California updated several tax rules for 2026 that directly affect how much comes out of your paycheck. Whether you're an employee checking your paystub or an employer running payroll, here's what changed and what stayed the same.
State Disability Insurance (SDI) Rate Increase
The SDI withholding rate increased from 1.2 percent in 2025 to 1.3 percent in 2026. This is the third consecutive year the rate has gone up — it was 0.9 percent in 2023 and 1.1 percent in 2024.
There is no wage cap on SDI contributions. Since January 1, 2024, all wages are subject to SDI withholding regardless of how much you earn. That means if you make $200,000 a year, you'll see $2,600 withheld for SDI in 2026 compared to $2,400 in 2025.
| Year | SDI Rate | Wage Cap |
|---|---|---|
| 2023 | 0.9% | $153,164 |
| 2024 | 1.1% | No cap |
| 2025 | 1.2% | No cap |
| 2026 | 1.3% | No cap |
On your paystub, SDI typically appears as a separate line item under state tax withholdings. If your SDI deduction looks higher than last year, this rate increase is why.
Income Tax Brackets Stay Progressive
California's progressive income tax structure remains unchanged in 2026, with rates ranging from 1 percent to 12.3 percent across nine brackets. The bracket thresholds receive a small inflation adjustment each year.
For a full breakdown of every bracket, see our California state income tax guide.
An additional 1 percent tax applies to income over $1 million. This surcharge was renamed from the Mental Health Services Tax to the Behavioral Health Services Tax starting in 2025, but the rate and threshold are the same. The effective top rate remains 13.3 percent.
California Conforms to Federal Tax Code Through 2025
Senate Bill 711, signed in October 2025, moved California's conformity date with the Internal Revenue Code from January 1, 2015 to January 1, 2025. This is the first major conformity update in a decade and affects how several federal provisions are treated on your California return.
The most notable change for employees: alimony payments. For divorce or separation agreements executed after December 31, 2025, alimony is no longer deductible by the payor or included as income for the recipient. California now matches the federal rule that has been in effect since 2019.
What California Does Not Conform To
California explicitly does not conform to the One Big Beautiful Bill Act (OBBBA), signed into federal law on July 4, 2025. If you're used to certain deductions or credits from the OBBBA on your federal return, they won't carry over to California. You may need to make adjustments when filing your state return.
Military Retirement Exclusion
Starting in 2025 and running through 2029, California allows an exclusion of up to $20,000 from gross income for military retirement pay or Department of Defense Survivor Benefit Plan annuities. This is new for California — previously, military retirement was fully taxable at the state level.
If you receive military retirement pay, this won't change your paystub withholding automatically. You may need to adjust your state withholding allowances on your DE 4 form or claim the exclusion when you file your return.
What Stays the Same
Several key aspects of California's tax system are unchanged for 2026:
- No local income taxes — unlike some states, California does not allow cities or counties to impose their own income tax
- Paid Family Leave — still funded through SDI (included in the 1.3 percent rate)
- Standard deduction — adjusted for inflation but structurally the same
- FICA taxes — Social Security (6.2 percent up to $176,100) and Medicare (1.45 percent, plus 0.9 percent over $200,000) are federal taxes that appear on every paystub regardless of state
How These Changes Show Up on Your Paystub
If you compare your first 2026 paystub to one from late 2025, the most visible difference will be a slightly larger SDI deduction. The income tax brackets and rates are the same, so your California income tax withholding should look similar unless your salary changed.
Here's a quick reference for what to look for:
| Paystub Line | 2025 | 2026 | Changed? |
|---|---|---|---|
| CA Income Tax | 1% – 13.3% | 1% – 13.3% | No |
| CA SDI | 1.2% | 1.3% | Yes |
| Federal Income Tax | Per W-4 | Per W-4 | No |
| Social Security | 6.2% | 6.2% | No |
| Medicare | 1.45% | 1.45% | No |
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