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OASDI Tax: How Contributions Differ for Employers and the Self Employed

OASDI, or Old Age Survivors and Disability Insurance, refers to Social Security and Medicare. Learn about OASDI tax, including FICA, SECA, contribution limits, self-employed contributions, and more.

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Kristin Hoppe
May 12, 20217 minutes
What is the OASDI tax? We break it down.

What Is OASDI Tax?

OASDI is an acronym standing for Old Age, Survivors, and Disability Insurance. The OASDI tax funds a large portion of a program you’re likely already familiar with: Social Security.

The money that employers collect from employee paychecks for the purposes of the OASDI tax, goes toward funding the Social Security program. The OASDI program limits the amount of earnings subject to taxation annually. This annual limit changes each year. The taxable maximum for 2021 is $142,800.

Employers, employees, and the self-employed contribute to OASDI through payroll taxes. More in depth, here is what your contributions to OASDI cover:

What the OASDI Tax Covers

  1. Support in old age. Once qualified contributors reach retirement age, they will receive monthly benefits to replace a portion of their income in retirement.

  2. Survivors benefits. Survivors benefit amounts are based on the earnings of the deceased relative. The more the deceased relative paid into Social Security, the higher the survivors benefit would be. The monthly benefit amount is a percentage of the deceased’s basic Social Security benefit.

  3. Lump-Sum Death Payment. A surviving spouse or child may also be eligible to receive a lump sum payment of $255 if they meet specific requirements.

  4. Disability benefits. The Social Security Disability Insurance (SSDI) program provides benefits to qualifying contributors and their family members. And the Supplemental Security Income (SSI) program provides benefits to qualifying adults and their children.

Is the OASDI Tax Mandatory

OASDI is federally mandated, and for the most part, all workers must contribute. There are only a few exceptions to this rule. Members of some religious groups may be exempt from Social Security taxes, but must waive their rights to benefits in order to become exempt.

When Should You Outsource HR and Consider a PEO?

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FICA, SECA, and OASDI Contributions

Because the OASDI tax is taken directly from payroll contributions, how much is paid by employees, employers, and self-employed workers vary. There are two ways in which people contribute to OASDI — through FICA or SECA.

Employee and Employer Contributions

Employers and employees contribute through FICA, which stands for the Federal Insurance Contributions Act.

It taxes both parties, employers and employees, to contribute to Social Security and Medicare (aka the FICA tax).

Employers pay matching contributions to the percentage of income that employees pay on a monthly basis. For 2021, the OASDI tax rate is set at 6.2% of net earnings for Social Security coverage and 1.45% for Medicare coverage (a total of 7.65%).

Self-Employed Contributions

Those who are self-employed, however, have to pay for both sides of the OASDI contributions — essentially matching their contributions. Instead of paying through FICA tax, those who are self-employed pay through SECA, also known as the Self-Employment Contributions Act.

This means if you have a company classified as an S-Corp, Sole Proprietorship, or Partnership, you pay for OASDI through SECA. As of 2021, the SECA tax rate is 15.3% of net earnings, which equals the amount an employer and employee would jointly pay through FICA.

If you’re a self-employed worker and worried about paying disproportionate taxes compared to an employee, fear not: there is a way to relieve the burden. Because self-employment tax is deductible as a business expense, half of the SECA tax can be deducted from income tax.

You can do this on the Form 1040 Self-Employment tax form on Line 6.

Related Article: Know the Basics: LLC Advantages & Disadvantages

As of 2021, the maximum amount of income taxed for Social Security topped out at $142,800, a $5,100 increase from 2020. That means the maximum any person can pay towards Social Security in 2021 is $8,853.60 (6.2% of the maximum income $142,800).

However, the Medicare tax rate has a different limit. Employees are taxed 1.45% on their first $200,000, then 2.35% for anything beyond $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return).

All wages in excess of $200,000 will be taxed at 2.35% ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return).

Remember, if you are self-employed those rates will approximately double to cover employer and employee coverage, although you can write half of those costs off on your yearly Form IRS 1040.

Those who file as self-employed are taxed at 2.90% Medicare tax on the first $200,000 of self-employment income, and 3.8% (2.90% regular Medicare tax + 0.9% additional Medicare tax) on all self-employment income in excess of $200,000. As with employers and employees, these limits change to $250,000 of combined self-employment income if filed as a joint return, and $125,000 for married taxpayers filing a separate return.

The OASDI tax stands for Old Age, Survivors, and Disability Insurance tax. Although this term might be new to you, you’ve probably heard of its better known names: social security and medicare.

Employers, employees, and the self-employed contribute to OASDI through payroll taxes. More in depth, here is what your contributions to OASDI cover:

What the OASDI Tax Covers

  1. Support in old age. Once qualified contributors reach retirement age, they will receive monthly benefits to replace a portion of their income in retirement.

  2. Survivors benefits. Survivors of a deceased relative who contributed to OASDI may receive a lump sum of money to help handle costs in the absence of the deceased’s income. Although this only covered specific jobs when social security was first established in the 1930’s, it now covers nearly all professions.

When Should You Outsource HR and Consider a PEO?

Should you outsource HR? Use this guide to decide.

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  1. Disability insurance. Beneficiaries are eligible for vocational rehabilitation services or other forms of disability insurance. 4. Hospital insurance. Although the acronym doesn’t mention it, the OASDI tax also pairs with medicare hospital insurance trust funds to pay for services like inpatient hospital care and home health care.

How Employees and the Self-Employed Contribute Differently

Because the OASDI tax is taken directly from payroll contributions, how much you pay depends on whether you’re an employee, employer, or self-employed. There are two ways in which people contribute to OASDI — through FICA or SECA.

Employee and Employer Contributions

If you are an employee or an employer, you contribute through FICA. FICA stands for Federal Insurance Contributions Act. It taxes both parties to contribute to social security and medicare (aka, the OASDI tax). Employers pay matching contributions to the percentage of income that employees pay on a monthly basis, which sets the FICA tax rate at 6.2% of net earnings for social security coverage and 1.45% for medicare coverage (a total of 7.65%).

Self Employed Contributions

If you are self employed, however, you have to pay for that matching contribution yourself as well. Instead of paying through FICA tax, self-employed people pay through SECA, also known as the Self-Employment Contributions Act. This means if you have a company classified as an S-Corp, Sole Proprietorship, or Partnership, you pay for OASDI through SECA. As of 2016, the SECA tax rate is 15.3% of net earnings, which equals the amount an employer and employee would jointly pay through FICA.

Related: Which Business Structure Best Fits Your Company? [Quiz]

If you’re worried about paying disproportionate taxes compared to an employee, fear not: there is a way to shift the burden. Because payroll is considered a business expense, corporations have the ability to deduct half of their total profits as such. You can do this on the Form 1040 Self-Employment tax form on Line 6.

Contribution Limits and Other Facts to Know

As of 2016, the maximum amount of income taxed for social security topped out at $118,500, a $1,500 increase from 2015. The Social Security Administration announced that it will not increase the wage limit in 2016. That means the maximum any person can pay towards social security in 2016 is $7,347.

However, the Medicare tax rate has a different limit. Employees are taxed 1.45% on their first $200,000, then 2.35% for anything beyond $200,000. Remember, if you are self employed those rates will be doubled to cover employee and employee coverage, but you can write half of those costs off on your yearly 1040.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.