California Subjects All Income to Unemployment Insurance Tax

Gov. Gavin Newsom signed into law legislation that removes limits to the income that is subject to the state’s tax to fund unemployment insurance. California funds its state disability insurance program with a payroll tax of 1.1 percent on the first $145,600 in wage income. SB 951, signed into law on September 30, 2022, removes the income limit effective January 1, 2024 to make all wages subject to the contribution rate. The extension of the payroll tax to all wages a significant departure from the federal practice of capping the income subject to Social Security taxes.

The bill has two other components:

• The bill extends the existing wage replacement rates for the State Disability (SDI) and Paid Family Leave (PFL) programs. The current wage replacement of 60-70% was scheduled to expire January 1, 2023 but will now expire January 1, 2025.

• The bill also revises the formulas for determining benefits under both programs to provide an increased wage replacement rate ranging from 70-90% based on the individual’s wages earned, as specified. This take effect on or after January 1, 2025.

The current tax rate of 1.1% is subject to annual adjustment based on program need and is authorized to increase to a maximum of 1.5 percent. With the elimination of the cap, California’s top marginal rate on wage income increases from 13.3% to 14.4%.

The extension of the payroll tax to all wages a significant departure from the federal practice of capping the income subject to Social Security taxes.