Employees and employers of all shapes and sizes in California, from large corporations and enterprises to sole proprietors, should be aware of a new California state law that goes into effect in 2024 which will have a significant impact on the SDI (State Disability Insurance) withholding on earnings. Keep up to date on these new laws and don’t get caught unaware when these changes go into effect next year.
What is Senate Bill 951?
Senate Bill 951 (SB 951), which takes effect January 1, 2024, introduces several amendments to California’s Unemployment Insurance Code and to State Disability payments. The bill also increases the SDI withholding amounts on employees and eliminates the taxable wage limit on employee wages subject to California’s SDI withholding rate.
This bill is intended to increase disability benefits for California residents in need by revising the formulas for calculating Weekly Benefit Amounts and extending the formula applicable for periods of disability. Beginning in 2025, disability benefits will cover 90% of wages for low-wage workers and 70% up to a cap for other workers. The bill also adjusts benefit amounts and contribution rates for inflation.
The bill also establishes a family temporary disability insurance program that provides up to eight weeks of wage replacement benefits for workers who need time off to face family-related challenges such as caring for seriously ill family members.
This bill is designed to make California’s SDI program more affordable for low-income workers and to prevent California’s paid leave benefits from reverting to 55% income replacement—the lowest rate of any state-run paid leave plan.
To cover the cost of these changes, starting on January 1, 2024, the SDI withholding rate will increase from 0.9 percent of taxable wages to 1.1%.
Not only is the percentage of earnings taxed for SDI contributions increasing from 0.9% to 1.1% for all employees but also the maximum taxable wage base for California is changing. Prior to 2024, earnings above $153,164 were not subjected to withholding. However, when SB 951 goes into effect, there will be no cap on taxable earnings. As a result, higher-income individuals will continue to be subject to SDI withholding on wages above $153,164 each calendar year.
Earned wages above $153,164 will continue to be taxed at the rate of 1.1%. Previously, earned wages above this amount of $153,164 were not subject to withholding taxes.
How These Changes Will Affect Small Businesses
SB 951’s increase of the SDI withholding rate will potentially have an impact on employees and employers alike. These adjustments will increase revenue for SDI, strengthening the long-term fiscal sustainability of this essential program.
However, these changes will also increase the tax burdens for earners, especially high-income individuals who make more than the previous taxable maximums, resulting in lower take-home pay. Small businesses and sole proprietors will also be affected.
It is unclear how these changes will affect the economy or the available labor force by providing increased payments to workers who are unable to work due to a disability.
Examining SB 951’s Effect on Small Businesses and Sole Proprietors
SB 951’s several amendments to the Unemployment Insurance Code in California introduce changes to unemployment insurance, disability benefits, and family temporary disability insurance that will likely have financial and administrative implications for small business owners and sole proprietors in the Golden State.
Businesses and system programmers will likely need to update their payroll and benefits administration systems to ensure their business remains in compliance with revised contribution rates and benefits amounts.
Impact on Take-Home Income
With state SDI tax rates increasing, employees, employers, and self-employed Californians and sole proprietors alike may notice a direct impact on take-home income, influencing one’s decisions related to business expansion, investment, or personal financial planning.
Changes to Incorporation Strategies
It is not uncommon for self-employed individuals to incorporate by forming an S-Corp, which carries with it not only limited liability protection but also lower corporate and self-employment tax rates and additional tax deductions. The changes in the SDI maximum taxable wage base will likely make incorporating as a self-employed individual slightly less advantageous as a legal strategy for reducing tax obligations.
Keeping Up to Date with Changing California Tax Withholdings
A critical part of maintaining your payroll and benefits administration platforms is ensuring they can easily be adjusted to reflect changing state laws regarding tax withholdings for earnings. Are your current HR, payroll, and benefits administration solutions flexible enough that you can easily prepare yourself for compliance with the ever-shifting landscape of California labor laws?
California Payroll provides payroll and benefits administration solutions that can be tailored to reflect the unique demands of your business’s policies and customized to focus on compliance with state laws across the US, especially in California, which has some of the most complex labor laws in the country. Speak to a specialist today to find out what our solutions can do for your business.
What is the effective date of Senate Bill 951?
Senate Bill 951 will take effect on January 1, 2024.
What changes does Senate Bill 951 introduce to California's State Disability Insurance (SDI) withholding?
SB 951 increases the SDI withholding rate from 0.9% to 1.1% of taxable wages. It also eliminates the previous cap on taxable wages, meaning higher-income individuals will now be subject to SDI withholding as well.
How will these changes affect small businesses and sole proprietors?
Small businesses and sole proprietors may see an increase in their tax burdens, especially if their earnings exceed the previous taxable maximum. This may result in lower take-home pay and potential financial implications for business expansion or investment decisions.
What steps should businesses take to ensure compliance with the changing tax withholdings in California?
Businesses should update their payroll and benefits administration systems to reflect the revised contribution rates and benefit amounts. It is essential to keep up to date with changing state laws and ensure your HR, payroll, and benefits administration solutions can adapt to comply with California’s complex labor laws.