While you may know about some payroll taxes that come out of your paycheck, such as state and federal government income taxes, you may be wondering about the OASDI tax that you see on your pay stub.

OASDI tax is the Old-Age, Survivors, and Disability Insurance program, commonly known as the Social Security tax. This Social Security Administration (SSA) program provides monthly benefits to disabled and retired workers and their surviving spouses and dependents. Keep reading to learn more about how this tax works, what the tax limits are, and if it’s mandatory.

What Is OASDI Tax?

The OASDI tax is deducted from your earned income and is used to provide monthly benefits to those who have lost income due to disability, retirement, or death. The OASDI program (Old-Age, Survivors, and Disability Program) is also known as the Social Security program.

OASDI tax, along with Medicare tax, make up the Federal Insurance Contributions Act (FICA tax), which collectively accounts for 15.3%.

How Does OASDI Tax Work?

The OASDI tax rate is 12.4% of your wages. If you’re an employee, the tax is split between you and your employer. This means that 6.2% is deducted from your paycheck automatically, and your employer will pay the remaining 6.2%.

OASDI tax is also subject to an income limit. This means that there’s a limit to how much of your income will be subject to this tax. You’ll pay the tax regardless of your age, even if you’re collecting Social Security and working part-time. However, once your income crosses the income threshold, you won’t have to pay more.

How Does OASDI Tax Work If I’m Self-Employed?

If you’re self-employed, you’re responsible for paying the full 12.4% of OASDI tax. You can have a tax professional calculate the tax for you or do it yourself. OASDI taxes are due quarterly, but you can choose to pay them monthly.

While it may seem like a big expense for self-employed individuals, you’ll be able to deduct half of the OASDI tax you paid on your income tax return. You may also be able to lower your OASDI tax by forming an S-corporation.

OASDI Tax Rates

The 2024 OASDI tax rate is 12.4% of the employee’s gross pay. This amount is evenly split between you and your employer. This means that you’ll only pay 6.2% of your gross income to OASDI tax while your employer pays the remaining 6.2%.

OASDI Tax Withholding

OASDI tax is automatically withheld from your paycheck each pay period. This means that you won’t have to pay it separately once you receive your pay. The OASDI tax rate has remained the same since 1990 at 12.4%.

If you’re self-employed, there will be no tax withholding, but you’ll be responsible for paying the full 12.4% towards OASDI tax. Taxes are due quarterly, and when you file your annual tax return, you can deduct half of the tax amount you paid. Keep in mind that not paying taxes by the tax deadline can result in penalties and interest.  

OASDI Tax Limits

The OASDI program limits the earnings subject to taxes each year. This annual limit changes each year based on the average wage index.

This annual limit is also known as the contribution and benefit base or taxable maximum. The OASDI tax limit for the year 2024 is $168,600, which is up $8,400 from 2023, when it was $160,200. This means that you won’t have to pay OASDI tax on any income above $168,600.

OASDI Tax Deductions

As we’ve mentioned above, OASDI tax liability is 6.2% in 2024 if you’re an employee and 12.4% if you’re self-employed. The tax rate can change if there’s new legislation.

Self-employed workers can claim a deduction for half of the OASDI tax they pay. However, if you’re an employee, there are no deductions or credits to reduce your tax liability.

Opting Out of OASDI Tax

OASDI tax is mandatory in most cases, so you won’t be able to opt-out. However, you won’t have to pay Social Security tax on any income above the 2024 taxable maximum of $168,600.

There may be some exceptions where you won’t have to pay OASDI tax:

  • If you’re self-employed and earn less than $400.
  • Some religious groups are exempt, but they need approval from the IRS and must waive their rights to any benefits in the future.
  • Some non-immigrant and non-resident aliens may be exempt depending on their visa, including foreign students, foreign government employees, academics, and researchers.
  • State and local government employees may be exempt if they’re only covered by their local or state pension plan.

OASDI Tax Funds Social Security 

OASDI tax deducted from your paycheck provides Social Security benefits to millions of retirees and disabled individuals. If you’re self-employed, you’ll need to pay more than employed workers. However, self-employed individuals can also claim deductions for half of the tax they paid.

There aren’t many exemptions from OASDI tax, and they’re not easily approved. The Social Security system works best when most American workers pay into the system. Keep in mind that even if you receive Social Security when you retire, the benefit amount won’t be enough to cover your retirement expenses. It’s important to start retirement planning as soon as you start working.

Consider opening a Simplified Employee Pension Individual Retirement Account or SEP IRA, which allows self-employed individuals and small business owners to set aside money for retirement with tax advantages, helping to ensure a more secure financial future.