OASDI Tax
What is the OASDI tax?
OASDI (Old-Age, Survivors, and Disability Insurance) Tax, also called social security, is a mandatory tax deducted from the income contributing to the Federal Insurance and Contributions Act (FICA). It is used to provide benefits to retired workers, disabled individuals, and surviving family members of deceased workers in the United States.
The OASDI program started in 1935, with all employees covered as long as they worked in jobs covered by Social Security. To be eligible for OASDI, employees must have fully insured status, requiring at least 40 credits or 10 years of work experience.
Employment credits can be earned based on wages or self-employment income, with a maximum of 4 per year.
Is the OASDI tax mandatory?
Yes, the OASDI tax is mandatory for most U.S. employees.
It’s a contribution from both the employer and the employee with a standard rate of 6.2% for both parties. Hence, the total contribution comes to 12.4%.
Self-employed individuals need to contribute the complete amount of 12.4%.
Workers contribute to OASDI through one of two mechanisms: employees pay via the Federal Insurance Contributions Act (FICA), while self-employed individuals contribute under the Self-Employment Contributions Act (SECA).
The OASDI taxable maximum is $176,100, meaning that only the first $176,100 of an individual’s earnings are subject to the 6.2% Social Security tax. Any income earned above this threshold is not subject to OASDI tax, but the individual still pays OASDI tax on earnings up to $176,100.
What are the tax exemptions for OASDI tax?
Certain employees are exempted from the OASDI tax in general. Examples include:
- Self-employed individuals earning less than $400 annually.
- Some state and local government employees participate exclusively in their employer’s retirement system.
- Certain nonimmigrants and nonresident aliens, depending on their visa types, might be exempt from OASDI taxes.
However, from September to December 2020, employees earning within specified wage limits were temporarily exempt from COVID-19. The deferred taxes were collected from wages again in 2021.
How are Social Security benefits taxed based on income and filing status?
The taxation of Social Security benefits depends on a recipient’s total income and filing status. Up to 85% of benefits may be subject to federal income tax if the taxpayer’s income exceeds certain thresholds.
The table below summarizes the thresholds for different individuals:
| Filing Status | Income Range | Taxable Portion of Benefits |
| Married Filing Jointly | $32,000 – $44,000 | Up to 50% |
| Above $44,000 | Up to 85% | |
| Married Filing Separately | Any income | Up to 85% |
| Other Filing Statuses | Lower thresholds apply | Up to 50% or 85% |
How does the OASDI tax work?
OASDI tax works as a system where current workers and employers contribute to trust funds that benefit retirees, the disabled, and survivors.
Taxes are allocated to three trust funds:
- Old-Age and Survivors Insurance (OASI)
- Disability Insurance (DI)
- Medicare Hospital Insurance (HI)
Workers attain insured status by earning a minimum number of credits based on their earnings. There are several types of insured status tests depending on the type of benefit being sought:
1. Fully insured status: Generally, a worker must earn at least 40 credits to be fully insured, which typically requires about 10 years of work.
2. Currently insured status: To be currently insured, a worker must have earned at least six credits in the 13 quarters ending with the quarter in which they die, become entitled to retirement benefits, or become entitled to disability benefits.
3. Disability-insured status: There are four rules for determining disability-insured status, including requirements for the number of credits earned within specific time frames. For example, one rule requires at least 20 credits in the 40-quarter period ending with the quarter in which the worker becomes disabled.
The OASDI program is administered by the Social Security Administration (SSA), which collects taxes, determines eligibility, and distributes benefits.
How is the OASDI tax calculated?
The OASDI (Old-Age, Survivors, and Disability Insurance) tax is calculated based on an employee’s earnings up to a set wage base. Here’s an overview:
The two main variables are the wage base for the year and the OASDI tax rate. For 2025, the wage base is $176,000, and the OASDI tax rate is 6.2% for employers and employees.
Case 1: If an employee earns less than the wage base, the tax is 6.2% of their earnings.
Case 2: If an employee earns more than the wage base, they only pay OASDI tax on the maximum taxable earnings ($176,100).
Here are three examples:
1. Employee earning $50,000
50,000×6.2%=3,100
The employee pays $3,100 in OASDI tax.
2. Employee earning $176,100 (wage base limit)
176,100×6.2%=10,918.20
The employee pays $10,918.20 in OASDI tax.
3. Employee earning $200,000 (above wage base)
Only the first $176,100 is taxed at 6.2%. The calculation remains:
176,100×6.2%=10,918.20
The employee does not pay OASDI tax on earnings beyond $176,100.
What are the OASDI tax rates and limits for 2025?
For 2025, the OASDI tax rate for both employer and employee is 6.2%, which comes to a total os 12.4%. The taxable maximum or wage base is $176,100.
This results in a maximum OASDI tax of $10,918.20 per person for both employees and employers if earnings meet or exceed the wage base. The OASDI tax rate for self-employed individuals is 12.4%, as they are responsible for both the employee and employer portions.
Note: The taxable maximum, or wage base, increased from $168,600 in 2024. This adjustment reflects an approximate 4.4% increase
Is the OASDI tax refunded?
Unlike income taxes, the OASDI tax is not refunded at the end of the year, even if you overpay.
However, if an individual works for multiple employers and their combined earnings exceed the taxable maximum, they may have paid more than the required OASDI tax. In such cases, the excess amount can be claimed as a credit on their tax return.
How do you reduce the OASDI tax?
While the OASDI tax is generally mandatory, certain strategies can be used to reduce an individual’s overall taxable income. This could help potentially reduce major amount of tax burden:
1. Maximize contributions to tax-advantaged accounts
Individuals who contribute to retirement accounts like 401(k)s and traditional IRAs can lower taxable income marginally. For 2025, the annual contribution limits for 401(k) and 403(b) accounts will increase to $23,500, and for SIMPLE IRAs, the limit will rise to $16,500.
Such contributions reduce the total taxable income, thereby potentially lowering an employee’s overall tax liability.
2. Optimize business structure and compensation
For business owners, to reduce OASDI taxes, structuring your business as an S Corporation can offer tax advantages. By paying yourself a reasonable salary and taking additional income as distributions, you can reduce the portion of income subject to self-employment taxes, including OASDI.
3. Get self-employment benefits
Self-employed individuals pay the full 12.4% OASDI tax but can deduct half of it when filing annual tax returns. As a result, this reduces adjusted gross income.
4. Use tax-free benefits
Employers can provide certain benefits that are exempt from taxation, such as health insurance premiums, health savings accounts (HSAs), and flexible spending accounts (FSAs).
If or when employees participate in these programs, they can reduce their taxable income and thereby lower the overall tax burden.
What is the difference between OASDI and FICA?
OASDI is a specific component of Social Security funded through FICA taxes, whereas, FICA is the federal law that mandates payroll taxes to fund Social Security and Medicare programs. FICA includes both OASDI (Social Security) and Medicare (Hospital Insurance for seniors and the disabled) taxes.
For 2025, the OASDI tax rate is 6.2% of taxable gross income up to the taxable wage limit set by the SSA, while the Medicare (MED) tax rate is 1.45% of all taxable earnings with no income cap.
