The California Disability Income, also known as the State Disability Insurance (SDI), was formed in 1946 to provide financial assistance to qualified workers facing health-related issues that prevent them from working.
California State Disability Income (SDI) is not taxable at the state level, but it is subject to federal income tax. Workers’ Compensation benefits are tax-exempt both federally and in California. Social Security Disability Insurance (SSDI) may be federally taxed if total income exceeds a certain threshold, while private disability insurance benefits are typically tax-free unless employer-paid.
What Is California Disability Income?
It’s a financial support program designed to help Californian workers who cannot work due to injury, illness, pregnancy-related conditions, or any other temporary disability.
A portion of the lost wages is provided to eligible workers during times of incapacity to help them survive financially during difficult times.
Types of Disability Income in California
Given the different types of disabilities and employment situations, various financial support programs are designed to provide financial aid to qualifying workers in California. Here are the main ones:
1. State Disability Insurance (SDI)
This state-run financial program provides partial wages to eligible workers for up to 52 weeks. To be eligible for SDI benefits, an employee must meet the following requirements:
- Must be actively working or seeking employment at the time of disability.
- Must have contributed to the SDI program through payroll deductions.
- Must have earned a certain amount of wage for a specified period.
- Must be willing to provide all the necessary medical documents to prove disability.
The eligible employee will receive a percentage of the quarterly income earned during a certain base period. Depending on one’s income level, the percentage is usually around 60 to 70% of the earnings.
2. Paid Family Leave (PFL)
PFL is a unique financial program that provides partial wages to eligible workers who are compelled to take time off from work due to unavoidable life situations, such as taking care of seriously ill family members, foster care, grave health conditions, and other critical things along the same lines. For eligibility, one must meet the following criteria:
- Must have paid towards the SDI program.
- Must be actively working or looking for a job.
- Must be experiencing loss of wages.
- Must provide necessary medical documentation.
Eligible workers are compensated for up to 8 weeks, which can be taken consequently or in separate blocks of time over 12 months.
3. Workers’ Compensation
The Workers’ Compensation financial program aims to support California workers suffering from work-related illness or injury. Both financial support and medical care are provided to eligible workers. In the event of death, the family members are provided the death claim benefits.
Here are the requirements to be eligible for Workers’ Compensation benefits.
- Must be employed and not be an independent contractor.
- Must have suffered work-related injury or illness.
- Must be willing to undergo medical evaluations as a part of the process.
- The injury or illness must be reported within the specified deadline.
It’s the employer’s responsibility to provide Workers’ Compensation insurance to the employees. Decisions about the eligibility amount and period are based on the claim investigation.
4. Social Security Disability Insurance (SSDI)
This disability insurance is designed for individuals whose disability is expected to last for at least one year. Death occurrence is also covered. Eligible disabled workers can file an insurance claim both online and offline. A person is expected to provide detailed personal, medical, and employment-related information at the time of application.
The benefit amount is determined by the earning history and the Social Security credits gathered at the time of claim application. The higher the contribution towards Social Security credits, the higher will be the benefit amount. However, the typical waiting period to receive SSDI benefits is around five months.
5. Private Disability Insurance
Unlike other disability claims discussed earlier, the Private Disability Insurance is not government-supported. Private Disability Insurance is purchased by individuals directly from private insurance companies to protect their income during times of disability.
Since the policy is purchased directly from the insurance company, individuals can choose coverage with terms based on their income level, preference, occupation, and financial goals. For coverage eligibility, the insurance company will ask the applicant to undergo a medical procedure to assess the person’s health.
Is California Disability Income Taxable?
The California State Income tax doesn’t impose taxes on California State disability income (SDI). However, SDI benefits are taxable for Federal income tax purposes.
1. Taxation of State Disability Insurance (SDI) and Paid Family Leave (PFL)
At the state level, there won’t be any income tax levied on these benefits. You must still report these benefits for your federal income tax return. The SDI and PFL income will be added to your overall income from other sources, and you will be charged taxes on your combined income based on the current income tax slab.
2. Taxation of Workers’ Compensation
For Worker’s compensation benefits, there are usually no taxes. Both state and federal governments provide tax exemption because imposing taxes would mean returning a part of the financial aid to the government, depriving the worker of crucial financial help when out of work.
3. Taxation of Social Security Disability Insurance (SSDI)
Depending on your total income from other sources, SSDI may be taxable as per the federal tax rules. If your overall income exceeds the income threshold set by the federal government, a portion of the SSDI benefits becomes taxable.
4. Taxation of Private Disability Insurance
The income benefits you receive from private disability insurance are not taxable because the premium is paid from the money that is already taxed. Only when your employer pays for the insurance premium, the private disability insurance benefits will be taxable for you.
How to Report California Disability Income on Your Tax Return
1. Reporting State Disability Insurance (SDI) and Paid Family Leave (PFL)
If you are an employer in California, you need to deduct SDI and PFL contributions from your employees’ paycheck and report these deductions by submitting the payroll tax forms, including DE 9C and DE 9 Forms. If you are an employee, you just need to check that the deductions are being made.
2. Reporting Workers’ Compensation
Since Workers’ Compensation benefits are not taxable in California, you don’t have to worry about reporting them as taxable income. They are also exempted from Federal taxes.
3. Reporting Social Security Disability Insurance (SSDI)
Depending on your overall earnings, a portion of the SSDI benefits will be taxable at the federal level. You should report the SSDI income by submitting appropriate tax forms (usually Form 1040A and Form 1040).
However, there is no need to report SSDI benefits as ‘taxable’ income while filing your California state income tax return.
4. Reporting Private Disability Insurance
If you receive private disability insurance income that is subject to taxes, you will have to report it the same way you treat other taxable income for federal tax purposes.
It must be reported as income on your California state income tax return. You may have to submit Form 540 and 540NR.
Understanding Your Tax Obligations for Disability Income in California
To understand your tax obligations for disability income in California, you must understand how different disability benefits are treated for income tax purposes.
It’s also important to know that the tax laws keep changing. So, it would be helpful to stay updated about the current guidelines regarding taxation.
At the same time, you should maintain proper records of disability-related income and expenses. Proper documentation will be of substantial help at the time of tax filing.
