Is California Disability Payment Subject to Federal Income Taxes?

In California, workers are eligible for State Disability Insurance, or SDI, if they are unable to work due to a disability not related to the job. These temporary benefits are also available to workers who take time off to care for a sick relative or new child. This is because Paid Family Leave (PFL) benefits are also part of the SDI program. SDI benefits are usually not subject to federal taxes unless the Internal Revenue Service considers the payments unemployment compensation, or the payments were PFL benefits.

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.