Only Certain SDI Benefits Subject to Tax
SDI benefits are considered unemployment compensation if a worker's disability was the only reason he was disqualified for unemployment insurance. For example, if a worker is already receiving unemployment and then becomes disabled, California will pay him SDI benefits instead of unemployment insurance. As a result, the SDI payments are taxable because the IRS considers the payments a substitute for unemployment. In these cases, California issues the worker a 1099-G form listing the total amount of taxable benefits and also forwards a copy to the IRS. Workers who receive Paid Family Leave benefits under the SDI program also receive a 1099-G form because these payments are subject to federal tax as well.