Easy Way for CA Shareholders to Save over $1,000 per Year

In the state of California, if you are the sole shareholder (other than your spouse) and officer of a corporation, you could save up to $1,008.80 by electing to exclude your corporate wages from State Disability Insurance (SDI) withholding.

We recently attended a meeting of small business owners and CEOs.  As the discussion turned toward income tax planning for the upcoming year, we had the opportunity to mention this simple election to the group.  The result:  immediate uproar.  These owners and CEO’s had never heard of it.  We have many closely-held corporate clients, and frequently advise them to make this election.

Here’s how it works:  The State Disability Insurance (SDI) withholding rate for 2013 is 1.0 percent. The taxable wage limit is $100,880 for each employee per calendar year. Thus, the maximum to withhold for each employee is $1,008.80.  You can claim the exclusion by filing a simple one page statement with the California Employment Development Department (see https://www.edd.ca.gov/pdf_pub_ctr/de459.pdf).  Your exclusion will be effective in the calendar quarter filed.  With 2012 coming to a close, now is a good time for you to consider filing for this exclusion effective January 1, 2013.

Of course, by electing to be excluded from SDI, you will not be eligible for State disability benefits.  Employees covered by State Disability Insurance (SDI) are also covered by Paid Family Leave (PFL) insurance. See https://www.edd.ca.gov/disability for more information on the SDI program. Therefore before making the election, you should consider the expected value of any potential benefits. Most shareholder/officers will find that the cost savings significantly exceeds the value of the insurance, especially if they have private disability insurance.

There’s more – if your spouse is also a shareholder and officer, either or both of you may file for the exclusion! If your spouse is not a shareholder of record, he or she could still be considered a shareholder if the stock is community property. If the stock is your separate property, then your spouse would not qualify for the exclusion. In addition to being a shareholder, your spouse must be a legally appointed officer to qualify for the exemption.

To be excluded from SDI for 2013, we recommend notifying your payroll service and filing the statement before your first 2013 payroll is processed!

This is just one of the many little-known ways you can realize significant savings with careful tax planning.  We can help!

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