OASDI Tax

The Old-Age, Survivors and Disability Insurance (OASDI) tax is a U.S. tax that is levied on your earned income to fund the Social Security program. The tax is a component of the Federal Insurance Contributions Act, along with the Medicare program, and is automatically deducted from your paycheck.

Established in 1935, the OASDI tax is designed to ensure workers have enough funds to support themselves in retirement or in other situations such as disability or death, when earned income is no longer a source of cash flow. Essentially, the tax forces workers and employers to save for retirement needs so that they will receive benefit payments in the future. Though few retirees can cover all of their living expenses with just their Social Security benefits, the monthly payments are a key aspect of many retirement plans. The benefits also may be paid to the families of qualified workers with a disability and their dependents, and to the surviving families of insured workers who have died.

By law, the OASDI tax must be automatically withheld from employee paychecks at a rate of 6.2%, and employers are required to pay a matching 6.2% — for a total tax of 12.4%. The accumulated funds are used to fund monthly benefits payments to Social Security program recipients.

While the aggregate tax is fairly steep, there is a limit to the tax. The Social Security tax limit is established via a maximum level of taxable income, which can change from year to year due to inflationary pressure. The taxable income limit is $147,000 for the 2022 tax year and $160,200 for 2023.

Incidentally, there is no limit to the Medicare tax, which is currently levied at a rate of 1.45% on every dollar of income earned, along with a matching tax for employers.

The OASDI tax applies to both traditional employees and self-employed individuals. If you’re self-employed, you are expected to pay the entire 12.4% tax on your earned income. The tax can be paid in monthly or quarterly payments.

This tax can be a huge drag on liquidity if you’re self-employed, but fortunately, self-employed workers are permitted to deduct half of the OASDI tax paid on their annual tax filings. Essentially, this pulls the tax back toward the 6.2% paid by traditional employees.

According to the Social Security Administration, approximately 85 cents of every dollar of the OASDI tax is put into a trust fund that pays monthly benefits to current retirees and their families and also to surviving spouses and children of workers who have died. Nearly 15 cents of every dollar goes into a trust fund that pays benefits to people with disabilities and their families. A minimal proportion of the tax goes toward the costs of managing the program.

Virtually everyone that earns an income or pays a work-based income is required to pay the OASDI tax. There are, however, a few groups that are exempt from paying Social Security tax. Exempted groups include members of some religious organizations; self-employed individuals who earn less than $400 per year; and foreign researchers and academics who are neither U.S. citizens nor permanent residents.

That said, exemptions to the OASDI tax are not automatically granted. To request an exemption, you must fill out IRS Form 4029. To gain an understanding of the various visas that may exempt those who are not U.S. citizens or permanent residents from paying the OASDI tax, see IRS Publication 15 (Circular E), Employer’s Tax Guide.

The OASDI tax, commonly referred to as the Social Security tax, was created to ensure workers have adequate money to support themselves in retirement or in the case of disability or death. To fund the program, all U.S. workers are required to pay a tax of 6.2% on their earned income up to a specified annual limit ($147,000 for 2022 and $160,200 for 2023), and their employers are obligated to match the payments.

The OASDI tax can seem onerous, but when you consider it as part of your entire personal finance picture, it’s theoretically just a savings vehicle that can help provide future benefits to you and your family. That said, the resiliency of the Social Security program is largely dependent upon the ability of the U.S. government to manage persistent challenges with the federal budget.