What Is OASDI Tax And How Does The OASDI Program Work?

If you look at your pay stub, you’ll usually notice that money is withheld for federal, state and local taxes. On the federal front, there are two taxes typically withheld as part of the Federal Insurance Contributions Act (FICA). There’s Medicare (hospital insurance for older Americans) and something called OASDI. We’ll take a closer look at this tax and benefit program.

What Is OASDI And What Does It Stand For?

The Old-Age, Survivors and Disability Insurance (OASDI) program – also known as Social Security – is a taxpayer-funded program that provides benefits to retired or disabled workers, along with their eligible survivors and dependents. Upon reaching retirement age, workers may be eligible for OASDI benefits.

The tax is contributed to a couple of separate funds that are designed to allow you to collect benefits you’re eligible for and grow your net worth once you stop working.

• Old-Age And Survivors Trust Fund (OAS): The OAS is designed to pay workers who are eligible for benefits upon reaching retirement age. The fund also pays survivors’ benefits to the eligible survivors of those who passed before reaching retirement age as long as they meet certain work requirements leading up to their death.
• Disability Insurance Trust Fund (DI): The federal DI trust fund is meant to pay out to those who are unable to participate in substantial gainful activity in any form of employment due to total disability, provided they worked enough time to qualify for payments. The amount of working time needed to qualify depends on the age your disability was sustained.

How Does OASDI Tax Work?

From a tax perspective, the OASDI tax works differently depending on whether you work for an employer (and receive a W-2) or you’re self-employed. We’ll get into the particulars for self-employment below, but let’s start by breaking down the basics for employers and employees.

If you work for someone other than yourself, you and your employer each contribute half of your OASDI tax. The total tax is 12.4%, meaning you each pay 6.2% of the tax out of every paycheck up to an annual limit calculated based on the average wage index.

How Does OASDI Work For Self-Employment?

When you’re self-employed, there’s no employer to cover the other half of your OASDI. The full 12.4% is included in your self-employment tax up to the annual income limit. The total self-employment tax is 15.3% because 2.9% of your wages go to the Medicare hospital insurance tax. Unlike OASDI, there’s no annual limit on the wages that go toward Medicare.

The good news is that as a self-employed individual, you can deduct the wages that would normally be paid by an employer – half of your self-employment tax – from your adjusted gross income.

What Is The OASDI Limit For 2024?

As mentioned above, there is an OASDI tax limit based on the annual wage index. In 2024, this is $168,600, up 5.24% from $160,200 in 2023. This means the maximum amount a wage-earning employee could expect to pay in OASDI tax is $10,453.20.

If you made this income while self-employed, the portion of your self-employment tax going toward OASDI would be $20,906.40.

How Does OASDI Calculate Retirement Benefits?

Eligibility for federal retirement benefits through Social Security are calculated based on a system of work credits as well as the average earnings of your work years. Your credits determine whether you’re eligible for benefits, while your average earnings during your career help determine the amount you’re eligible for.

You earn a credit toward your Social Security benefits periodically based on attaining a certain level of wages subject to OASDI tax. Although this changes periodically, you earn a credit for every $1,730 in taxable wages, with the ability to earn up to four credits per year. With the exception of a government-recognized disability preventing you from working, you need 40 credits during your career to be eligible for benefits.

The actual amount of the benefits you’re eligible for is dependent on your average earnings over the course of your working life. If you make more, you pay more, so your benefit is higher.

What Happens With OASDI When Working Beyond Retirement Age?

Full retirement age varies based upon the year you were born, but if you work beyond your full retirement age, you earn delayed retirement credits that increase your Social Security benefit by a certain percentage for every month you work beyond your full retirement age before maxing out when you reach age 70.

If you were born in 1943 or later, the monthly increase is 2/3 of 1%, or 8% per year. Prior to that, there was a gradual increase from 11/24 of 1% per month, or 5.5% over a year, if you were born between 1933 – 1934.

What Are The Criteria For The OASDI Program?

Assuming you’ve attained at least 40 OASDI credits over the course of your working life, the big factor for most people in qualifying for benefits under Social Security is age. But we’ll break everything down in this table:

FAQs: What To Know About OASDI Insurance

Those are the basics, but let’s touch on a few more pertinent questions.

Is the OASDI tax mandatory?

For those in covered occupations, OASDI tax is mandatory. There are a few occupations (usually minimum wage), including domestic employees (who work in a home), where you have to earn at least $2,700 from any single employer before the tax is withheld. An election worker is covered under the law if they make more than $2,300. Farmworkers must pay the tax if they earn more than $150 from any employer or the employer employs more than $2,500 worth of labor in 2024.

At what age do I stop getting taxed for OASDI?

If you’re in a qualifying occupation, OASDI never stops based on age. There are wage thresholds beyond which you won’t be taxed if you hit them before the end of the year. Additionally, if you work beyond retirement age, that can increase your payments by a certain percentage for every month you work between retirement age and age 70. Your Social Security retirement, disability or survivors’ benefits could be taxable if half your benefits added to all your other income exceeds a threshold amount for your filing status. Speak to a tax advisor.

Is OASDI the same tax as Social Security tax?

OASDI tax is the same as Social Security tax. It funds Social Security benefits.

Can my OASDI be part of estate planning?

The Social Security benefits associated with OASDI are more traditionally tied to retirement planning than estate planning. However, there are certain circumstances in which survivors’ benefits apply if you’re a widow(er), surviving divorced spouse, child, mother or father taking care of a child or a dependent parent. This gets complex, so speak with a financial advisor.

Is it possible to avoid OASDI tax?

Not every worker is covered under OASDI tax. Exemptions include civilians employed by the federal government who were hired before January 1, 1984, railway workers, some state and local government employees and domestic, farm and self-employed workers who don’t meet given income thresholds. In some cases, these employees are covered by other retirement systems to make up for not qualifying for Social Security. In others, they don’t meet work minimums.

The Bottom Line: OASDI Could Benefit You Later In Life

The OASDI tax funds Social Security benefits. So, while you pay into it in perpetuity (up to an annual maximum) while working, you benefit from it later in life. With limited exceptions, OASDI tax applies from the first taxable dollar. If you work beyond your full retirement age, each additional month up to age 70 increases your Social Security benefit in retirement.

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