A look at your pay slip will reveal a number of withholdings and deductions that reduce your net income. Among these deductions is the Old Age, Survivors, and Disability Insurance (OASDI) Tax. This money is deducted by your employer, matched with an equivalent amount and, forwarded to the federal government to support the Social Security program.
The program is designed to benefit persons after retirement, dependents of deceased workers, and persons who are eligible to receive Social Security Disability. But, it’s on condition that the employer withhold an individual’s tax during employment according to the annual base wage.
In Simple Terms
The OASDI tax is a Social Security Program by the U.S. government and the largest globally of its kind. It also takes the most considerable portion of the federal government’s expenditure in the budget. About 9 out of 10 persons aged 65 years and above are beneficiaries of the taxation program, according to the Social Security Administration (SSA) data.
The program is governed by the Social Security Act and has been in existence since 1935. There’s been quite significant strides since its inception as the economy and the population grows. In 2020, the beneficiaries were estimated to be over 70 million compared to 222,000 beneficiaries in 1940.
How Much Is The OASDI Tax?
The employer withholds 6.2% of the employees’ income and matches with a similar amount to make the total 12.4% OASDI tax which is paid to the federal government. For self-employed individuals, they have to pay the full 12.4% as they pay employees and employers at the same time. The employer deduction from self-employed individuals is to place them on the tax position as the other employers.
The OASDI Tax doesn’t all go into your social tax. Only 85 cents in a dollar go to the trust fund where the current retirees and survivors are paid from. About 15 cents goes to the disability fund, while some pennies out of the 15 cents are reserved for the program’s management.
Who’s Exempt From Paying OASDI Tax?
Several categories are exempt from paying the OASDI tax. They include: –
- Foreign diplomats or consular officials
- Local and state employees under the public retirement plan as that means they’ll be paying twice
- Some students working in universities they’re enrolled to, but any income from a job outside the campus is eligible for the tax
- Some religious sects opposed to receiving social security benefits. They need to apply for the exemption by filling form 4029
For high-income earners, whatever income beyond the wage base is also exempt from the social security tax.
How OASDI Tax Is Calculated
If your annual wages add to less than USD$137,700, you multiply that by 6.2% to get the amount you and your employer pay to get the 12.4% total required. If you’re self-employed, you need to calculate your earnings by 12.4%.
If your annual wages are above USD$137,700, you still work it out as detailed above as an amount above it doesn’t come under the OASDI tax. As self-employed, you do the same as when you’re earning below the threshold and multiply it by 12.4%.
Note that the social security wage base varies from year to year. The base wage for 2021 stands at USD$ 142,800.
What Happens If You Work Multiple Jobs?
Always keep the wage base in mind as it applies to all your earned income. To avoid overpaying the tax, you should notify your employers to stop withholding until the year ends. It’s because separate employers may not be aware that you’ve reached the wage base threshold and keep on withholding the tax. But, you can always receive a refund of the excess tax paid.
How Will OASDI Tax Benefit You?
It makes you eligible for retirement and disability benefits under the program, including your survivors in the event of your demise. But, you must have been paying the tax on base income to qualify.
Eligibility to the retirement benefits depends on the duration you’ve been paying the OASDI Tax. Usually, you’re required to have collected 40 credits under the programs to qualify, which most individuals achieve over a ten-year contribution period.
On the other hand, disability benefits are dependent on the age of a worker when they become disabled. For survivor benefits, the deceased’s work and contribution history determine if the survivors are eligible for monthly pay even without necessarily having paid into the program themselves.
The OASDI tax is purposely programmed to cushion you as your retirement income or if you suffer a disability. It also helps your survivors in case of your death. Unless you’re part of the groups exempted to pay the tax, everyone else has to contribute the tax, and you cannot just opt out.
If you’ve been asking yourself what the OASDI Tax on your paycheck is, well, now you know. If you hadn’t noticed the deductions, it’s still good to know where your dollars are going and how these benefit you in the future.