Are California Disability Payments Taxable? SDI, SSDI, and VA

For the most part, California disability payments are not taxable at the state level. California does not tax State Disability Insurance (SDI), Paid Family Leave (PFL), Social Security Disability Income (SSDI), workers’ compensation, or VA disability benefits. Federal tax treatment is more complicated: some disability income is fully excluded, some is fully taxable, and some is taxable only above certain income thresholds. The rules turn on the source of the benefit, who paid the premiums, and how much other income you have.

California State Disability Insurance for Your Own Illness or Injury

If you collect DI benefits from the EDD because a non-work illness or injury keeps you off the job, those benefits are generally tax-free at both the federal and California levels. SDI is funded through after-tax payroll deductions, so DI benefits fall under the federal exclusion for accident and health insurance paid with after-tax dollars.¹

There is one exception. If you were already receiving unemployment benefits when you became sick or injured, your DI benefits are treated as a substitute for unemployment compensation. In that case they are federally taxable, though still exempt from California tax. The EDD will notify you with your first payment and send you a Form 1099-G at tax time.²

Paid Family Leave Benefits

PFL comes from the same SDI program but gets different federal treatment. The EDD classifies PFL as a type of unemployment compensation for federal purposes, and Revenue Ruling 2025-4 confirmed that state-paid family leave benefits are included in federal gross income.¹³ You’ll receive a Form 1099-G. On your California return, subtract the PFL amount on Schedule CA (540) because the state does not tax it.⁴

Social Security Disability Income

California does not tax Social Security of any kind, including SSDI and survivors’ benefits. You subtract these amounts from your federal adjusted gross income on your California return.⁵

Federally, SSDI may be partially taxable depending on your combined income, which the IRS calculates as half of your Social Security benefits plus all your other income (including tax-exempt interest). For single, head of household, or qualifying surviving spouse filers:⁶

Below $25,000: benefits are not federally taxable.
$25,000 to $34,000: up to 50% of benefits may be taxable.
Above $34,000: up to 85% of benefits may be taxable.

For married couples filing jointly, the thresholds are $32,000 and $44,000.⁷

Married couples filing separately face a trap. If you lived with your spouse at any point during the year and file a separate return, your base amount is $0, meaning up to 85% of your SSDI may be taxable no matter how little you earned.⁸

Supplemental Security Income (SSI) is separate from SSDI and is not taxable at any level. You won’t receive a Form SSA-1099 for SSI.⁹

Workers’ Compensation

Workers’ compensation benefits for job-related injuries or illness are fully exempt from both federal and California income tax. That covers wage replacement, medical expense reimbursement, and permanent disability payments. The federal exclusion sits in 26 U.S.C. § 104(a)(1).¹⁰

The exemption doesn’t reach retirement benefits you receive based on age or length of service, even if you retired because of a workplace injury. If you get a disability pension under a statute covering only service-connected disabilities, the portion equivalent to workers’ compensation is tax-free and the rest is taxable pension income.¹¹

If you receive both workers’ compensation and SSDI, federal law may reduce your SSDI so the combined total does not exceed 80% of your average pre-disability earnings.¹² The workers’ compensation portion stays tax-free; the remaining SSDI follows the normal income-based rules.

Private Disability Insurance

For a private disability policy, whether the benefits are taxable depends on who paid the premiums and how.

If you paid the premiums with after-tax dollars, benefits are tax-free.¹³
If your employer paid the premiums, benefits are fully taxable as income.
If you and your employer split premiums, only the portion attributable to the employer’s share is taxable.

The Cafeteria Plan Trap

Many California employers offer disability coverage through a Section 125 cafeteria plan, which lets you pay premiums with pre-tax dollars. The IRS treats those premiums as if your employer paid them, so your benefits become fully taxable if you ever have to collect.¹⁴ If your employer offers a choice between pre-tax and after-tax premiums, the after-tax route usually wins. The small savings on premiums rarely offset the tax hit on benefits at a time when your income has already dropped.

VA Disability Benefits

VA disability compensation and pension payments are completely excluded from both federal and California income tax. The exclusion also covers grants for wheelchair-accessible home modifications and grants for vehicles adapted for limb loss or blindness.¹⁵

Veterans who retired from the military based on years of service and later received a retroactive VA disability rating can recover taxes paid on retirement pay that should have been excluded. File Form 1040-X for each year in the retroactive period and attach a copy of the VA determination letter.¹¹

Self-Employment and Disability Coverage

If you are self-employed and buy an individual disability policy with after-tax dollars, your benefits are tax-free, just like an employee who personally funds coverage. Don’t deduct the premiums as a business expense. Once you deduct them, the benefits become taxable.

Business overhead expense (BOE) insurance is a different product. BOE covers business costs like rent, utilities, and employee salaries during your disability. Premiums are deductible as a business expense, and benefits are taxable when received. This often washes out because the benefits pay expenses that are themselves deductible.

How to Report Disability Income on Your Return

Even when a benefit is not taxable, you may still need to report it and then subtract it. Here is what to expect for the most common benefit types.

SSDI: Form SSA-1099 arrives from the Social Security Administration. Report the net benefits from Box 5 on line 6a of Form 1040 or 1040-SR, with any taxable portion on line 6b. Subtract the full amount on Schedule CA (540).¹⁶⁵
DI as an unemployment substitute, and PFL: Form 1099-G arrives from the EDD. Report the taxable amount on Schedule 1 (Form 1040), line 7 as unemployment compensation. Subtract it on your California return.¹
Employer-paid disability insurance: benefits usually appear on a Form W-2 or Form 1099 from the insurer. Report the taxable amount on your federal return.
Workers’ compensation: no reporting required on either return.
VA disability: no reporting required. The VA does not issue a tax form for disability compensation.

Repaying Overpaid Disability Benefits

If you had to pay back an overpayment of disability benefits, the tax treatment depends on the amount. For repayments of $3,000 or less, deduct the amount on the same form or schedule where you originally reported the income.¹¹

For repayments over $3,000, you have a choice. Take an itemized deduction on Schedule A for the full repayment, or use the claim-of-right method under 26 CFR 1.1341-1, which compares your current tax with the deduction against your current tax without the deduction but reduced by the tax you would have saved in the earlier year if you had never included the income.¹⁷ Use whichever result costs you less.

When you receive several types of disability income at once, the reporting layers stack up quickly. Getting the Schedule CA subtractions right matters: skipping an exempt item inflates your California taxable income and costs you money you don’t owe.

1
Employment Development Department. Form 1099G FAQs
2
Employment Development Department. Tax Information (Form 1099G)
3
Internal Revenue Service. Revenue Ruling 2025-4
4
Franchise Tax Board. Paid Family Leave
5
State of California. Special Circumstances
6
Internal Revenue Service. IRS Reminds Taxpayers Their Social Security Benefits May Be Taxable
7
Internal Revenue Service. Publication 907 (2025), Tax Highlights for Persons With Disabilities
8
Internal Revenue Service. Regular and Disability Benefits
9
Social Security Administration. Information for Tax Preparers
10
Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness
11
Internal Revenue Service. Publication 525 (2025), Taxable and Nontaxable Income
12
Office of the Law Revision Counsel. 42 USC 424a – Reduction of Disability Benefits
13
Internal Revenue Service. Life Insurance and Disability Insurance Proceeds
14
Internal Revenue Service. Life Insurance and Disability Insurance Proceeds
15
Internal Revenue Service. Veterans Tax Information and Services
16
Internal Revenue Service. Publication 915 (2025), Social Security and Equivalent Railroad Retirement Benefits
17
eCFR. 26 CFR 1.1341-1 – Restoration of Amounts Received or Accrued Under Claim of Right