What Is OASDI Tax?

Learn more about Old Age, Survivors and Disability Insurance and why you pay OASDI tax.

Everyone knows that taxes come out of their paycheck, but exactly which taxes may be less clear – specifically, the OASDI or OASDI/EE tax listed on a pay stub.

OASDI is an acronym for the Old-Age, Survivors, and Disability Insurance program. The EE stands for “employee expense.” Here’s a closer look the OASDI tax, including what it is, how it works and how much you pay.

What Is the OASDI Tax?

OASDI is a tax that you and your employer both pay to fund Social Security. In fact, it’s often called the “Social Security” tax.

Going a little deeper, the OASDI tax is part of FICA taxes. FICA is short for the Federal Insurance Contributions Act, which states that taxes should be withheld from paychecks and used to fund Social Security and Medicare programs.

How much OASDI tax do you pay? “Employees pay 6.2% of their wages and employers pay a matching 6.2% for a total of 12.4% that is sent to the federal government,” says Katelyn Magnuson, founder of The Freelance CFO LLC, an accountancy for freelancers.

How OASDI Works

Virtually everyone with a paycheck pays the OASDI tax, although though there are a few exceptions that we’ll get to momentarily.

But if you work for a company, you’ll pay half of that 12.4%, and your employer will pay the other half. If you work for yourself, you’ll pay the entire 12.4% OASDI tax. You’ll be glad to know that you can deduct half of the self-employment tax when you calculate your adjusted gross income, also known as AGI.

You may wonder: Is there a limit to the OASDI? After all, 6.2% of your pay, or if you’re self-employed, 12.4%, really adds up.

In fact, there is a threshold after which you no longer have to pay additional OASDI tax. Every year, the Social Security Administration determines the rates for the OASDI tax. The rates haven’t budged since 1990, but the maximum taxable earnings often change from year to year, especially if inflation is on the rise or the cost of living climbs. Last year, the maximum taxable earnings for the OASDI tax was $142,800. For earnings in 2022, it’s $147,000.

“After that point, you and your employer are off the hook for that 12.4% tax on any income earned above that amount,” Magnuson says.

OASDI and Self-Employment

If you’re self-employed, you should pay the OASDI tax. And what you pay in OASDI taxes is considerable. Instead of paying 6.2% taxes like employees do, you pay the entire 12.4% yourself because you are your own employer.

“This is also part of the reason that many solopreneurs/single member LLCs choose an (S-corporation) election once they hit a certain income threshold,” Magnuson says. She explains that people who form an LLC often end up paying less OASDI tax than they would have otherwise.

Ideally, self-employed individuals pay OASDI taxes every quarter or every month. Wait and pay annually, and you’ll be hit with a hefty tax bill, including penalties and interest charges.

“The best advice I can give to make paying your taxes when you’re self-employed is preparation and organization,” says Joshua Zimmelman, managing director of Westwood Tax & Consulting, a New York City-based virtual accounting firm.

He suggests that if you have an accountant or tax preparer, ask what the estimates will be for the upcoming year. “Once you have that information, you’ll need to budget your finances to make sure you’re able to pay the correct amount every quarter. Schedule the payments on your calendar and set reminders, so you don’t miss any and risk late fees or penalties,” Zimmelman says. “The more organized you are, the more routine quarterly taxes will become and the less stress you’ll face because of them.”

To calculate your OASDI taxes, use the IRS form Schedule SE to estimate how much you will pay.

Is OASDI Tax the Same as Social Security?

Yes, in a way. When someone refers to a “Social Security tax,” they likely mean the OASDI tax. Still, it’s more complicated than simply saying the two are the same.

Eighty-five cents of each OASDI tax dollar is put into a trust fund that pays monthly benefits to current retirees and their families and to surviving spouses and children of workers who have died, according to the Social Security Administration. About 15 cents goes into a trust fund that pays benefits to people with disabilities and their families. The reason it’s “about” 15 cents is that a tiny bit of what’s left over – less than a penny from each dollar paid – goes toward managing the Social Security program.

Can I Opt Out of Paying Social Security Tax?

Almost all workers are required to pay OASDI tax. “There are only a few groups that are exempt from paying taxes into the Social Security system – members of some religious groups, many foreign researchers or academics, if they are nonimmigrant and nonresident aliens, and self-employed workers who make under $400 a year,” Zimmelman says.

He adds: “Local and state government employees who are covered under a public retirement plan typically don’t need to pay into Social Security if it would mean they were paying twice.”

To request an exemption, you must fill out IRS Form 4029.

Nonresident Citizens and OASDI Taxes

For the most part, even those who aren’t U.S. citizens but live in the United States are subject to OASDI taxes.

But as Zimmelman notes, there are exceptions. Some countries have income tax treaties that allow citizens to exempt part or all of their American wages from being taxed by the United States. Certain types of visas may exclude someone from paying OASDI tax. According to the IRS, the following visas exempt someone from paying Social Security taxes:

• A-visas: These are primarily for employees of foreign governments.
• D-visas: A crew member of a ship or aircraft may have a D-visa if the vessel is a foreign vessel and the employer is a foreign employer, or if the services are performed outside of the United States.
• F visas, J visas, M visas and Q visas: These visas are usually held by researchers, professors and scholars.
• G-visas: These are generally held by employees of international organizations. Spouses usually do have to pay the OASDI.  
• H-visas: There are different levels of H-Visas, such as H-1B, which are for specialty occupations. H-2A visas are often held by temporary agricultural workers. H-3 visas may be held by special education exchange visitors.
  
  

For a full list of exempt services, see the IRS’ Publication 15 (Circular E), Employer’s Tax Guide.

The bottom line: For most people, the OASDI tax is a certainty. You’re paying it. But at least you’ll get your money back when you start receiving Social Security checks.