisdictions that require it, from the employer's side.

Even the California coverage is often wrong. In 2024 the state abolished the wage cap entirely, and a startling number of pages still confidently quote a maximum annual withholding that no longer exists.

Here is the whole thing: what SDI is, what to withhold in each jurisdiction in 2026, who actually pays, and the multi-state problem nobody addresses, which is that there is no company-wide answer, only a per-person one.

I build FirstHR, which is where the employee records that drive all of this live. Rates change every single year in every one of these jurisdictions, and this is general information rather than tax advice, so verify the current numbers before you configure anything.

What Is SDI Tax?

SDI is a state payroll deduction that funds short-term wage replacement for workers who cannot work because of an illness or injury that did not happen at work.

Three things follow from that definition, and each of them is a place employers go wrong.

It is insurance, not revenue. The money does not go into a general state budget. It goes into a fund that pays benefits to workers in that state. Which is why an employee who never files a claim does not get their contributions back: nobody refunds your car insurance because you did not crash.

Non-occupational is the whole point. An injury that happens at work is a workers compensation matter, and workers comp is a completely separate insurance program with its own coverage obligations. SDI covers the other thing: the illness, the accident at home, the pregnancy. Employees conflate the two constantly, and so, occasionally, do employers.

It is not the same as paid family leave, except when it is. In California and Rhode Island, the identical withholding funds both the disability benefit and the family leave benefit. In New York and New Jersey, they are separate lines with separate rates. There is no consistent rule, which is the recurring theme of this entire subject.

The names vary just as much, so here is a quick key. The EDD is California's Employment Development Department. TDI is temporary disability insurance, the name used in New Jersey, Rhode Island, and Hawaii. New York's DBL is coverage under its Disability Benefits Law, PFL is Paid Family Leave, FLI is New Jersey's Family Leave Insurance, and TCI is the Rhode Island caregiver benefit.

Who Pays It, the Employer or the Employee?

The employee, the employer, or both, depending entirely on which jurisdiction you are asking about. This is the question that gets answered incorrectly more than any other, and it is answered incorrectly because people generalize from California.

Read that table and the shape of the problem becomes obvious. There is no rule you can carry from one state to the next. A payroll setup that is correct in California is wrong in New Jersey, wrong in a different way in New York, and does not even describe the right kind of thing in Hawaii, where you are not remitting a tax at all.

The California case is the one everybody knows: the employer withholds, the employer remits, and the employer contributes nothing. Which is why owners sometimes say SDI does not cost them anything. It does not cost them money. It costs them an obligation, and the obligation is the expensive part when it goes wrong.

Which States Have SDI Tax

Five states and one territory. Everywhere else, there is nothing to set up.

Two of those entries deserve to be pulled out, because they are the ones that break the mental model people bring to this.

New York is not a tax. It is an insurance requirement. You are obliged to carry a Disability Benefits Law policy, with Paid Family Leave attached as a mandatory rider, and per the New York Workers' Compensation Board you may deduct a permitted employee share toward the DBL premium. If you went looking for a New York SDI rate to plug into payroll, you were looking for something that does not exist in that form.

Hawaii has no state fund for employers to join. Per the Hawaii Disability Compensation Division, employers must provide coverage through a private carrier or an approved self-insured plan. An employer who tried to set up Hawaii SDI the way they set up California would find there is nobody to register with.

Hawaii caps the employee share twice over. You may recover up to half the premium, but never more than 0.5 percent of weekly wages and never more than the weekly ceiling. The Division's 2026 schedule sets the maximum weekly wage base at $1,500.21, which caps the deduction at $7.50 a week.

You will also hear these programs called statutory disability, which is insurance shorthand for the minimum coverage a state law compels, as distinct from a richer plan an employer buys on top of it. The term turns up most often around New York DBL, where the policy genuinely is a statutory floor.

SDI Rates by State

The numbers, as they stand for 2026, except New York Paid Family Leave, whose 2027 rate the New York Paid Family Leave program has already published. Every one of these changes annually, so treat this as a starting point and confirm against the agency before you configure payroll.

A few things worth noticing in that table, because they are not obvious.

Rates move in both directions. California went up, from 1.2 to 1.3 percent. Rhode Island went down, from 1.3 to 1.1 percent, while its wage base rose to $100,000. New Jersey's employee rates both fell. An employer who assumes rates only ever rise, and who therefore does not bother updating, will be over-withholding in some states and under-withholding in others simultaneously.

New Jersey has two wage bases. The employee contributes on $171,100 of wages. The employer contributes on a completely different and much lower base. Per the New Jersey Division of Temporary Disability and Family Leave Insurance, that employer base is $44,800 in 2026, with rates ranging from 0.10 to 0.75 percent. Two bases, two rates, one state.

The single Rhode Island deduction funds two programs. The 1.1 percent withholding covers both temporary disability and the caregiver benefit, and per the Rhode Island Department of Labor and Training the employer withholds it and remits quarterly to the Employer Tax Unit without contributing anything.

California: The Cap Is Gone, and Your Payroll May Not Know

California no longer caps the wages subject to SDI. That is the single most consequential fact in the entire subject, and it is the one most guides are still getting wrong.

Here is why this matters more than the rate change. A rate moving from 1.2 to 1.3 percent is a small arithmetic adjustment that every payroll provider handles automatically. A structural change from capped to uncapped is a configuration change, and configuration is where things quietly stay wrong.

Now look at what the absence of a cap actually does to a well-paid employee, because the number is larger than people expect.

That gap is not theoretical. It is the difference between a payroll system configured for 2023 and one configured for reality, and it repeats for every high earner, every year, until somebody notices.

One more California-specific point, because employees will ask. The same 1.3 percent funds both Disability Insurance and Paid Family Leave. There is no separate PFL deduction on a California stub, and an employee coming from another state who goes looking for one will not find it. It is not missing. It is included.

What You Actually Have to Do

Withholding is the easy part, and it is the part your payroll provider does. The obligations that trip employers up are the ones around it.

Registration

Before you withhold anything, you have to exist to the agency. In California that means an EDD employer payroll tax account. In New Jersey it means registering with the state. In Rhode Island, an out-of-state company hiring somebody who works there has to register with the Employer Tax Unit at the Department of Labor and Training so it can report and remit the TDI it withholds.

New York and Hawaii work differently. There you are not registering for a tax at all. You are buying an insurance policy, which is a different kind of task with a different lead time.

Remittance, and the deposit schedule nobody reads

Here is the part that catches California employers: SDI deposits are not always quarterly, however reasonable that assumption sounds.

Reporting

In California, quarterly reporting runs on the DE 9 and the DE 9C, and deposits go on the DE 88. SDI does not get its own form; it rides along with your other state payroll taxes, which is precisely why it is easy to leave misconfigured. Nothing about the filing process draws your attention to it specifically.

At year end, the amount withheld goes on the employee's W-2. Which brings us to the question employees actually ask.

SDI Employee Withheld: What Your People Are Looking At

The SDI employee withheld figure is the employee's own disability contribution, taken out of each paycheck and reported as a yearly total. On a California stub, an employee sees a deduction labeled CASDI-E, does not recognize it, did not agree to it, and cannot opt out of it. That combination generates a question, and the question arrives on your desk.

On the W-2, the total goes in Box 14, which the 2026 form splits into 14a (Other) and 14b (tipped occupation codes). The IRS instructions for Forms W-2 and W-3 designate Box 14a as the place for other information you want to give the employee, and they specifically list state disability insurance taxes withheld as an example.

Box 14a is an informational box rather than a mandatory one, but it is where employees, and their tax software, will look for the figure.

SDI does not go in the state income tax boxes, because it is not state income tax. An employee whose SDI ended up in Box 19 will hit an error in their tax software, and the fix is a conversation with you, not with the software company.

Two things employees frequently ask that are worth having a clean answer to.

Can I get it back if I never use it? No. It is insurance, not a savings account. In California there is not even an over-withholding case left to make: the Franchise Tax Board marked the excess SDI line on the return reserved for future use once the wage cap that created it disappeared.

Jurisdictions that still cap the contribution work differently. An employee who had two or more New Jersey employers in one year can claim back disability and family leave contributions above the annual maximum on the state return. That is over-withholding being corrected, not a refund of unused premiums.

Is this the same as the OASDI line? No, and the similar names are unfortunate. OASDI is federal Social Security, withheld from every US employee at 6.2 percent. SDI is a state program that exists in six places. A California employee sees both lines on the same stub, paying into two different systems run by two different governments, and reasonably wonders why they appear to be buying disability coverage twice.

What SDI Benefits Actually Pay

SDI benefits are partial wage replacement, not full pay, and every jurisdiction sets its own formula and its own ceiling. In California, the Employment Development Department puts the 2026 weekly benefit at 70 to 90 percent of prior wages depending on income, capped at $1,765 a week, for a maximum of 52 weeks.

The other five run on the same idea with different numbers, so the honest answer to an employee asking what they would receive is that it depends on where they work and what they earned. What holds everywhere: the benefit is a share of prior earnings, it has a weekly ceiling, it runs for a limited number of weeks, and each program has its own earnings test plus a medical certification.

The part worth saying out loud to your people is who decides. The claim goes to the state agency or, in New York and Hawaii, the carrier. They rule on it. Your role is to confirm wage information when it is requested. You do not approve or deny anything, and you are not the appeal route when a claim goes against someone.

Is SDI Taxable?

Two separate questions hide inside that one. The benefit an employee receives is generally not taxable, and the contribution they paid in may be deductible.

On the benefit side, the EDD says Disability Insurance benefits are not taxable in most cases. The exception is an employee who was drawing unemployment, became unable to work, and moved onto disability benefits: that portion is reported to the IRS up to their unemployment maximum benefit amount.

Paid Family Leave is treated differently. Those benefits count as unemployment compensation, are federally taxable, and arrive with a Form 1099G. Someone who draws both in the same year can therefore end up with one benefit that is reportable and one that is not.

On the contribution side, the deduction comes out after tax. The IRS instructions for Schedule A treat mandatory contributions to the California, New Jersey, New York, and Rhode Island disability benefit funds as deductible state income taxes for an itemizer, subject to the state and local tax cap. That is why reporting the amount in Box 14a helps an employee who itemizes.

None of which changes your job. You withhold, you remit, you report. Whether a benefit is taxable to the person receiving it sits between that employee and their return, so send the question to their tax preparer rather than answering it yourself. This is general information, not tax advice.

The Multi-State Problem Nobody Writes About

Every guide to SDI treats it as a single question with a single answer. It is not. It is a per-person question, and the answer is determined by where each individual physically works.

Not where you are incorporated. Not where the payroll runs. Not where the founder sits. Where that specific human being does their job.

Look at what that company actually has to do. Eighteen employees, four regimes, and there is no setting anywhere in any system called company SDI. There is a per-person determination, driven by a single field on each employee record: the state they work in.

Which means the operational answer to SDI is not really about tax. It is about knowing where your people are, keeping that field accurate, and having something happen when it changes. That is a records problem before it is a payroll problem, and it is what an HRIS, the system that holds your employee records, exists to solve.

And it is a moving target. Somebody relocates from Texas to California, tells you casually over Slack, and their withholding obligations change from that pay period forward. If nobody updates their record, nobody updates their payroll, and the error compounds every two weeks in silence.

What SDI Is Not

Half of the confusion around this term is people mistaking SDI for something adjacent, such as federal Social Security, workers comp, unemployment insurance, paid family leave, or a disability policy an employer chose to buy.

The workers compensation row is the one to hold onto, because employees get it wrong in the direction that costs you. Somebody hurts their back lifting something at work, files for SDI, and gets denied, and now they are angry and it is your problem. The work injury goes through workers comp. Knowing which system a claim belongs in is part of the job.

What Happens If You Get It Wrong

Getting SDI wrong leaves you owing the state money, and it happens in two very different ways, with two very different consequences.

You under-withheld

The money is the employee's, and you failed to take it. The liability is still yours: you owe the state the contribution regardless, so now you either absorb it or catch up by taking a larger deduction from a paycheck the employee was counting on. Neither is a good conversation, and the second one is worse.

This is exactly what happens when California ceiling logic is left in a payroll system. The withholding stops at some invisible threshold, the employee's net pay quietly goes up, nobody says anything because nobody complains about more money, and the shortfall accumulates until year end.

You withheld correctly but deposited late

Per the EDD, a 15 percent penalty plus interest is charged on late payments of California payroll taxes. And note what makes this dangerous: you did everything right on the employee side. The right amount came out of the right paycheck. You simply sent it to the state on the wrong day, because you assumed your deposit schedule was quarterly when it was not.

And there is a third, quieter failure that costs nothing until it costs everything: you never registered at all. The remote hire in a covered state, the payroll that ran without the withholding, the state that eventually notices. This is the same category of problem as the rest of small-business employment law compliance: nothing goes wrong for a long time, and then it all goes wrong at once.

How to Set It Up

The whole thing, in order, for a business that has just discovered it has an SDI obligation.

Step seven is the one that actually matters, and it is the one nobody puts in a payroll guide because it is not a payroll task. It is a records task. Whether the right amount comes out of somebody's paycheck in March depends entirely on whether a field on their employee record was accurate in February.

Two sheets carry the whole thing. One row per person recording where they physically sit and what that triggers, with a date showing when somebody last checked it was still true. One row per jurisdiction for the January pass, so the rate you are withholding at is one you actually confirmed rather than one you inherited.

The last-confirmed column is the one doing the work. A relocation announced in a message thread changes nothing until it changes that cell, and a register nobody has revisited in a year is a list of where your people used to be.

Common Mistakes

The same SDI mistakes recur from one company to the next, and very few of them are about arithmetic.

The unifying error is treating SDI as a company-level setting rather than a per-person consequence. There is no company SDI rate. There is a rate for each individual, determined by where they sit, and the moment you have people in more than one state, the only way to get it right is to know exactly where everybody is and to notice when that changes.

Frequently Asked Questions