California’s High Earners: Facing a Significant SDI Tax Increase: What You Need to Know

California’s implementation of SB951, removing the cap on State Disability Insurance (SDI), marks a significant shift in tax obligations for high-income earners. This legislative change is twofold: not only has the cap on SDI been eliminated, allowing the tax to apply to all earned income, but the SDI tax rate itself has increased to 1.1%. Previously, the tax was capped at $1,378.48 per year, based on the maximum salary figure for 2023 of $153,164, with the SDI rate then set at 0.9%.

With the cap now removed and the rate increased to 1.1%, the financial impact on high-net-worth individuals is significant. Consider the implications for earners at various income levels:

• For an individual earning $1 million annually, under the previous system, their SDI tax would have been capped at $1,378.48. Now, with the rate at 1.1% and no cap on taxable earnings, their SDI tax would be $11,000, representing an increase of $9,621.52.
• For someone with an annual salary of $2 million, the difference is more stark. Where the SDI tax was previously capped at $1,378.48, it would now surge to $22,000, marking an increase of $20,621.52.
• At the $5 million salary level, the impact is even more dramatic. The SDI tax would jump from the capped amount of $1,378.48 to $55,000, an increase of $53,621.52.

As tax professionals, it’s essential to communicate that this adjustment is a payroll tax change, affecting employees directly through their payroll withholdings. There are no strategies or deductions available to offset this increase if you are a wage-based employee, as it is automatically applied based on earnings. The primary role of advisors in this context is to provide clear, comprehensive information to our clients, ensuring they are fully aware of how these changes will impact their take-home pay.

This update serves as an important reminder of the ever-evolving nature of tax legislation and the direct impact these changes can have on individual financial situations. For our clients, especially those with substantial incomes, understanding these modifications is crucial for accurate financial planning and expectations management. Our aim is to keep clients informed and prepared, helping them navigate through these adjustments with complete awareness of the implications for their personal and financial well-being.