Uncapped SDI Tax in California, Techniques You Must Learn
One of the biggest payroll tax changes for California high-income employees you should be aware of is that the State Disability Insurance (SDI) withholding has no taxable wage cap. The SDI wage cap has been eliminated in California as of January 1, 2024. In 2026, the SDI withholding rate will be 1.3% of the covered wages amount, and there will be no maximum taxable wage limit.
This translates to a much larger SDI deduction for employees who make significant incomes, especially those in the tech industry with high bonus, commission, or equity compensation packages. Get a tax professional (like an IRS tax attorney) for guidance.
How the Uncapped SDI Tax Works?
Prior to 2024, employees would cease to contribute to SDI once they exceeded the annual taxable wage cap. Now, covered wages continue to be subject to SDI, year-round.
If all wages are subject to SDI, and an employee received $300,000 in covered wages during 2026, the employee would be $3,900 short of the SDI withheld at 1.3%. If someone is making $500,000 a year, then about $6,500 might get deducted from their pay.
There’s a simple equation:
The SDI withholding is covered wages times 1.3 percent.
This amount may differ according to the nature of the compensation and payroll situations.
Why Tech Workers Should Pay Attention?
Compensation for high-income technology workers may include compensation in addition to salary. Other taxable wages, such as bonuses, commissions, stock-related compensation, etc., may add to SDI.
The amount of SDI a $180,000 worker may have withheld during the year may therefore be different than the amount of SDI a $180,000-plus worker with a large year-end bonus may withhold.
The shift is particularly significant for workers who had thought that the SDI deduction would end once a certain annual cap was reached.
How to Audit Your Paystub?
A payroll audit can also be used to look for payroll mistakes before it’s too late.
Check these items:
- SDI rate: Make sure the rate applied is 1.3% for 2026.
- Taxable wages: Ensure that the SDI is calculated on covered wages, and not on a “wage ceiling” that has been outdated.
- Bonus Payments: See if any supplemental payment is entered properly.
- Equity compensation: Examine payroll treatment of the receipt of RSUs or other equity awards.
- YTD totals: Match up withholding totals for SDI with covered wages.
- Changes of employers: If you had a change of jobs during the year, review each employer’s payroll records on their own.
According to California’s EDD, SDI is not included in the wages paid to the employee, and it does not have a taxable wage limit. Look for an expert (similar to a tax audit lawyer in San Diego) who can understand your problem and find solutions.
The Following Are Some of The Steps High Earners Should Take
In general, there is no way for any employee to choose not to have mandatory SDI withheld from their wages. Rather, the emphasis should be on correct payroll reporting and general tax planning.
Consider these steps:
- Take a look at each paycheck, particularly if bonuses or equity vesting.
- Retain W-2s and pay stubs for tax reconciliation.
- Don’t assume that an increase in withholding is a mistake; ask them. Don’t assume that if a withholding has been changed in an unusual way, this is a mistake; ask payroll.
- Estimate cash flow for the year if there are multiple compensation sources.
- If your W-2, paystubs or SDI withholding do not seem consistent, consult a tax professional.
High-income workers in California will no longer be protected from SDI withholding after reaching a certain income limit. Kids get paid at 1.3% in 2026, and the rate doesn’t have an upper limit on wages, which is why it’s important to carefully audit paychecks to make sure the right amount is withheld.
If you have a significant salary, bonus, or equity payout, then knowing how this payroll adjustment works is a critical aspect of your annual cash flow and helps you avoid being surprised by it.
