All you need to know about OASDI Tax

The OASDI, also known as Old Age, Survivors, and Disability Insurance tax, is a federal income tax levied in the United States to fund the Social Security program. The tax, like the Medicare program, is part of the Federal Insurance Contributions Act and is automatically deducted from your paycheck.

If you work, 6.2% of your payment goes toward OASDI, matched by your employer, and is sent to the federal government to help fund Social Security. Your paycheck may also be listed as OASDI/EE tax, with the “EE” standing for employee expense.

Self-employed must pay both the employee and employer portions of the OASDI tax, so their effective OASDI tax rate is 12.4%.

The employer amount of the self-employment OASDI tax is deductible from income, putting self-employed people in the same tax bracket as employers.

How Does the OASDI Tax work?

The Social Security Administration (SSA) annually establishes and confirms OASDI rates. Though the percentage of OASDI tax may not change regularly, the maximum taxable earnings may vary due to inflation and the cost of living index.

While the aggregate tax is pretty high, there is a tax limit. The Social Security tax limit is determined by a maximum level of taxable income that varies yearly due to inflationary pressures. The taxable income limit was $147,000 in 2022 and $160,200 in 2023.

The Medicare tax, which is currently assessed at 1.45% on every dollar of earned income, and the matching tax for employers are also uncapped.

What Is the Purpose of the OASDI Tax?

The Social Security Administration reports that a trust fund that provides monthly benefits to current retirees and their families and surviving spouses and children of deceased workers receives about 85% of every dollar paid in OASDI taxes.

Almost 15 cents of every dollar goes into a trust fund that pays benefits to disabled people and their families. A small portion of the tax is used to cover the program’s costs.

What exactly is the distinction between Social Security and OASDI?

Social Security and OASDI taxes are the same things. Because it is housed under the Social Security Administration, which distributes Social Security numbers and works with retirement, insurance, and income programs, OASDI is often referred to as Social Security.

According to the Social Security Administration, a trust fund receives 85 cents of every dollar paid in OASDI taxes. The remaining 15 cents will pay monthly benefits to current retirees, their families, and the surviving spouses and children of deceased workers.

About 15 cents of every dollar goes into a trust fund that pays benefits to disabled people and their families. The reason it’s “about” 15 cents is because a small portion of what’s left over – less than a penny out of every dollar paid – goes toward running the Social Security system.

Because you contribute 85 cents of every OASDI tax dollar to this trust fund, you will be taxed on 85% of your Social Security benefits.

Can I Avoid the OASDI Tax?

The OASDI tax must be paid by almost everyone who earns an income or receives a work-based payment. However, a few groups are exempt from paying Social Security taxes. Members of specific religious organizations, self-employed individuals earning less than $400 per year, and foreign researchers and academics who are neither US citizens nor permanent residents are exempt.

What if I pay too much in OASDI taxes?

Sometimes, employees pay more than their fair share of OASDI taxes. This can happen if you work two jobs with combined earnings that exceed the maximum taxable earnings.

If you earn more than $147,000 from two jobs in 2022, you may overpay because employers must withhold 6.2% of your earnings. You may overpay in OASDI tax because your jobs have separate human resource departments and will presumably not communicate about your earnings.

On your federal tax return, extra OASDI taxes are treated as a separate payment, so they will either increase your refund or decrease any balance owed.

The OASDI tax, also known as the Social Security tax, was established to ensure that workers have enough money to support themselves in retirement, disability, or death.

The OASDI tax may appear burdensome, but when viewed in the context of your overall personal finance picture, it is theoretically just a savings vehicle that can help provide future benefits to you and your family. However, the resiliency of the Social Security program is largely dependent on the ability of the United States government to manage persistent budgetary challenges.