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What Is OASDI Tax
The OASDI tax refers to the Old Age, Survivors, and Disability Insurance program, also called the Social Security Tax.
The Social Security Administration administers the OASDI tax and it is intended to fund the Social Security program.
Both employers and employees pay the OASDI tax as part of their FICA taxes.
FICA is short for the Federal Insurance Contributions Act, which requires employers to withhold certain taxes from employees’ paychecks to fund Social Security and Medicare programs.
The main objective of this tax is to ensure that workers can support themselves in retirement or cases of disability or death.
You can consider the OASDI tax as a forced saving for your retirement or as protection against disability or death leading to a loss of a family’s source of income.
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How OASDI Tax Works
Every employee in the United States is required to pay the OASDI tax.
Employers are required to remit a total sum of 12.4% of their employees’ wages in OASDI tax to the government, where the employer and employee each pay half of this amount.
Employees that pay the OASDI tax will get a tax slip at the end of the year where the total amount of tax that was paid will be indicated.
The good news is that the OASDI tax paid will be deducted from the employee’s adjusted gross income (AGI).
Also, for every pay, your employer should provide you with a paystub where the actual amount of tax that has been deducted should be reflect.
Since the employer remits your taxes to the government, at the end of the year, you will receive a statement showing the total that you have paid towards the OASDI tax.
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Who Pays OASDI Tax
Virtually every employee must pay the OASDI tax.
Typically, employers are required to withhold the appropriate amount of tax off of the employee’s paycheck.
The employer withholds 6.2% from the employee’s paycheck and contributes 6.2% to make a total tax contribution of 12.4%.
For example, if an employee earns $100,000, he or she will pay $6,200 in OASDI tax and the employer will add another $6,200 to it and remit $12,400 to the federal government.
Self-employed individuals must also pay OASDI tax.
The biggest disadvantage for self-employed individuals is that they will need to assume the entire 12.4% tax.
That’s why many sole proprietors and solo business owners will choose to form an S-Corporation or LLC to save some money in their taxes.
There’s one exception as to who is required to pay OASDI tax, and that’s members of some religious groups, foreign researchers or academics, and self-employed workers who make less than $400 a year.
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What Does OASDI Tax Pay
The OASDI tax is an amount of money that is remitted to the federal government to fund Social Security programs and Medicare programs.
Approximately 85% of the contributions goes to fund monthly benefits paid to retired workers and their families along with surviving spouses and their children of workers that died.
About 15% of the contributions goes to pay benefits to people with disabilities and their families.
A small fraction of the contributions is used ot fund the Social Security Administration and its management.
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OASDI Tax Example
Let’s look at an example of how OASDI tax is charged.
If you are an employee earning an annual salary of $50,000, you are required to pay OASDI tax on your wages.
In total, your employer must send an amount equal to 12.4% of your total wages, in this case $6,200.
However, employers and employees split the bill half and half.
You will therefore need to pay $3,100 throughout the year and your employer will pay $3,100.
Some types of workers are exempt from paying this tax, such as foreign scholars and researchers that are not US citizens or permanent residents, along with members of some religious organizations.
OASDI Tax FAQ
How much OASDI tax do you pay?
The OASDI tax deducted from an employee’s paycheck represents 6.2% of the employee’s wages.
In total, the employer remits an amount equal to 12.4% of the employee’s wage to the government, where the employee pays 6.2% and the employer pays 6.2%.
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Is there a limit to OASDI tax?
Yes, there is a limit after which the OASDI tax will not be charged.
The Social Security Administration is responsible for setting the OASDI tax rate in the United States.
For example, in 2022, the maximum taxable earnings for OASDI tax is set to $147,000.
This means you will not need to pay further taxes on earnings over $147,000.
Can I be exempt to pay OASDI tax?
Everyone earning an income is required to pay OASDI tax, with a small exception.
Those who are exempt of paying the OASDI tax are members of some religious organizations, self-employed individuals earning less than $400 per year, and foreign researchers and academics that are not US citizens or permanent residents.
Is OASDI the same as Social Security?
Loosely speaking, OASDI tax is also referred to as Social Security tax.
However, 85% of this tax funds retirement programs and 15% is used to pay benefits to people who are disabled or to families of workers that have died.
What does OASDI tax cover?
The OASDI tax covers several things, such as:
- Financial support in old age
- Survivor benefits
- Lump-sum death benefits
- Disability benefits
Takeaways
So there you have it folks!
What is the OASDI tax?
The Old-Age, Survivors and Disability Insurance (OASDI) tax is a US tax that is charged on every employee’s earnings to fund the Social Security program.
Employers are required to deduct this tax from their employees’ paychecks automatically.
If you look at your paycheck, you will be able to see a line item where the tax for OASDI has been deducted.
Now that you know what the OASDI tax is and how it works, good luck with your research!
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