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OASDI Tax Guide | Definition, Rates, & Exemptions

Tax Return Check On 1040 Form Background

If you have looked at your paycheck recently, you have likely noticed a lot of different taxes being withheld from your earnings. You probably already know what several of those taxes are. Federal and state income taxes should be fairly obvious, but what about others like the OASDI, FICA, or Social Security taxes? Most people do not know what the OASDI tax is and why it is withheld from your paycheck each pay period. If you are wondering, “What is the OASDI tax?” then keep reading! We will tell you what this tax is for, how it is calculated, and how you might be able to get out of paying it.

 

What Is The OASDI Tax & How Does It Work?

So, what is the OASDI deduction? The OASDI tax is officially the Old Age, Survivors, and Disability Insurance tax. Many people commonly refer to the tax as the Social Security tax. The OASDI tax is part of the FICA taxes deducted from your paycheck. FICA stands for the Federal Insurance Contributions Act, and this Act requires these taxes to be collected to fund both the Social Security and Medicare programs. FICA taxes include both OASDI taxes and Medicare taxes. So, how do these taxes work?

OASDI tax is due on all earned income. If you are employed, you generally don’t even have to think about the tax because it will automatically be deducted from your paycheck along with the other mandatory payroll taxes. You are responsible for paying half the tax, and your employer is required to pay the other half. Those who are self-employed will need to pay the total amount of the tax withholding themselves.

Here is how Social Security works. Once the OASDI tax is collected, it is placed into the Social Security trust funds. The Social Security Administration (SSA) uses the money from the OASDI tax to pay Social Security benefits to current beneficiaries. Social Security is considered a pay-as-you-go type of system. This means that the money collected from the taxes is not placed into your own personal retirement account. Instead, the money collected today is used to pay benefits for today’s beneficiaries. When you get ready to retire, your retirement benefits will be paid by taxes collected from the current workforce.

 

How Much Is The OASDI Tax?

Taxes Being Deducted From Paycheck

The tax rate for the OASDI tax is 6.2% of your gross income. You will pay 6.2% of your gross earnings into the Social Security trust funds. Your employer will also contribute another 6.2% of your earnings to the trust funds. So, the total OASDI tax that is due is 12.4% of your gross earnings. The Internal Revenue Service (IRS) will make sure that you have paid the proper amount when you file your tax returns for the year. Failure to pay the right amount of OASDI tax could lead to fines, penalties, and hefty bills for back taxes. Since self-employed individuals are technically both the employee and employer, the OASDI tax works a little differently for them. We will discuss how the OASDI works for those who are self-employed in more detail in the next section.

The 6.2% percent tax can really add up, so is there a limit to how much tax you are required to pay? Thankfully, the answer is yes! The Social Security tax limit in 2022 is $147,000. This means that you will only pay OASDI tax on your first $147,000 in earnings. If you earn more than this amount, no OASDI tax will be due on the earnings above the limit. You should know, however, that this limit tends to increase each year. So, the limit is likely to be higher in 2023.

So, what happens if you pay more tax than is required? It is possible to pay more than the limit accidentally, and you can get that money refunded when you file your tax return. If you only work one job, your employer should stop withholding OASDI tax when you reach the limit. However, this scenario is common for people who work more than one job. For instance, suppose you work two jobs but make less than $147,000 at each one. If the combined income from the two jobs exceeds the limit, you will likely pay more tax than is required. Since your employers likely don’t know how much tax you have paid at another job, they will continue withholding the tax since they are each below the limit individually.

Roughly 85% of the money collected from the OASDI tax is used to fund Social Security retirement benefits for retirees, spouses, and surviving spouses. Roughly 15% of the money collected from the tax is used to fund Social Security disability benefits. Less than 1% of the tax is used to fund overhead expenses for the Social Security program. Remember that Social Security is the largest line item in the federal government’s budget, so it requires a lot of money to operate the program each year.

 

OASDI Taxes For The Self-Employed

A employer calculating OASDI tax on her laptop computer.

We already mentioned that the full OASDI tax rate is 12.4%, but that amount is split equally between the employee and the employer. So, what happens when you are both the employee and the employer? This is the case for self-employed individuals. Unfortunately, if you are self-employed, you will be stuck paying the full amount of the tax. Many people call this the self-employment tax because you are required to pay double the amount of a normal employee.

Thankfully, the same tax limits apply to self-employed individuals, so you are not forced to pay 12.4% on all taxable wages, regardless of the amount. In 2022, once you hit $147,000 in taxable earnings, your tax liability will max out at that point. Many self-employed individuals opt to create an S-corporation for their business instead of a single-member LLC or sole proprietorship. An S-corporation designation often leads to a lower overall tax bill, especially for those businesses with higher revenues and earnings.

Remember that most self-employed individuals also need to pay their taxes quarterly. If you wait until the end of the calendar year to calculate your taxes, you might find that your bill is extremely high. In addition, you could be hit with fines and penalties for not filing quarterly estimated federal tax returns. You can always seek the advice of a personal finance expert or CPA for help with your taxes or check the IRS guidance for the rules on your situation.

 

OASDI Tax vs. Social Security Tax: Is There A Difference?

Many taxpayers wonder if there is a difference between OASDI taxes and Social Security taxes. No, there is really no difference between the two as long as you understand that Social Security taxes fund more than just retirement benefits. The OASDI tax and the Social Security tax are terms that are used interchangeably, and the two taxes are basically the same. However, some people might think that Social Security taxes only fund benefits for retirees, while the OASDI tax is more comprehensive since it has old age, survivors, and disability insurance directly in the name.

OASDI taxes, or Social Security taxes, are used to fund retirement benefits, survivor benefits, and benefits from the disability insurance program. These tax funds are used to pay monthly benefits to the beneficiaries of these programs, and most people receiving these funds rely on them as part of their monthly budget.

 

OASDI Tax Limits

A closeup of a person's hand using a calculator to add up taxes.

Hardly anyone enjoys paying taxes, but a big tax bill can really be disappointing. A tax rate of 6.2% is bad enough, but those who are self-employed will need to pay 12.4%. Is there any limit to the amount of OASDI tax that you will have to pay? The answer is yes, and here are the limits. First, you should know that, unlike some payroll taxes, the OASDI withholding tax rate does not change based on your income. In fact, the rate almost never changes, even from one year to the next. However, there is a tax limit to the amount of tax you will owe.

In 2022, the income limit for OASDI tax is $147,000. No OASDI tax will be due on any income above this limit. So, the most OASDI tax that you will need to pay in 2022 is $9,114. Self-employed individuals can be liable for up to double that amount. If you pay more than the limit, you will be entitled to a refund of the overage. When you file your tax returns, you can get a refund of the amount you paid in excess of the limit. You should also know that the limit increases nearly every year. In 2023, the earnings limit is likely to exceed $150,000.

 

Is The OASDI Tax Mandatory?

The short answer is yes, OASDI taxes are mandatory. Roughly 96% of working Americans pay the OASDI tax. There are a few limited exemptions to this tax, and falling under one of these exemptions can be quite difficult. First, foreign researchers or other academic employees who are not U.S. citizens or permanent residents can be exempt from the tax. In addition, some religious organizations are exempt from the tax.

However, to claim the exemption, you must generally waive your rights to any and all future Social Security benefits. This means that you will need to have your own retirement plan, and you agree that you will never apply for Social Security benefits. Even if you fall under an exemption, you must still take action to stop the collection of the tax. An exemption is not automatic for those who fall into one of the exempt categories. You must file Form 4029 with the IRS to notify them that you are exempt from OASDI taxes.

 

The Bottom Line

OASDI taxes are used to collect money that funds the Social Security program. These funds include retiree benefits, survivor benefits, spousal benefits, and disability insurance program benefits. The OASDI tax and the Social Security tax are essentially the same thing. The OASDI tax rate is 6.2%, but your employer also contributes an additional 6.2%. Participation in the OASDI tax is mandatory, and nearly all U.S. workers pay this tax. While a few limited exemptions exist, it can be difficult to qualify for an exemption.

 

Frequently Asked Questions

 

Is OASDI tax the same as federal tax?

No, the OASDI tax is not the same as the federal income tax. Now you might be wondering, “What is OASDI on my paycheck?” While the OASDI tax is a federal tax, it is not a tax that goes to the general budget of the federal government. OASDI taxes are specific taxes collected for funding the Social Security program. Federal income tax rates change on a sliding scale depending on your income. However, the tax rate for OASDI remains static at 6.2%. Unlike federal income tax, there is a limit to the amount of OASDI tax that you will owe each year.

 

What is the tax rate for OASDI?

The total tax rate for OASDI is 12.4%, but this amount is split equally between the employee and the employer. This means that you will see a tax rate of 6.2% deducted from your paycheck during each pay period. If you are self-employed, you will be required to pay the full 12.4% since you are acting as both the employee and employer. The OASDI tax limit for 2022 is $147,000, so you will not owe any OASDI tax on earnings above this limit.

 

Can I opt out of the OASDI tax?

There are a few limited circumstances under which you can opt out of the OASDI tax, but these cases are rare. Opting out of the OASDI tax means that you must give up your rights to any future Social Security taxes. This sometimes happens with foreign students who work in the academic world in the United States. In addition, some religious organizations are able to get an exemption from OASDI taxes. These organizations do not believe in social programs like Social Security, and they solely fund their own retirement plans. These groups can get religious exemptions to the OASDI tax in some limited cases.

 

Why is OASDI tax withheld from my paycheck?

OASDI tax is withheld from your paycheck because it is a mandatory payroll tax collected by the federal government. OASDI taxes are used to fund the Social Security program, and these taxes are vital to support the financial obligations of the program. Once you have reached $147,000 in earnings in 2022, you should no longer see OASDI tax withheld from your check. However, you should know that the tax limit typically increases each year.

 

Do I have to pay OASDI tax if I’m self-employed?

Yes, you must pay OASDI tax even if you are self-employed. In fact, you will owe twice as much tax as a regular employee. Since the OASDI tax is split equally between the employee and employer, self-employed individuals must pay both the employee and employer portion of the tax. This means that their tax liability will be 12.4% instead of just the 6.2% that employees must pay.

Elliot Marks

Elliot Marks

Elliot has spent years providing clear and concise information to help navigate the complex nuances of social security and many other government services in the United States. Elliot has a passion for helping those in need of these services to be able to find timely access to news and information that is relevant and helpful to their daily lives.