State disability insurance: A guide for US employers

State disability insurance (SDI) ensures that your employees have backup income if injury or illness strikes, enabling them to recover fully. This type of insurance leads to happier, healthier, more productive staff, who feel supported through life's curveballs.

But not every state requires you to contribute to SDI. In this article, we’ll look at which US states do, and how you can compliantly offer your employees competitive benefits — wherever they’re based. We’ll also explain how to contribute to SDI, and the pros and cons of doing so.

So let’s jump straight in.

What is SDI? 

SDI is a partial wage replacement insurance program, currently available in five US states. It is for people who need to take time off work due to a non-work-related illness or injury, as well as other specified health conditions.

SDI is funded through employee payroll deductions, known sometimes as the SDI tax. 

What is SDI tax?

In states where SDI is applicable (see below), employers withhold a small percentage from their employees’ paychecks. In some states, this is denoted on the paycheck as temporary disability insurance (TDI) rather than SDI.

This deduction is typically based on an income cap, set annually by the state. For example, California currently sets the SDI rate at 1% of an employee’s gross wages. 

Who is eligible for SDI? 

The key beneficiaries of SDI are employees who aren’t able to work. This can be due to: 

• A physical (or mental) injury, or illness

• Elective surgery

• Pregnancy 

• Childbirth

SDI programs are supported by state legislation (such as the Paid Family Leave (PFL) program in California) to provide wage-replacement benefits for family care situations. Specifically:

• SDI provides coverage for an individual’s own short-term disability due to injury, illness, or pregnancy

• PFL provides coverage to care for a seriously ill family member or bond with a new child

Note that long-term disability (LTD) isn’t part of an SDI program. LTD is a different type of insurance that offers wage replacement for a long period, and can include occupational injuries.

Which states are governed by SDI? 

Currently, SDI programs are run in the following five states:

1. California

2. Hawaii

3. New Jersey

4. New York

5. Rhode Island

Here’s how they work:

California

In California, SDI is funded entirely by employee payroll deductions (usually 1% of wages up to a cap of $84,240). The benefit amount is around 60 to 70% of weekly wages, up to a maximum weekly benefit of $1,620.

SDI provides benefits for up to 52 weeks, depending on the medical issue. The waiting period for employees is seven days, and benefits begin on the eighth day of disability for new claims.

Employers can provide SDI insurance through the state or through a private company (also known as a voluntary plan).

Hawaii

In Hawaii, SDI is known as temporary disability insurance (TDI). It’s funded by employee payroll deductions at a rate of 0.5%, up to a maximum taxable amount of $1374.78 per week. The benefit amount is 58% of weekly wages, up to a weekly maximum of $798. Benefits begin on the eighth day of disability and are available for up to 26 weeks.  

Employers can provide TDI in one of three ways: 

1. By purchasing insurance (insured plan) from an authorized insurance provider 

2. By offering a self-insured plan that the Division approves (here, the employer must present evidence of financial solvency)

3. By opting for a collective bargaining agreement that has sick leave benefits as required by ‌state law

New Jersey

New Jersey’s SDI is also known as TDI, and is both employee- and employer-funded. The benefit is available at a variable rate of 0.10% to 0.75% on a taxable wage base of $42,300. The benefit amount is 85% of the employee’s average weekly wage, up to a maximum of $1,055.  

Employers can opt for a public or private insurance program to provide benefits (as long as the program aligns with the requirements of TDI). TDI is mandated for most private sector employers. 

New York

In New York, the SDI rate is 0.5%. The benefit amount is up to 50% of the employee’s average weekly wage, up to a weekly maximum of $170. The benefit is available for up to 26 weeks.  

Employers can provide insurance through a private insurance carrier authorized by the New York State Department of Financial Services, or through a public insurance provider. They can also opt for self-insurance. 

Rhode Island

In Rhode Island, the TDI rate is 1.2% on a taxable wage base of $87,000. 

Another option in Rhode Island is temporary caregiver insurance (TCI), which provides up to six weeks of income support for individuals who require off days to care for a seriously ill child, spouse, domestic partner, parent, parent-in-law, or grandparent. It can also be used for time off to bond with a newborn, an adopted child, or a foster child.

To learn more about which taxes and contributions you need to withhold in each state, check out our US State Explorer tool.

Benefits of SDI for employers 

While SDI provides a safety net for employees, offering coverage can also be advantageous for employers.

Benefits include:

• Employee retention. Employees who need time off due to illness, injury, or childbirth get income stability. This makes them more likely to return to work after they recover.

• Peace of mind. Employers know their staff has an income safety net if they experience health issues requiring leave.

• Productivity. Employers can have peace of mind that, upon recovering, their employees will return healthy and ready to work.

• Tax savings. Usually, SDI is funded by employee payroll deductions rather than employer contributions. However, any premiums you pay are generally tax deductible.

• Compliance. SDI helps you follow state-mandated disability leave and wage replacement requirements.

• Recruitment incentives. Providing SDI and job protection during leave makes hiring easier, as it’s a magnet for new recruits.

Challenges of SDI for employers 

That said, there are potential challenges employers may face when managing SDI, especially if they have a global workforce. These can include:

• Understanding and complying with complex state SDI regulations and eligibility rules 

• Tracking employee SDI deductions and tax payments 

• Fielding questions and managing paperwork from state SDI administrators 

• Monitoring SDI claim status and return-to-work dates 

• Adjusting schedules and workloads around employee disabilities 

• Integrating state disability payments with payroll 

• Ensuring employee confidentiality around medical information

Managing SDI with Remote

Remote can handle all of this for you.

If you have employees in one of the above five states, our Payroll platform automatically ensures that you’re withholding the correct SDI/TDI contributions in line with those states’ laws, even when the rates are updated.

If you hire and/or onboard your people through our employer of record (EOR) platform, you can also handpick and manage all their benefits. This is ideal if you have team members in other states — and even other countries — and want to ensure that you’re treating every single person fairly.

To learn more about how Remote can remove your payroll and HR headaches — and save you money in the process — speak to one of our friendly experts today.

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