California to Impose Payroll Tax Increase for High-Earning Employees

Starting from January 1, a payroll tax increase in California will affect high-earning employees. This tax hike aims to finance an increase in benefits under California’s state disability insurance and paid family leave programs, set to begin on January 1, 2025. Here are the key details of this tax increase and its implications:

Tax Increase for Enhanced Benefits

  • The tax increase is designed to fund an expansion of benefits in California’s state disability insurance and paid family leave programs.
  • From January 1, 2025, the wage-replacement rate for participating workers will increase to a range of 70% to 90%, depending on their income. This is up from the current range of 60% to 70%.

Funding Mechanism

  • Both of these programs are funded entirely by contributions from participating employees and are administered by the California Employment Development Department (EDD).
  • Most private-sector employees in California have this tax, known as CASDI, withheld from their paychecks. Public-sector employees and self-employed individuals generally do not contribute to the program and are not eligible for benefits.

Tax Changes in 2024 and Beyond

  • Starting in 2024, the payroll tax rate is expected to increase from 0.9% to 1.1%, resulting in a slight tax increase for most employees.
  • The significant change is the removal of the wage ceiling, meaning the tax will apply to an unlimited amount of pay from 2024 onward. This change will impact high-income earners more significantly.

Impact on High-Income Workers

  • High-income workers will bear the brunt of the tax increase, as they will see a substantial rise in their contributions. For instance, someone earning $200,000 could face an increase of approximately $822 in their tax liability in 2024.

Purpose of the Tax Increase

  • The tax hike is intended to address an imbalance in leave-taking, ensuring that lower-wage workers have greater access to paid family leave.
  • In 2020, lower-wage workers were found to be four times less likely to use paid family leave than higher-wage workers.

Benefits of Disability Insurance and Paid Family Leave

  • These programs provide a percentage of an employee’s pay during a period when they are unable to work due to non-work-related injury, illness, pregnancy, or the need to care for a seriously ill family member.
  • The benefit amounts depend on an individual’s pay during their 12-month “base period.”
  • Starting in 2025, workers earning more than 70% of the average statewide wage will receive up to 70% of their pay in benefits, while those earning 70% or less of the average wage will receive up to 90% of their pay.

Conclusion: This payroll tax increase in California is primarily aimed at improving benefits for lower-wage workers while increasing contributions from high-income earners. While it may lead to higher tax liabilities for some, it reflects efforts to create a fairer system for paid family leave and disability insurance in the state.

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