California state disability income is taxed as ordinary income by the federal government, but not by California

California State Disability Insurance (SDI) payments are not taxed by California, but the federal government treats them as taxable income. This means you will owe federal income tax on what you receive, even though California itself does not tax it. The IRS considers SDI a form of income replacement, similar to unemployment benefits, and includes it in your gross income for the year.

When you file your federal tax return, you must report the full amount of SDI you received. The state will send you a Form 1099-G in January showing how much was paid to you during the previous year. You use this form to report the income to the IRS on your federal return.

Key Takeaways

  • California does not tax SDI payments, but the federal government does include them in your taxable income.
  • You will receive a Form 1099-G from the state showing your total SDI payments for the year.
  • Report the full amount from your 1099-G on your federal tax return as income.
  • Depending on your total income and filing status, you may owe federal tax on the SDI or may be able to claim it as a deduction.
  • If you also received unemployment benefits, both are taxable federally, though you can elect to have taxes withheld from either payment.

How the federal tax treatment works

The IRS taxes SDI the same way it taxes unemployment insurance benefits. When you receive SDI, it counts toward your gross income for the tax year. Your total income—including SDI, wages, interest, and other sources—determines whether you owe federal tax and how much.

If SDI is your only income for the year and the amount is below the standard deduction for your filing status, you may not owe any federal tax. For example, if you are single and received $13,850 or less in SDI in 2024, you would not be required to file a federal return (though you might want to if you had taxes withheld, to claim a refund). If your total income exceeds the standard deduction, you will owe tax on the amount above it.

You can choose to have federal income tax withheld from your SDI payments while you receive them. This is optional but can help you avoid owing a large amount when you file your return. To set up withholding, you complete Form W-4V and submit it to the California Employment Development Department (EDD).

What form you will receive and when

In January of each year, the EDD mails you a Form 1099-G showing the total SDI you received during the previous calendar year. This form has five boxes; Box 1 shows your total SDI payments. You use this amount when you file your federal tax return.

If you did not receive a 1099-G by early February, contact the EDD directly. You can request a copy through their website or by phone. Do not file your federal return without this form—the IRS will also receive a copy, and your return must match.

Keep your 1099-G with your tax records. You do not mail it with your return, but you need it to support the income figure you report.

Whether you can deduct SDI on your federal return

You cannot deduct SDI as a business expense or claim it as a loss. However, if your total income (including SDI) is low enough, you may not owe any tax at all because the standard deduction covers it.

Some people confuse SDI with workers' compensation. Workers' compensation benefits are not taxable by the federal government, so you do not report them on your return. SDI is different—it is a wage-replacement program, not an injury settlement, so it is taxed.

If you are self-employed or have other business income, SDI does not reduce your self-employment tax. You still owe self-employment tax on your net business income separately.

Withholding taxes from your SDI payments

You can ask the EDD to withhold federal income tax from your SDI checks before you receive them. This is voluntary, but many people choose it to avoid a large tax bill in April.

To set up withholding, complete Form W-4V (Voluntary Withholding Request) and mail or submit it to the EDD. You can choose to have 10%, 12%, 22%, or 24% of your payment withheld, or you can specify a flat dollar amount per payment. The withheld amount is credited toward your federal tax liability for the year.

If you change your mind, you can submit a new Form W-4V to stop withholding or change the amount. Changes usually take effect within two pay periods.

If you also received unemployment benefits

If you received both SDI and unemployment insurance (UI) in the same year, both amounts are taxable federally. The EDD will send you separate 1099-G forms or one form showing both amounts in different boxes. Report both on your federal return.

You can elect to have federal tax withheld from either SDI, UI, or both. This is done separately for each program using Form W-4V. If you did not have taxes withheld and your combined income is high enough, you may owe tax on both amounts.

State tax considerations in California

California does not have a separate state income tax on SDI. However, California does have a state income tax on other types of income. If you had wages or other income during the year in addition to SDI, you may owe California state tax on that other income.

SDI itself is excluded from California taxable income. This is one of the few breaks California offers—while the federal government taxes it, the state does not. When you file your California return, you do not report SDI as income.

Frequently Asked Questions

Do I have to file a federal tax return if I only received SDI?

Only if your SDI income exceeds the standard deduction for your filing status. For 2024, the standard deduction is $13,850 for single filers and $27,700 for married filing jointly. If your SDI was below that, you are not required to file, but you should if you had taxes withheld—you may be due a refund.

What if I did not receive a 1099-G?

Contact the EDD by phone or through their website to request a copy. You can also check your EDD account online to see your payment history. Do not file your federal return without confirming the amount—the IRS will have a copy and will match it to your return.

Can I claim SDI as a deduction to lower my taxable income?

No. SDI is reported as income, not as a deduction. However, if your total income is low enough that it falls below the standard deduction, you will not owe any federal tax on it.

Is SDI taxed differently than unemployment benefits?

No. Both SDI and unemployment benefits are treated the same way by the IRS—both are taxable income and both are reported on a 1099-G. You can elect to have federal tax withheld from either one.

What if I disagree with the amount on my 1099-G?

Contact the EDD when ready to report the error. Provide your claim number and the dates of the payments you believe are incorrect. The EDD will investigate and issue a corrected 1099-G if needed. Keep records of all your SDI payments to support your claim.