Who Is Exempt From California SDI Tax?

California’s State Disability Insurance (SDI) is funded by employees through mandatory payroll deductions. This system provides partial wage replacement benefits to eligible workers who are unable to perform their job duties due to a non-work-related illness, injury, pregnancy, or childbirth. The SDI program also funds Paid Family Leave (PFL), which offers benefits for individuals to bond with a new child, care for a seriously ill family member, or handle a qualifying event arising from a family member’s military deployment. For most California workers, contributing to SDI is not optional, as the deduction is automatically taken from their paychecks.

Exempt Categories of Employment

The California Unemployment Insurance Code specifies several categories of employment that are exempt from this payroll deduction, based on the nature of the employment relationship or the employer. For exemptions that must be elected, such as for certain business owners or religious reasons, approval means the individual does not contribute to SDI and is therefore not eligible to receive any SDI or PFL benefits.

Government Employees

One of the largest groups exempt from SDI are government employees. This includes most federal, state, and local government workers. Federal employees are covered under their own systems and are excluded from state-level programs like SDI. Many state and local government employees, including those in public school districts, may be covered by separate non-industrial disability insurance programs instead of SDI, though some public agencies can elect to have their employees covered.

Family Employment

Another exemption applies to certain family employment situations. This includes services provided by a child under the age of 18 in the employ of their parent, an individual employed by their spouse or registered domestic partner, and a parent employed by their son or daughter. This family exemption does not apply if the employing entity is a corporation, even if family members own all the stock.

Business Owners

An individual who is the sole shareholder of a corporation and also serves as a corporate officer can elect to be excluded from SDI coverage. This exemption is also available if the only other shareholder is their spouse, who is also a corporate officer. This exclusion is not automatic and must be requested by filing a specific form with the Employment Development Department (EDD).

Domestic Workers

Domestic workers, such as housekeepers or in-home caregivers, may also be exempt depending on their earnings. An employer is not required to withhold SDI for a domestic employee until they pay that individual at least $750 in cash wages within a single calendar quarter. Once this threshold is met, the employer must begin withholding SDI for that quarter and continue to do so for the remainder of the current calendar year and through the following calendar year.

Religious Exemption

An employee who is a member of a recognized religious sect whose beliefs require them to rely on prayer for healing can request an exemption from SDI taxes. To qualify, the individual must file a Religious Exemption Certificate with the Employment Development Department (EDD).

Miscellaneous Exemptions

Other miscellaneous employment categories are also exempt from SDI. These include employees of foreign governments, employees of interstate railroads, and certain employees of non-profit organizations. Additionally, services performed by election officials and campaign workers are exempt from SDI withholding. Casual labor is also exempt if the employee is paid less than $50 in cash and works on fewer than 24 days in a quarter.

Self-Employed Individuals and Independent Contractors

Individuals who are self-employed or work as independent contractors are not classified as “employees” under the California Unemployment Insurance Code. This distinction means they are automatically exempt from the mandatory SDI payroll tax because there is no employer to make the deduction, and their earnings are not subject to SDI withholding.

This default exemption leaves a coverage gap, so the state established the Disability Insurance Elective Coverage (DIEC) program. The DIEC is a voluntary program administered by the Employment Development Department (EDD). It allows self-employed individuals, independent contractors, and business owners to pay premiums and gain access to Disability Insurance (DI) and Paid Family Leave (PFL) benefits.

To be eligible for DIEC, an individual must derive the major portion of their income from their business and have a minimum net income of $4,600 annually. The program is not available to corporate officers or limited partners, as they are considered employees. Enrollment in DIEC is not automatic and requires submitting an Application for Disability Insurance Elective Coverage to the EDD.

Once enrolled, participants pay premiums based on their net profit from the previous year. The premium rate is re-evaluated annually. Participants must remain in the program for a minimum of two complete calendar years unless they cease their business operations or move out of California. This elective coverage provides a valuable safety net for entrepreneurs and contractors.

Voluntary Plans as an Alternative to SDI

Another way for employees to be exempt from paying the state-mandated SDI tax is through coverage under an employer-sponsored Voluntary Plan (VP). A VP is a private disability insurance plan that an employer can offer to its California employees as a legal substitute for the state’s program. If an employee is covered by an approved VP, they will see deductions for the private plan on their paystub instead of the standard “CASDI” deduction.

For a VP to be a valid alternative, it must be approved by the California Employment Development Department (EDD) and meet strict requirements. The VP cannot cost the employee more than they would have paid into the state plan. The benefits provided must be equal to what SDI offers in all respects and also provide at least one benefit that is more generous, such as a higher weekly payout or a shorter waiting period.

The establishment of a VP requires the written consent of a majority of the employees who will be covered by it. Even when an employer offers an approved VP, individual employees retain the right to reject it and choose to remain covered by the state’s SDI program. The employer must offer the VP to all eligible California employees and provide them with a written document detailing their benefits.

Being part of a VP means disability and paid family leave benefits are administered by a private insurance carrier or a self-insured employer trust fund, rather than the EDD. The employer is responsible for holding employee contributions in a separate trust to pay claims. This arrangement provides an exemption from the state tax deduction because the employee and employer are fulfilling their obligations through a private, state-sanctioned alternative.