OASDI tax: What it is, how it works, and regulations

Published

Nov 11, 2024

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OASDI (Old-Age, Survivors, and Disability Insurance) tax is one of the two FICA (Federal Insurance Contributions Act) taxes that employers are required to pay on an employee’s wages, tips, and salaries. FICA taxes and benefits are divided into two parts: OASDI Tax also known as Social Security Tax, and Medicare Tax. Both are part of the larger category of payroll taxes which include federal, state, and local taxes as well.

What is the OASDI tax?

OASDI Tax or Social Security Tax is a mandatory tax deducted from earned income, and collected from both employees and employers. OASDI tax goes towards funding the Social Security program which provides benefits to retired workers, people with certain disabilities, and survivors of deceased workers.

What does the OASDI tax cover?

For employers whose employees might be wondering what the OASDI tax deduction on their paycheck is about, here is a deeper dive into what the OASDI tax is used for:

Retiree benefits: 85% of the OASDI tax is put into a trust fund that pays monthly retirement benefits to retired workers. Once a worker reaches retirement age, they’ll receive these monthly benefits to replace a portion of their income in retirement. Benefits are based on a worker’s lifetime earnings and they must have earned at least 40 work credits and be at least 62 years old.
Disability benefits: 15% of OASDI tax goes into a trust fund administered by the Social Security Disability Insurance (SSDI) program that provides benefits to qualifying contributors and their family members. Benefits are calculated based on the workers’s lifetime earnings as well as the employee's age and length of career.
Survivors benefits: If an employee dies, monthly Social Security benefits go to surviving spouses and children. Benefits are based on the deceased’s earnings and relationship to the survivor. The spouse must have been in a relationship with an eligible employee at the time of the employee’s death. The more the deceased relative paid into Social Security, the higher the survivors benefit would be. The monthly benefit amount is a percentage of the deceased’s basic Social Security benefit.
Program management: 0.5 percent of annual Social Security benefits goes towards the costs of managing the program.

How does the OASDI tax work?

Employers are required by FICA (Federal Insurance Contributions Act) to automatically withhold a 6.2% OASDI tax from employee paychecks and contribute a matching 6.2% tax for a total of 12.4% OASDI tax.

The federal government instituted an income cap also known as a wage base limit or taxable maximum, which limits the Social Security Tax deduction by establishing a maximum level of taxable income.

The taxable maximum changes from year to year based on inflation. For the 2024 tax year, the taxable income limit is $168,000 and for 2023, it is $160,200.

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OASDI tax for self-employed workers

The OASDI tax applies to all workers, including those who are self-employed. There are two ways in which workers are required to contribute to OASDI—either through the Federal Insurance Contributions Act (FICA) if they’re employees or the Self-Employment Contributions Act (SECA) if they’re self-employed.

Instead of having Social Security Tax deducted regularly from a paycheck, self-employed workers can choose to pay OASDI taxes monthly but most pay them quarterly when they are due. Whereas employees and employers each contribute 6.2% of an employee’s earned income to OASDI through FICA, self-employed workers are responsible for the entire 12.4% tax according to Self-Employed Contributions Act (SECA) Regulations.

For a self-employed worker, a significant proportion of their paycheck goes towards Social Security Tax. However, self-employed workers can deduct half of the OASDI tax they’ve paid when they file their annual tax return. This brings self-employed workers’ total OASDI tax down to the same 6.2% that employees and employers are paying.

Is the OASDI tax mandatory?

OASDI tax is federally mandated by FICA and SECA, and for most employers, employees, and self-employed workers, it is required. But there are exceptions. Members of the following groups are not required to pay OASDI taxes:

1. Religious groups:

Certain religious groups and members of the clergy can opt out of paying Social Security and Medicare Taxes. Their nonpayment means they will not receive Social Security benefits or Medicare benefits in the future.

2. Self-employees that make less than $400:

Those who are self-employed and make less than $400 per year don’t have to pay Social Security Taxes.

3. Local and state government employees:

If a local or state government employee is covered by their state or local pension plan, they are entitled to an exemption from paying Social Security Taxes. To be exempt from Social Security Taxes, an employee's retirement plan must provide benefits that are at least as generous as the social security benefits they would have received from the Social Security Administration. The employee must also be able to start receiving benefits at or before Social Security's full retirement age.

4. Nonimmigrants and Non-residents:

Employees who are nonimmigrants and non-residents may be granted exemptions from having to pay Social Security Tax, depending on the type of visa they hold. For example, foreign students, researchers, and academics who are employees of universities, as well as foreign government employees working in the US, are all exempt from paying into Social Security and Medicare because they will not be receiving Social Security benefits when they retire.

How to calculate the OASDI taxes

OASDI taxes are a percentage deducted from an employee’s earned income or gross salary, which is every dollar they earn before deductions are taken. Here’s how OASDI payments are calculated:

Step 1. Define the employee’s gross wages:

Gross salary refers to an employee’s total earnings before any deductions like Social Security, health insurance, and 401k are taken.

Step 2. Multiply by 0.062:

Since the basis for Social Security Taxes is gross salary, take that number and multiply by 0.062.

Step 3. Get the result of the OASDI tax:

The resulting number is the amount of OASDI tax that is deducted from an employee’s paycheck.

For example, if an employee’s gross wages totaled $10,000, this amount would be multiplied by 0.062. $10,000 x 0.062 = $620.00. The amount of $620.00 would be deducted from the employee’s salary as Social Security Taxes. According to FICA, the employer would be responsible for paying a matching $620.00 to the federal government as OASDI tax.

Effectively manage payroll taxes with Rippling

Rippling’s full-service payroll software streamlines and automates payroll to save companies time and money. For instance, Rippling calculates all taxes and submits tax forms and payments automatically. Employee withholdings automatically flow into payroll, so there’s no need to manually enter withholding amounts. Also, automatic compliance audits ensure that all legally-required forms and documents are in order. Electronic copies of employee tax forms are stored for reference or audit purposes. They’re all attached to an employee’s profile—even after termination—so they’re easy to locate at any time.

By automatically calculating and submitting tax forms and payment for payroll taxes—including OASDI taxes, Rippling makes HR administration faster and easier. Additionally, Rippling monitors tax laws at the federal, state, and local levels, and flags potential infractions, ensuring your business will stay compliant with FICA.

OASDI tax FAQs

When are OASDI taxes due for employers?

Generally, employers must file quarterly with the required Form 941, Employer’s Quarterly Federal Tax Return. Small employers (those with annual employment tax liabilities of $1,000 or less) may file annually with Form 944, Employer's Annual Federal Tax Return, if approved by the IRS, and agricultural employers can do the same with file Form 943, Employer's Annual Tax Return for Agricultural Employees.

Are bonuses or commissions subject to OASDI tax?

Yes. The federal government requires a 6.2% Social Security Tax and 1.45% Medicare tax on all wages including bonuses up to the 2024 Social Security cap of $168,600 (up from $160,200 for 2023). If the commission is paid separately from a regular paycheck, then it's considered to be a supplemental wage and is taxed at the 22% rate. However, employers still have to withhold Social Security and Medicare taxes from supplemental wages.

What penalties apply if an employer fails to pay OASDI taxes?

Businesses that are unable to pay their employment taxes usually receive a notice from the IRS and a monetary penalty. If the taxes remain unpaid and the failure is determined to be willful, the IRS can place a lien on the employer’s assets or file criminal charges, which may include imprisonment for up to five years. Not only does the Tax Division pursue criminal investigations and prosecutions against individuals and entities who willfully fail to comply with their employment tax responsibilities, but also those who aid and assist them in failing to meet those responsibilities.

How do employers report OASDI taxes?

Employers report withheld and contributed OASDI tax—plus other employment taxes—on Form 941, Employer's Quarterly Federal Tax Return, or Form 944, Employer's Annual Federal Tax Return (those with annual employment tax liabilities of $1,000 or less). Also, employers must report withheld Social Security Tax on each employee's Form W-2.

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