Reporting employee contributions on tax Form W-2 using Box 14 – State disability insurance taxes withheld. New York is one of a handful of states that require employers to provide disability benefits coverage to employees for an off-the-job injury or illness.NY SDI benefits are taxable at the federal and state level. Workers' Compensation Benefits are not subject to withholding, Social Security, or Medicare taxes. Disability benefits insurance is mandatory for most employers in New York State. You can pay the IRS directly or withhold taxes from your payment. You can complete the W4S with your estimated adjusted gross income and any income tax withheld to date to determine if withholdings are recommended. Don't include nontaxable disability payments made directly to a state. California wages are subject to SDI (State Disability Insurance) or VDPI (Voluntary Plan Disability Insurance) withholding up to a specific annual amount. Employers are permitted to top up wages while employees are receiving SDI or PFL benefits, but total income cannot exceed pre-claim income.