💡 How to Reduce the Tax Impact from California’s SDI Wage Base Elimination

Starting in 2024, California eliminated the wage ceiling for the State Disability Insurance (SDI) program — meaning all wages are now subject to SDI tax, regardless of income level.

For 2025, the SDI tax rate is 1.2%, increasing to 1.3% in 2026. While this change provides more funding for disability benefits, it also means high-income earners and business owners will face larger SDI deductions from their paychecks.

At Velin & Associates, Inc., we’ve outlined several ways individuals and businesses can minimize the impact of this change through careful tax planning and compensation structuring.

1️⃣ Option for Corporate Shareholders: Adjusting Compensation Strategy

Corporate shareholders, especially S corporation owners, should consider adjusting the balance between wages and distributions.

For example, a Los Angeles-based dentist CPA client earning $400,000 in W-2 wages will now pay $4,800 in SDI tax at 1.2%. However, if they reduce wages to $200,000 and take the remaining $200,000 as distributions, their SDI liability would be cut in half — assuming their wage still meets the IRS’s reasonable compensation standard.

This strategy must be carefully reviewed because lowering wages could affect the Qualified Business Income (QBI) deduction under Section 199A, which is based on wages paid.

✅ Best for:

• CPA for Doctors and Dentists CPA clients with S corporations
• High Net Worth Individuals with flexible income structures

2️⃣ Sole Shareholders Can Elect Out of SDI

Under California law, corporate officers who are sole shareholders (or the only shareholders aside from their spouse) can opt out of SDI coverage entirely.

For instance, a freelance YouTuber who incorporated their brand and pays themselves a small salary can file an election to exclude themselves from SDI, reducing their tax cost while maintaining compliance.

This election only applies to SDI—not to state or federal unemployment insurance. It’s a valuable option for business owners who prefer to self-insure or already have private disability coverage.

✅ Best for:

• CPA for Creators
• CPA for TikTokers
• CPA for Online Commerce professionals who run single-shareholder corporations

3️⃣ Employers Can Offer a Voluntary Disability Plan

Another effective option for employers is to establish a Voluntary Plan instead of participating in the state’s SDI program.

Under California Employment Development Department (EDD) rules, a voluntary plan must:

• Offer equal or better benefits than state SDI
• Cost employees no more than SDI
• Be approved by a majority of covered employees
• Allow employees to opt out and stay with state SDI coverage

For example, a large dental practice or Shopify-based eCommerce business with many high earners might benefit from offering a voluntary plan. This plan could improve employee satisfaction by offering faster claims processing or higher benefit amounts—while lowering the perception of “take-home pay reduction” from the SDI rate hike.

Although SDI is funded through employee withholdings, offering a better plan can help retain talent without raising wages. Most employers hire third-party administrators to manage these plans.

✅ Best for:

• Dental Business CPA clients with multiple employees
• Amazon Business CPA and Online Commerce CPA clients with large teams

4️⃣ Elective Coverage for Self-Employed Individuals

Self-employed individuals such as doctors, dentists, filmmakers, and freelancers may choose to opt into SDI coverage through the Disability Insurance Elective Coverage (DIEC) program.

To qualify, they must:

• Earn at least $4,600 annually or $1,150 quarterly (for new businesses)
• Have a valid professional license (if required)
• Operate full-time in a non-seasonal business
• Stay enrolled for at least two full calendar years

For instance, a freelance filmmaker or medical practice owner might decide to join the SDI system to ensure protection in case of injury or illness that prevents them from working.

✅ Best for:

• CPA for Filmmakers
• CPA for Medical Practice
• Freelancers and high earners who want state-backed disability protection

🔍 Bottom Line

With the SDI wage base now unlimited, California workers and business owners need to plan carefully. The good news is that there are legal and strategic ways to reduce the impact through thoughtful compensation planning, elections, and benefit design.

At Velin & Associates, Inc., we specialize in helping professionals—whether you’re a doctor, dentist, YouTuber, filmmaker, or eCommerce entrepreneur—structure your business and payroll efficiently to minimize tax exposure while staying compliant with California and federal laws.

For more information about our tax planning services, contact us today: visit our website.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org

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