Everyone knows that taxes come out of their paychecks, but exactly why the taxes are removed may be less clear. For instance, the OASDI or OASDI/EE tax listed on a pay stub is not a tax one hears about every day.
OASDI, also known as the Social Security tax, is an acronym for the Old-Age, Survivors and Disability Insurance program, which provides monthly benefits to qualified retired and disabled workers and their dependents and survivors. The “EE,” stands for employee expense.
So, what exactly does that mean for your paycheck? Keep reading as we take a closer look the OASDI tax, how it works and how much it costs you.
[READ: What Is the Social Security Tax Limit?]
What Is the OASDI Tax?
OASDI is part of your Federal Insurance Contributions Act (FICA) taxes, which are used to fund Social Security and Medicare programs.
“The place that a taxpayer is likely to see the term OSADI/EE is on their paycheck stub,” says Mark Luscombe, a Chicago-based CPA, attorney and principal federal tax analyst at Wolters Kluwer Tax & Accounting.
“However, with direct depositing and paychecks no longer coming in the mail, many employees don’t look at their paycheck stubs often,” he adds.
“Employees pay 6.2% of their wages toward the OASDI tax 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.
How OASDI Works
Generally, if you work for a company you and your employer split the cost of the tax. If you work for yourself, however, you’ll pay the entire 12.4% OASDI tax. That said, you can deduct half of the self-employment tax when you calculate your adjusted gross income, or AGI.
[Related:How to File Taxes When You’re Self-Employed]
While you’ll always pay an OASDI tax no matter what age you are — you’ll even pay it if you’re working part-time while collecting Social Security — once your income hits a financial threshold you no longer have to pay more.
Every year, the Social Security Administration determines the OASDI tax rates. Those rates haven’t budged since 1990, but the maximum taxable earnings often change from year to year, especially if inflation is on the rise or the cost of living climbs.
Last year, the maximum taxable earnings for the OASDI tax was $160,200. With last year’s inflation, the number jumped quite a bit. In 2024, it’s $168,600.
“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.
OASDI and Self-Employment
If you’re self-employed, you should pay the OASDI tax. Unfortunately, what you will pay in OASDI taxes is considerable. Instead of paying 6.2% taxes like employees do, you pay the entire 12.4% yourself because you are your own employer. That’s the downside of being the boss.
“Having to pay the entire OASDI tax if you’re self-employed is part of the reason that many solopreneurs/single member LLCs choose an (S-corporation) election once they hit a certain income threshold,” Magnuson says. She explains that people who form an LLC often end up paying less OASDI tax than they would have otherwise.
Ideally, self-employed individuals pay OASDI taxes every quarter or every month. If you wait and pay the tax annually, you’ll be hit with a hefty tax bill, including penalties and interest charges.
“The best advice I can give to make paying your taxes easier when you’re self-employed is preparation and organization,” says Joshua Zimmelman, founder of Westwood Tax & Consulting, a New York City-based virtual accounting firm, and co-founder of Levitax, a virtual tax preparation service website.
He suggests that if you have an accountant or tax preparer, ask what your estimated payments will be for the upcoming year.
[Related:How to Find a Reputable Tax Preparer Near You]
“Once you have that information, you’ll need to budget your finances to make sure you’re able to pay the correct amount every quarter. Schedule the payments on your calendar and set reminders, so you don’t miss any and risk late fees or penalties,” Zimmelman says.
“The more organized you are, the more routine quarterly taxes will become and the less stress you’ll face because of them,” he adds.
To calculate your OASDI taxes, use the IRS Schedule SE.
Is the OASDI Tax the Same as Social Security?
When someone refers to a “Social Security tax,” they likely mean the OASDI tax. But because of where the money goes and how it is split up, it’s more complicated than simply saying the two are the same.
Out of every OASDI tax dollar, the money is split into three parts:
— Eighty-five cents is allocated to 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 into a trust fund that pays benefits to people with disabilities and their families.
— A tiny bit of what’s left over — less than a penny from each dollar paid — goes toward managing the Social Security program.
And because you put 85 cents of each OASDI tax dollar into this trust fund, you will pay tax on up to 85% of your Social Security benefits.
“A lot of people may think that the Social Security taxes being withheld from their paychecks are going into a cash fund that’s set aside for receiving Social Security payments when they retire. In fact, the Social Security trust funds exists only as a calculated balance of the totals paid in,” Luscombe says, adding that “Social Security receipts are distributed when needed by current retirees.”
It’s complicated, but the way the Social Security trust funds are structured, there are always fears that Social Security will not be able to make payment obligations to younger people currently contributing to Social Security out of their paychecks.
Luscombe says that there are frequent discussions in the federal government on how to shore up the Social Security trust funds.
“A number of years ago, the Social Security retirement age was raised from 65 to 66 and then to 67 to try to help out,” Luscombe says.
He says that there are also discussions about raising the retirement age further or raising the income threshold subject to Social Security tax withholding, or both.
Can I Opt Out of Paying the OASDI Tax?
Your odds of being exempt from paying the OASDI tax are low.
“There are only a few groups that are exempt from paying taxes into the Social Security system — members of some religious groups, many foreign researchers or academics (if they’re nonimmigrant and nonresident aliens) and self-employed workers who make less than $400 a year,” Zimmelman says.
“Local and state government employees who are covered under a public retirement plan typically don’t need to pay into Social Security if it would mean they were paying twice,” he adds.
To request an exemption, you must fill out IRS Form 4029.
Nonresident Citizens and OASDI Taxes
For the most part, even those who aren’t U.S. citizens but live in the United States are subject to OASDI taxes.
But Zimmelman says there are exceptions.
Some countries have income tax treaties that allow citizens to exempt part or all of their American wages from being taxed by the United States. Certain types of visas may exclude someone from paying OASDI tax. According to the IRS, the following visas exempt someone from paying Social Security taxes:
— A-visas: These are primarily for employees of foreign governments.
— D-visas: A crew member of a ship or aircraft may have a D-visa if the vessel is a foreign vessel and the employer is a foreign employer, or if the services are performed outside of the United States.
— F-visas, J-visas, M-visas and Q-visas: These visas are usually held by researchers, professors and scholars.
— G-visas: These are generally held by employees of international organizations. Spouses usually do have to pay the OASDI.
— H-visas: There are different levels of H-Visas, such as H-1B, which are for specialty occupations. H-2A visas are often held by temporary agricultural workers. H-3 visas may be held by special education exchange visitors.
For a full list of exempt services, see the IRS’ Publication 15 (Circular E), Employer’s Tax Guide.
More from U.S. News
Can You Take the Home Office Deduction?
10 Tax Breaks for People Over 50
What Is the OASDI Tax? originally appeared on usnews.com
Update 03/05/24: This story was published at an earlier date and has been updated with new information.
