If you've ever looked at the details on your paycheck stub, you've probably run into the alphabet soup of deductions and withholdings that reduce the amount of money you get to take home on payday. One common item you might find on your paycheck is OASDI tax. OASDI stands for old age, survivors, and disability insurance tax, and the money that your employer collects goes to the federal government in order to fund the Social Security program. Even for those who earn too little to owe income tax, OASDI tax usually gets deducted from the first $1 of earnings you get from your job.
How much is the OASDI tax?
The federal government collects OASDI tax from employees at a tax rate of 6.2%. Employers are responsible for withholding the 6.2% from their employees' pay and then sending it on to the government. Employers must also match the 6.2% with an additional 6.2% from their own funds.
For self-employed individuals, the effective OASDI tax is 12.4%, because those who are self-employed have to pay both the employee and employer portions of the OASDI tax themselves. An income tax deduction for the employer portion of the self-employment OASDI tax is allowed in order to put self-employed individuals in the same tax position that employers enjoy.
What's the maximum OASDI tax?
The OASDI tax only applies to wages or salary income up to a certain amount that changes from year to year. For 2020, the maximum amount on which OASDI tax gets applied is $137,700. That means that the most that you'll pay in OASDI tax is $8,537.40, or twice that if you're self-employed.
Note, however, that you sometimes will have to work to get any overpaid OASDI tax back. For instance, if you work two different jobs whose total salaries add up to more than the $137,700 limit, then the employers might well withhold too much in OASDI tax. There's a space on your income tax return that you can use to claim excess paid OASDI tax, giving you a refund of the overpaid amount.
What does OASDI tax get you?
Eligibility for Social Security retirement, survivors, and disability benefits hinges in large part on developing enough of a past earnings history to qualify for the program. That, in turn, requires workers to report and pay OASDI tax on enough income over time to meet the specific qualification requirements.
Different benefits require different time periods. For retirement benefits, you'll typically need to collect 40 Social Security credits, which many can do within a 10-year period. Disability benefits can kick in sooner, depending on the age of the worker at the time of disability. Survivor benefits depend on the work history of the person who dies, leaving some survivors with the benefit of getting monthly checks without actually having paid into the Social Security system themselves.
What's ahead for OASDI?
Some policymakers have suggested that the 6.2% amount for the OASDI tax might not be enough to move ahead into the 21st century. For instance, the 2019 Social Security Trustees Report said that if the OASDI tax were raised to around 7.55%, it would be sufficient to keep the Social Security program solvent over the next 75 years. Otherwise, benefit cuts will be necessary in order to keep the program financially solvent.
Nevertheless, the 6.2% rate has been in effect since the 1990s, and few seem excited about changing it. With most projections giving the government until the mid-2030s to resolve the Social Security funding issue before benefit cuts become necessary, it's likely that the OASDI tax will remain unchanged for the foreseeable future. That's likely to stay the case until Washington lawmakers build up the momentum they need to tackle the politically contentious issue going forward.