What is OASDI Tax, and How is it Calculated?

Ever wondered what is OASDI tax, which is mentioned in the tax section of your payslip? Well, it is a common form of tax, however, it is often misunderstood by employees in the US. Despite how unfamiliar it sounds, it is a social contribution made by Americans towards the Social Security trust fund of the government. 

As it is important to know where your money quietly goes, we have explained the OASDI tax, meaning, concept, eligibility, benefits, and deductions in this blog. So keep on reading!

What is OASDI Tax?

OASDI stands for Old-Age, Survivors, and Disability Insurance. Following, the OASDI tax is a federal tax levied by the government of the US on both employers and employees. The funds collected under this tax system go directly to the Social Security program of the country. 

The motto behind this program is to provide financial support to: 

• Retired workers.
• Surviving family members of any deceased person. 
• Disabled individuals in the country.

The Internal Revenue Service (IRS) and the Federal Insurance Contributions Act (FICA) hold the responsibility of collecting these taxes directly from the payable wages and earnings of the citizens. 

Now that you’re aware of what is OASDI tax is, let’s understand who pays it in the next section. 

Who Pays OASDI Tax?

Paying OASDI tax is an act of social contribution towards the welfare of the people in need. It was started back in 1935 during the economic crisis to create a safety net for Americans who could no longer work. So now the question is, who actually pays this tax? 

Almost all the employees with salary or hourly payments and employers are mandated to pay for what is OASDI deduction. 

• The employees working in all sectors pay 6.2% of their wages. 
• The employers also pay 6.2% for every employee they hold in their organization. 
• The self-employed individuals pay up to 12.4% of their total earnings under the Self-Employment Contributions Act (SECA). 

Let’s say you are earning up to $50,000 per year, your OASDI is $3,100 of your contribution to the government. 

What is the OASDI Deduction?

These taxes are mandatory to be paid by every earning citizen. Let’s understand here how it is calculated. 

The Social Security Administration (SSA) sets a base wage limit for tax deductions, which is revised every year. This base wage limit is the maximum cap on which the tax is applied. $168,600 is the base wage limit for 2025 that is set by the SSA. Furthermore, this highlights that any income above $168,600 will not be taxed by the government. 

Here’s the OASDI tax formula: 

For employees: 
OASDI Tax = Gross Wages × 6.2% 

For self-employed: 
OASDI Tax = Net Earnings × 12.4%

The IRS automatically deducts the amount to pay over 70 million Americans who come under this social program. 

Check Out: Retained Earnings: Explanation, Formula, and Importance for Businesses

OASDI Tax Eligibility and Benefits 

OASDI tax helps reduce poverty, providing necessary support to war survivors and widows. It can also act as a primary source of income for the retired population. 

The individuals need to have credits to qualify for the benefits of the programs. According to the current rules, one must acquire 1 credit for every $1,730 in wages, which can be summed up to 4 credits in a year and 40 credits in 10 years. 

Based on the average lifetime earnings and acquired credits, the individual can apply and qualify to receive the retirement benefit. Apart from that, people with disability and widows, widowers, and children of deceased workers are liable to receive regular income from this program. 

Is OASDI Tax Mandatory?

Yes, it is absolutely necessary to pay for the OASDI tax. There’s no way one can opt out of the paying strata of the program. According to the federal rule, citizens who are working and earning are expected to contribute, and in return, they receive credits that are accumulated till the age of retirement. 

So basically, the Social Security follows the pay-as-you-go rule. You fund the retired people today, and when you retire, the next set of working people will support you. 

The only exceptions who are not required to pay are certain government employees who already pay social taxes in other forms, any religious group approved by the IRS for the exemption, and non-residents and VISA holders. 

Wrapping Up!

Your paychecks contain many components, like OASDI tax, and where the money is deducted is a crucial part that must be understood. This government tax program supports the elderly, survivors, medically challenged people, and widows by providing them a steady source of survival income. 

We have explained what is OASDI tax, whether is it mandatory to pay OASDI tax, and more in this blog. So the next time you see the deduction, you’ll know a little portion of your earnings is serving a greater purpose. 

Read Next: Tax Reference Number UK: Decoding Everything About It

Frequently Asked Questions 

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