Uncapped SDI Tax, for High-Income Wage Earners
Changes to the State Disability Insurance (SDI) payroll deduction in California have also made an impact in 2024. The SDI taxable wage ceiling and maximum employee contribution were removed from the taxable wage ceiling with the enactment of Senate Bill 951. Because of this, high-income W-2 employees will keep paying SDI on covered wages even if they surpass an annual earnings limit.
The SDI withholding percentage for 2026 is 1.3%, and California does not have an SDI taxable wage limit. Look for experts (like a tax attorney for IRS problems) and manage your pending taxes.
The Uncapped SDI Tax is a Progressive Tax
SDI is taken from payroll for covered employees and contributes to California’s Disability Insurance and Paid Family Leave programs. Since there is no longer a wage cap, higher wages can result in much greater yearly deductions.
The example cost to an employee claiming $200,000 in covered wages is around $2,600 at the 2026 rate. A person who earns $500,000 a year would have roughly $6,500 deducted from their wages.
The simple math equation is:
SDI withholding: Covered wages x 1.3%
Actual withholding may vary based on whether or not certain payments are considered subject wages.
Tech Workers Need to Pay Attention
It’s commonplace for tech jobholders to be paid above base pay. Total wages for the year can be boosted with bonuses, commissions, and taxable equity compensation.
If the employee earns $150,000 plus a significant bonus or taxable stock compensation, then the withholding on SDI will continue with the additional amounts. According to California’s EDD, at this time, all wages are subject to SDI, but there are some types of employment and payment methods that may be exempt.
Payroll monitoring is especially crucial for employees who are paid through commissions.
How to Audit Your Paystubs?
High-income employees should review their payroll records periodically rather than when they get their W-2.
Check:
- SDI rate: Verify that the 2026 rate is 1.3%.
- Calculate SDI wages: Make sure to compare the taxable SDI wages with the total amount of your covered wages.
- Year-to-date withholding: Ensure that withholding is made as it should be throughout the year.
- Bonus payments: Discuss how SDI was determined with additional compensation.
- Equity compensation: Review payroll treatment if RSUs or other awards that are taxable are included in wages.
- Multiple employers: Reconcile each employer’s payroll records individually.
Using an average SDI of 1.3% over the course of the year, without taking into account a wage ceiling, California’s EDD offers examples of such calculations. Hiring an expert (similar to a tax attorney in Pasadena CA) will help.
Practical Tips to Be Useful
Some practices will make it easier to catch payroll errors:
- Keep all pay stubs, especially if they include pay bonuses or vested equity.
- Analyze year-to-date data following significant compensation events.
- Compare your final pay stub with Form W-2 when preparing your tax return.
- Don’t assume that if there’s something unusual in the payroll, it’s wrong; ask payroll about it.
- Be aware of covered wages, as not all forms of wages will be treated the same.
- Adjust cash flow since the annual SDI contribution limit has been removed for high earners.
Typically, employees are not able to voluntarily exclude required withholding from covered wages for SDI. The focus of the practical is making sure payroll calculations are correct.
California’s uncap SDI system can substantially impact the payroll deductions of higher-income W-2 workers. The 1.3% rate will apply in 2026 with no wage limit, making paystub reviews even more important for employees who earn high wages, bonuses, and equity compensation.
By knowing the new rules and keeping up to date on payroll records, employees can better spot any possible withholding discrepancies and be better prepared for withholding deductions on their annual paychecks.
