If you rarely pay attention to the deductions and withholdings on your paycheck, you may not know what the OASDI tax is.
After all, you don’t need to know. You’re going to pay it one way or the other. You could argue that the details don’t really matter. But you could also argue that it’s smart to understand where your money is going.
Here is a deeper dive into the OASDI tax, including what it is, how it works and how much you pay.
[See: 15 Tax Questions — Answered.]
What Is the OASDI Tax?
OASDI stands for Old Age, Survivors and Disability Insurance. It’s a tax that you and your employer both pay to fund Social Security. In fact, it’s often called the “Social Security” tax.
Making matters more complicated, the OASDI tax is part of FICA taxes, which stands for the Federal Insurance Contributions Act. It’s a law that states that taxes should be withheld from paychecks and used to fund Social Security and Medicare programs.
Do All of the Dollars From My OASDI Tax Go to Social Security?
Close but not quite. Eighty-five cents of each dollar that goes to OASDI is put into a trust fund that pays monthly benefits to current retirees and their families and to surviving spouses and children of workers who have died, according to the Social Security Administration. About 15 cents goes to a trust fund that pays benefits to people with disabilities and their families. The reason that it’s “about 15 cents” is that a tiny bit of what’s left over — less than a penny from each dollar you contribute — goes toward managing the Social Security program.
What Percentage of My Paycheck Is Taken Out for the OASDI Tax?
“Employees pay 6.2% of their wages and employers pay a matching 6.2% for a total of 12.4% that is sent to the federal government,” says Katelyn Magnuson, founder of The Freelance CFO LLC, an accountancy for freelancers.
If I’m Self-Employed, Does That Mean I Don’t Pay the OASDI Tax?
Well, yes and no. Technically, you don’t (payments don’t automatically come out of the checks or direct deposits you are sent). But you’re supposed to pay the OASDI tax. You’re supposed to pay the 12.4% yourself.
If you don’t pay those taxes, you’ll owe back taxes. There’s really no way out of this.
But I Have to Pay 12.4% for My Self-Employment Taxes and Not 6.2%. Am I Being Punished for Being Self-Employed?
It sounds that way, but no, not really. Magnuson explains it this way:
“If you’re self-employed, you’re able to claim the employer portion (6.2%) as a deduction to help even the playing field. OASDI is paid on wages up until you earn $142,800,” she says.
She adds that $142,800 is for 2021. It changes every year. Last year, self-employed taxpayers paid 12.4% of their income to the OASDI tax up to $137,700.
“After that point, you and your employer are off the hook for that 12.4% tax on any income earned above that amount,” Magnuson says, adding: “This is also part of the reason that many solopreneurs/single member LLCs choose an (S-corporation) election once they hit a certain income threshold. Because OASDI is only paid on earned wages, S-corps only pay it on the wages reported on their W-2s, and then they don’t pay the tax on the distributions they take from their company. Whereas a sole proprietor or single member LLC will pay that 12.4% tax on all income up until that $142,800 threshold.”
So If I Earn Over $142,800, I Won’t Have to Pay Toward Social Security?
Yes, but don’t start spending that money you haven’t earned yet. Since you brought it up, President Joe Biden proposed a plan during his campaign in which the cap would be raised to $400,000. That would, it has been estimated, increase Social Security revenue by $740 billion over the next 10 years.
Can I Get Out of Paying the OASDI Tax?
Mostly, no. You may be able to get out of paying the OASDI tax if you fill out IRS Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits — and if the Internal Revenue Service agrees with the case that you make.
Sometimes you can get out of paying if you are part of a qualifying religious group. This is very rare, though. You and your employer both need to be part of the religious group, which needs to have been in existence continuously since or before Dec. 31, 1950, and there are other qualifiers. Some nonresident aliens can get out of paying the OASDI tax (though most do). Foreign government employees can get out of it.
But for most people reading this, it’s a certainty. You’re paying it. But at least you’ll get your money back when you start receiving Social Security checks.>
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