What Is OASDI Tax? // The "Social Security" Tax
Posted by Elliot Marks
If you have taken the time to look at any of your pay stubs, you have probably seen several different taxes and withholdings being taken from your gross pay. Maybe you have seen a line item for OASDI tax or simple "Social Security Withholding." But what exactly is this tax and what is it used for? Like it or not, you are on the hook for paying the tax, and there are very few ways around it. Let's take a deeper look at what this tax is and what the government uses it for.
What Is The OASDI Tax?
Many people ask, "What is OASDI tax?" Literally, the letters OASDI stand for "old age, survivors, and disability insurance." More plainly, this is the tax that funds the Social Security program. In its most basic form, OASDI is Social Security taxes. This tax is automatically taken out of your paycheck, and your employer must pay a matching amount as well. The tax funds the payments of retiree benefits, survivor benefits, and Social Security disability benefits. This program is the most expensive item in our government's budget.
The program is designed to replace income that is a result of old age, death of a spouse, or disability. About 85% of the tax money generated is placed into a trust fund that is used to pay retiree and survivor benefits. The other 15% is used to fund payments to recipients of disability benefits. Less than 1% of each dollar placed into the program is used for overhead and management of the program itself.
The OASDI tax is mandatory, and you will be required to pay it whether you work for a company or are self-employed. Even though the tax might not be taken from your paycheck if you are self-employed, you will still be on the hook for the full amount when tax season rolls around. The OASDI tax is part of the FICA taxes, or Federal Insurance Contributions Act. While the OASDI tax might be called the Social Security tax, FICA taxes could be called the Medicare tax. These are the payroll taxes which fund Medicare and other insurance programs. Without these payments going into the system, the programs funded by these dollars would no longer be able to operate.
Oddly enough, even though these programs are funded through tax dollars, you may still be required to pay income tax on the benefits when you receive them. This even includes tax on Social Security Disability payments as well. Whether or not you pay taxes on your Social Security benefits depends on your total income amount and what is called your combined income for Social Security purposes.
What Does The OASDI Tax Get You?
By paying the OASDI tax, you will get access to various Social Security programs. To be eligible for these programs, you must have paid enough tax into the system to qualify. This is how Social Security works. By making these payments and having that history, you will be able to apply for retirement benefits when the time comes. You would also be able to qualify for disability benefits should the need arise, and your spouse or children would have access to survivor benefits in the event of your passing.
While "working under the table" might seem like a good thing to do to avoid paying these income taxes, it is definitely not a good idea. Not only is it illegal, but by not paying the Social Security tax, you will not be able to get any of the Social Security benefits in the future. Imagine that you become disabled and unable to work. Since you have not paid into the system, then you will not be able to qualify for benefits. Even upon retirement, you will not be able to receive retiree benefits from the Social Security Administration. So, while paying the taxes each pay period might be frustrating, they do allow you access to many important Federal programs that might pay you monthly benefits in the future.
What Percentage Of My Paycheck Is Taken Out For OASDI Tax?
The standard OASDI tax rate for withholdings for employees is 6.2% So, you will see 6.2% of each paycheck withheld for Social Security tax. Note that this amount is entirely separate from the amount of income tax that you will owe to the IRS. In addition to the employee's tax, your employer is also required to pay 6.2% of your gross income into the system. So, this brings the total tax to 12.4% of your pay.
This is where self-employment has some disadvantages. If you are self-employed, you will be required to pay the full 12.4% tax. This covers both the employee and employer contribution. However, the Internal Revenue Service does give you a little break when it comes to paying the full 12.4% self-employment tax. They do allow you to write off the 6.2% employer portion as a tax deduction on your tax return. This is done in an attempt to put self-employed individuals in the same tax position as traditional employers.
While there is no limit to the amount of this tax in a given pay period, there is a limit on the amount of Social Security tax you are required to pay each calendar year. You are only required to pay these taxes on an annual income up to $142,800. If your income exceeds this amount, then no additional Social Security taxes will be withheld. In the event that you work two jobs and have a combined income higher than this limit, then you can file for repayment of the excess tax on your federal income tax return.
In August 2020, President Donald Trump issued a Presidential Memorandum deferring individual payroll taxes through the end of the year for individuals making generally less than $4,000 biweekly. This tax deferral does not mean that the tax obligation has gone away. The deferred taxes will still be due, and they will be collected through payroll deductions in January through April of 2021.
Speaking of presidential actions, the income limit mentioned above applies in 2021, but there is talk of changing that. Now President Joe Biden proposed a plan during his campaign that would increase that limit to $400,000. As you can imagine, that would generate a great deal of additional tax revenue for the program. With the Social Security program on track to run out of money in the next 30 years or so, this could be a way to ensure that funding for the program continues well into the future. This increase is not set in stone at this point, but is simply an idea on the table as a way to help keep Social Security going with sufficient funding.
You should now have a much better understanding of the OASDI tax that you see withheld from your paycheck - what it is, what it is used for, and how much it costs you. Though it is not fun paying taxes, this program is extremely important to providing benefits for retirees, survivors, and disabled persons. The federal government funds and maintains these programs exclusively through these tax withholdings. When you reach retirement age, you will certainly want to apply for retiree benefits from Social Security, and you will not be allowed to do so if you do not have enough work credits to qualify. While there is currently a cap on the amount of OASDI tax that you are required to pay, it is possible this cap could go much higher in the future. This would generate billions of additional dollars to help fund the Social Security program for many years to come.
Frequently Asked Questions
Is OASDI the same as Social Security?
Essentially, yes, these are the same things. The OASDI meaning is simply an acronym for the different Social Security programs. The OASDI, or old age, survivors, and disability insurance, program includes all the benefits administered by the Social Security Administration This includes retiree benefits, survivor benefits, and benefits for those receiving disability payments. The program is the largest social program administered in the United States. The revenues from the taxes collected are deposited in the Federal Old Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Program Trust Fund. While OASDI might be the formal acronym for the program, most people simply refer to it as Social Security.
Do I get OASDI tax back?
Yes and no. While you technically do not get a refund of the OASDI tax that you pay into the system, it does qualify you to receive benefits from the program. So, in a sense, you do get the tax that you paid into the system back. However, it is not really in the form of a refund. Instead, it is in the form of benefit payments at retirement age or upon suffering a disability.
If you paid excess OASDI tax in a given year, then you are entitled to a refund of the excess. Suppose you work two jobs and have a combined income above $142,800. Each employer will withhold the full 6.2% for your total earnings, so you would end up paying tax on more than $142,800 of income for the year. When you file your federal tax return, you will be able to submit a claim for a refund of the excess tax you paid and it will be returned to you.
Can I opt out of OASDI?
You may not opt out of paying your OASDI taxes. There are, however, a handful of individuals who may be exempt from paying these taxes. State and local government employees who are part of a public retirement plan may not be required to pay these taxes. Doing so would essentially force them to pay into the system twice, which is not required. In addition, foreign government employees working in the United States are not required to pay this tax.
In very limited circumstances, individuals may be able to get a religious exemption from paying this tax. However, they must waive their right to future benefits - including hospital care - to claim the exemption. The religious organization must also provide food, housing, and other necessities to its members. Finally, individuals who are self-employed and earn less than $400 per year are not required to pay the Social Security tax.
Do I have to pay the OASDI tax if I'm self-employed?
The answer is yes, and unfortunately, you'll have to pay both the employee and employer portion of the tax. So, instead of just the 6.2% withholding from your paycheck, you'll be required to pay the full 12.4% amount of the tax. To help make things a little more fair, the IRS does allow you to deduce the 6.2% employer portion of the tax from your personal tax return. This helps to put you, as a self-employed individual, in the same position as a traditional employer.