Running a small business comes with its own challenges and triumphant moments. There’s inventory or services to think about, finding ways to keep the expenses low and profits high, and building a strong team of hardworking individuals. And with having a team comes an essential part of being a business owner: figuring out how to pay them.
Whether you’re running weekly, biweekly, or even monthly payroll, you may have noticed that it isn’t quite as straightforward as hours worked = earnings paid. There are several different taxes and withholdings that employers need to take into account on every employee’s paycheck and, if you live and work in California, CASDI is one of them.
If you’ve never heard of this type of insurance before, we’re here to tell you exactly what this means for you as a business owner, who it impacts, and why it’s important to understand how it could affect your team members.
What Exactly Is CASDI?
CASDI stands for California State Disability Insurance. It’s a type of short-term disability insurance (SDI) that provides employees in the state of California with weekly pay if they’re temporarily unable to work. Paid family leave (PFL) is also part of the program for those who need to take care of a sick family member or a new child.
It’s important to remember that this is different from workers’ compensation insurance, which covers accidents and injuries that happen in the workplace. Disability insurance is there to support individuals with non-work related illnesses or injuries that keep them from being able to perform their normal job duties for a few weeks or months.
Disability benefits can be claimed by California employees for up to one year and are usually around 60 to 70 percent of their average gross income in a quarter, up to a maximum weekly benefit of $1,357. These payouts are tax-free, which means that every penny can be used to pay bills and necessary essentials while the employee takes time off to get back on their feet.
California is one of a handful across the country that require employers (yes, even those who only have one member of staff on payroll) to offer their team this kind of short-term disability insurance. New York, Hawaii, New Jersey, and Rhode Island also have their own disability programs that help their workers claim tax-free benefits while they’re out of work due to a medical condition.
Disability insurance in California is administered by the Employment Development Department (EDD). They determine the maximum benefit amount for an employee when an SDI or PFL claim is made using a calculation known as a base period. The base period is one year that’s divided up into four quarters, with wages earned up to 18 months before the claim was made used to calculate the total amount that the employee can receive.
Determining Base Period
So how do you know when exactly an employee’s base period is? Let’s take a look at an example.
For claims made in January, February or March, your base period would be the 12 months ending on September 30. That means that:
- You make a claim on February 14, 2021.
- Your base period would be October 1, 2019 through September 30, 2020.
- You must have made at least $300 between those dates to be eligible for disability insurance.
- The EDD will look at what your highest quarterly earnings were between October 1, 2019 and September 30, 2020 to determine how much you receive in benefits.
- Between $929 and $6,803.34 per quarter, your weekly benefit amount will be approximately 70 percent of your earnings.
- If you made more than $6,803.34 in your highest quarter, you’ll receive approximately 60 percent of your earnings each week.
For April, May, or June claims, the base period would be the 12 months ending on December 31. July, August, and September claims would end on March 31, and October, November, and December claims would be the 12 months ending on June 30.
The EDD has an estimate calculator that you can use to see what your likely weekly benefit amount will be.
Who Is Responsible for CASDI Payments?
As an employer, you don’t need to worry about paying anything towards the state disability program. Everything is funded via payroll taxes that all employees in California contribute to.
These state income taxes are withheld from each paycheck and are held in a fund, ready for eligible workers to pull from when needed. Your employees should see a line item in the deductions section on their pay stub listed as CA SDI E—this is the amount that they, the employee, are contributing from that individual paycheck to the SDI program. This will be listed alongside other standard deductions like Social Security, Medicare, and income taxes.
When they receive their annual W2 form, they should confirm that the dollar amount in Box 14 matches the withholdings that they’ve had throughout the previous 12 months. This can then be claimed as an itemized deduction on state and local taxes.
What Is the Current Contribution Rate?
Employee contributions for 2022 are set at a withholding rate of 1.1 percent, up to a wage limit of $145,600 for each employee per calendar year. The most that an employer can withhold per employee is $1,601.60.
This is a change from 2021, where there was a withholding rate of 1.2 percent, up to a maximum of $1,539.58 per employee. This was bumped from 1 percent in 2020 as a result of the COVID-19 pandemic, with more benefits being paid in both 2020 and 2021 and lower anticipated contributions from taxable wages due to layoffs and furloughs.
As the economy began to stabilize and recover throughout 2021, the decision was made to lower the withholding rate again for 2022.
What Do Employers Need to Know?
While your business may not be responsible for actually paying for CASDI (because again, it’s a payroll tax that comes out of your employees’ paychecks) ensuring that your team members are having the right amount withheld is very important.
Using payroll software like Hourly helps you keep track of these automatically, but having a good understanding of what these taxes are for is still helpful. The benefits aren’t taxable, so there’s no need to report these to the IRS. But you’re still responsible for informing your employees about these deductions before anyone receives their first paycheck from you.
Most of the information that employees need to know is usually shared when you have new hires and your HR team is going through their first day paperwork. Notices to employees are all legally required to be given out to new team members ahead of their first shift or displayed as posters in common staff areas. These must include:
- Notice to Employees: Unemployment Insurance, Disability Insurance, and Paid Family Leave (DE 1847A): This poster outlines the rights that your employees have to claim benefits. For any employees not covered by unemployment insurance, posted DE 1858 Notice to Employees must be displayed.
- Disability Insurance Provisions (DE 2515): This brochure must be given to new hires and anyone who requests time off for non-work related medical conditions.
- Paid Family Leave Benefits (DE 2511): Anyone who asks for time off to care for a new child or sick relative must be given this brochure.
If your employees do make a claim, you’ll need to file the following response notices:
- Notice to Employer of Disability Insurance Claim Filed (DE 2503): Once the employee has filed a claim, you’ll receive this notice and must complete your portion of the form within two working days via the online portal or paper form.
- Notice of Paid Family Leave (PFL) Claim Filed (DE 2503F): If a PFL claim has been filed, you’ll need to complete and return the form to the EDD within two working days.
Additionally, your HR team should be notifying your employees in California about their rights and benefits when they’re preparing to go out on leave.
All of these notices and forms can be downloaded from the EDD’s Publications and Online Forms page.
Who Is Eligible to Receive CASDI Funds?
There are several different rules about who is eligible to receive funds from the program and who isn’t. For example, government workers, some domestic workers, and those who are employed by nonprofit organizations are generally not eligible.
If an employee is already receiving unemployment benefits, paid family leave, or workers’ compensation benefits, this could also stop them from receiving CASDI funds, since they’re already receiving payouts from another government support program. They will also be disqualified if they miss a medical appointment scheduled by the EDD to confirm their disability or if the illness or injury was the result of a felony.
But for the most part, if an employee has received more than $300 in wages during their base period, they will be able to claim SDI benefits. Immigration or citizenship status does not impact eligibility for benefits and most illnesses and injuries are covered by the insurance program.
Pregnancy is considered to be a short-term condition in California, so eligible workers will be supported for up to four weeks before their due date and six to eight weeks after the birth. They’re then eligible for PFL directly after those six to eight weeks for up to eight weeks at the same rate. However, it’s important for your employees to know that CASDI and PFL only offer monetary benefits and no job protection assurances like the federal Family and Medical Leave Act (FMLA), California Family Rights Act (CFRA), or Pregnancy Disability Leave (PDL) do.
Disability claims can be made once an individual:
- Has been unable to perform their regular job duties for more than eight consecutive days
- Has earned at least $300 in wages with CASDI deductions withheld
- Is currently employed or actively looking for work
- Is under the care of a licensed physician (the EDD will require medical paperwork for confirmation via the SDI online portal)
What about Independent Contractors?
If your business works with freelancers and other self-employed individuals, you probably already know that they’re noted as independent contractors when it comes to tax time. You simply pay their invoices and leave it to them to sort out their own taxes.
The same is true when it comes to deductions. Since you’re not withholding any taxes from them, you don’t need to offer short term disability as an employer.
But where does that leave freelancers? With around 10 percent of California’s working population employed independently, the government offers an optional elective coverage plan known as DIEC. This ensures that individuals who aren’t paying into the main SDI program through traditional employment can still be covered.
Can a Business Opt Out Of CASDI?
For most businesses in California, CASDI is a simple enough plan to stick with. But while it is mandatory for employers to offer their workers some form of short-term disability insurance, the official state option isn’t the only one.
Business owners can choose to opt out by providing Voluntary Plan Disability Insurance (VPDI) instead. Voluntary plans must provide the same benefits to employees that SDI does, without costing them any more in deductions. But in order to be approved by the EDD, employers must also offer at least one benefit that’s better than SDI when choosing to go with a voluntary plan.
So why choose a VPDI instead? The biggest benefit to both you and your employees is that you have the potential to offer better coverage at the same cost as SDI. If your team has a low claim rate, you have several choices for how to use the additional savings and contributions that are being made.
They can either help to lower overall employee contribution costs (which means more money in their pockets) or boost the quality of the plan to a higher tier. Essentially, a VPDI puts control into your hands as a business owner, to determine the best course of action for your staff.
One important point to note is that employees can choose on an individual level if they’d prefer to opt into the state program over VPDI. They’ll need to fill out a rejection of VPDI form so that you have this on file and can ensure that their SDI deductions are being made instead.
Some voluntary plans also only cover employees after they’ve worked with you for a specific length of time. SDI will cover them until the VPDI kicks in, but you must make sure that this is being accounted for on their paychecks.
Feel More Confident with Payroll
There’s a lot of paperwork to deal with and numbers to keep on top of as a business owner. Even if you don’t need to report state disability insurance figures to anyone, you still need to know that you’re checking all the right boxes.
Tools like Hourly can give you back the time you need to focus on growing your business and keeping your operations running smoothly. With a simplified payroll system that manages all of the deductions for you, you can get back to doing what you do best.