Yes, you may owe federal income tax on SDI and PFL payments, but California does not tax them
California State Disability Insurance (SDI) and Paid Family Leave (PFL) benefits are not subject to California state income tax. However, the federal government treats them as taxable income, which means you may owe federal income tax on what you receive. Whether you actually pay depends on your total income for the year and your filing status.
The IRS considers SDI and PFL payments to be wages, not gifts or information. This matters because it affects how much you owe in federal tax and whether you need to file a return at all. Many people receive these benefits without realizing they will owe taxes, so understanding the rules now can help you avoid a surprise bill later.
Key Takeaways
- California does not tax SDI or PFL benefits, but the federal government does treat them as taxable income.
- You may owe federal income tax on your benefits depending on your total income and filing status for the year.
- The state sends you a 1099-G form in January showing how much you received, which you report to the IRS.
- You can ask the state to withhold federal taxes from your benefit payments so you do not owe a lump sum at tax time.
- If your only income is SDI or PFL, you may still need to file a federal return to report the benefits.
How federal tax on disability benefits works
The IRS taxes SDI and PFL the same way it taxes wages from a job. If you earned other income during the year—from work, self-employment, investments, or other sources—your total income determines your tax bracket and how much you owe. If SDI or PFL is your only income, you still may owe tax if the amount exceeds the standard deduction for your filing status.
For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. If your SDI or PFL benefits alone exceed these amounts, you will owe federal income tax. If you have other income on top of the benefits, the threshold is lower.
The state does not automatically withhold federal taxes from your SDI or PFL payments. This is different from a regular paycheck, where your employer withholds taxes before you receive the money. Because of this, many people end up owing taxes they did not expect.
The 1099-G form and reporting your benefits
In January of the year after you receive benefits, the California Employment Development Department (EDD) mails you a 1099-G form. This form shows the total amount of SDI or PFL you received during the previous year. You use this form to report the income to the IRS when you file your federal tax return.
You will receive the 1099-G even if you did not owe taxes or did not work. Keep this form with your tax records. If you file electronically, you will need the information from the 1099-G to complete your return accurately. If the EDD sends you a corrected 1099-G (called a 1099-G with a corrected indicator), use the corrected version instead of the original.
If you do not receive a 1099-G by early February, contact the EDD directly. You can request a copy online through your EDD account or by calling their customer service line. Do not file your federal return without this form if you received SDI or PFL during the year.
Choosing to have taxes withheld from your payments
You can ask the EDD to withhold federal income tax from your SDI or PFL payments before you receive them. This works like tax withholding from a paycheck—the state takes out a percentage and sends it to the IRS on your behalf. At tax time, you will owe less or nothing, depending on how much was withheld.
To request withholding, you fill out Form DE 888 (Withholding Election) and submit it to the EDD. You can choose a flat dollar amount to withhold from each payment, or you can request that a percentage be withheld. Many people choose 10% or 20% to cover their expected tax bill.
Withholding is optional, but it can save you from owing a large amount in April. If you are unsure how much to withhold, consider speaking with a tax professional or using the IRS withholding calculator on irs.gov. You can change your withholding election at any time by submitting a new Form DE 888.
What happens if you do not pay the tax you owe
If you owe federal income tax on your SDI or PFL benefits and do not pay it by the April important date, the IRS will charge you interest and penalties. The longer you wait, the more you owe. If the IRS cannot collect the debt, they may garnish future wages, seize tax refunds, or take other collection action.
If you cannot pay the full amount by April, you have options. You can file your return on time and pay what you can, then set up a payment plan with the IRS for the remainder. You can also request an extension to file your return, though this does not extend the time to pay without penalties.
The best approach is to plan ahead. If you know you will owe taxes, either request withholding from your benefits or set aside money each month so you have it ready when taxes are due.
Combining SDI or PFL with other income
If you receive SDI or PFL and also have income from work, self-employment, or investments, your total income determines your tax liability. The benefits are added to your other income, which may push you into a higher tax bracket or require you to pay additional taxes.
For example, if you work part-time and earn $20,000 while receiving $15,000 in SDI, your total taxable income is $35,000. You will owe federal tax on the full $35,000, not just the work income. This is why it is important to consider all sources of income when estimating what you will owe.
If you are self-employed and receiving SDI or PFL, you also owe self-employment tax on your business income. The benefits themselves do not count toward self-employment tax, but your business income does. Make sure you understand both your income tax and self-employment tax obligations.
State tax considerations and other states
California is one of a few states that does not tax SDI or PFL benefits. If you live in another state or moved during the year you received benefits, the rules may be different. Some states tax disability benefits, while others do not. Check with your state's tax authority if you are unsure.
If you received benefits while living in California but moved to another state before filing your taxes, you may still owe California tax on the portion of benefits you received while a resident. You may also owe tax to your new state. This situation is complex, and it is worth consulting a tax professional to understand your obligations in both states.
Frequently Asked Questions
Do I have to file a federal tax return if SDI is my only income?
It depends on the amount. If your SDI benefits are less than the standard deduction for your filing status ($14,600 for single filers in 2024), you do not have to file. However, if you had taxes withheld, you should file to get a refund. If your benefits exceed the standard deduction, you must file.
Can I deduct SDI or PFL payments from my taxes?
No. SDI and PFL are treated as income, not as deductible expenses. You cannot reduce your taxable income by claiming the benefits as a deduction. However, you may be able to claim other deductions or credits that lower your overall tax bill.
What if I disagree with the amount on my 1099-G?
Contact the EDD when ready and explain the discrepancy. The EDD can investigate and issue a corrected 1099-G if an error was made. Keep records of your benefit payments so you can compare them to the form. Do not file your tax return until the issue is resolved.
Will receiving SDI or PFL affect my may be able to access for other benefits?
SDI and PFL may count as income for means-tested programs like Medicaid, CalFresh, or housing information. The rules vary by program. Contact the program directly to ask how benefits are counted. Withholding taxes from your SDI or PFL does not change the gross income amount that programs see.
Can I request withholding retroactively for payments I already received?
No. Withholding only applies to future payments. If you received benefits without withholding and now owe taxes, you will need to pay the tax bill when you file your return. You can request withholding for any remaining benefit payments you have not yet received.