Understanding OASDI: A Comprehensive Guide
One of the two FICA (Federal Insurance Contributions Act) taxes is the OASDI (Old Age, Survivors, and Disability Insurance) tax. Besides an employee’s salary, tips, and wages, an employer also pays OASDI tax. FICA taxes and the benefits that come alongside are divided into two sections. One of them is the OASDI tax, also known as the Social Security Tax. The other section is Medicare Tax. Both these taxes are covered in a broader category of payroll taxes, wherein local, state, and federal taxes are also included.
What is OASDI and Why It Matters
OASDI tax is one of the mandatory taxes deducted from one’s earned income. Both employers and employees pay this tax. This tax is used to fund the Social Security program, which provides benefits to retired staff, individuals with certain disabilities, and survivors of demised workers. People who fall in this category receive a monthly benefit that enhances their quality of life. So, for paying this FICA tax, an employer deducts 6.2% from an employee’s salary and matches this amount by contributing to the tax.
Definition and Basic Purpose
OASDI tax has been put in place to support the people and their families who do not have a stable source of income because of retirement or disability. In case an individual expires, his family benefits from the OASDI tax that the breadwinner had paid when he used to work.
OASDI tax currently covers 96% of jobs in the US. It is one of the mandatory taxes under the Self-Employment Contribution Acts (SECA) and Federal Insurance (FICA). For 2025, the OASDI tax rate is 6.2%. So, an employee pays 6.2% of his salary towards OASDI tax, and the employer matches this amount by contributing to the tax. Overall, an amount equivalent to 12.4% of a person’s salary goes towards OASDI tax, which, in turn, helps run the Social Security program.
Historical Background
The US passed the Social Security Act in 1935, and the OASDI tax was established. It was, however, implemented in 1937 after the Social Security Act was enacted. The purpose of the act was to address the economic hardships that the Great Depression brought along. A safety net was now in place for survivors of expired workers, people with disabilities, and retirees.
Across decades, the program and OASDI tax have grown significantly with the US population and economy. Benefit amounts are adjusted each year for inflation.
Impact on American Workers
Social Security benefits add to the economic well-being of millions of people. Towards the end of December 2022, 66 million people were the recipients of these benefits, and the amount dispersed was $111 billion. In 2022, the recipients received $1.2 trillion. Nearly the same amount was paid by employees and self-employed workers in 2022 for funding the program.
The Core Components of OASDI Benefits
- Retiree benefits: 85% of the OASDI tax received goes to a trust fund to pay retirement benefits. To be eligible for these benefits, one should have earned 40 work credits and should be at least 62.
- Disability benefits: 15% of the OASDI tax collected goes to a trust fund for the Social Security Disability Insurance (SSDI) program. Family members of disabled workers receive qualifying contributions.
- Survivors benefits: If an employee passes away, his children and spouse are eligible for monthly Social Security benefits. These are defined by the deceased’s relationship with the survivor and his earnings.
- Program management: Each year, 0.5% of Social Security benefits are spent towards managing the program.
Breaking Down OASDI Tax Contributions
As discussed earlier in the article, OASDI tax contributions have two components: Employees’ Contributions and Employers’ Contributions.
Employee Contributions
A section of the employee’s salary is deducted in the form of OASDI tax. This amount is adjusted each year for inflation and, as of 2025, stands at 6.2% of the salary.
You can Calculate Your OASDI Tax Easily with Our Free Online Calculator
Employer Responsibilities
The employer also matches the amount that is contributed to the employee’s OASDI tax. So, the amount equivalent to 12.4% of an employee’s salary goes towards OASDI tax. Besides paying this amount (6.2% of an employee’s salary) towards the OASDI tax, an employer also has some associated responsibilities:
| Employer Responsibilities | Details |
|---|---|
| Remitting Taxes to the IRS | The employer has to deposit the OASDI tax deducted from an employee’s salary and the matching contribution he makes towards the same to the IRS (Internal Revenue Service). |
| Reporting Employment Taxes | The employer has to deposit the OASDI tax deducted from an employee’s salary and the matching contribution he makes towards the same to the IRS (Internal Revenue Service). |
| Maintaining Accurate Records | For four years at least, an employer has to hold detailed records of wages paid and taxes withheld. |
| Going by Wage Base Limits | An employer has to operate keeping the annual Social Security wage base limit in mind. |
Self-Employment Considerations
If a person is self-employed, he needs to pay both the employee and employer part of the OASDI tax. So, he pays the entire 12.4% and also calculates it by himself, though he may take the services of a tax accountant or a Certified Public Accountant (CPA) for the same.
It is possible to pay the OASDI tax monthly, but it is due quarterly. Delaying tax payments makes the tax bill bigger, with interest and penalties involved.
Eligibility Requirements for OASDI Benefits
The eligibility requirements for OASDI benefits may depend on which benefit type you’re seeking; here are the general eligibility criteria as per our most recent update:
| Benefits | Eligibility Criteria |
|---|---|
| Retirement Benefits: | An employee should get at least 40 work credits, which is the same as working for 10 years in the covered employment. If you retire prematurely (before you are 67), the benefits are reduced. You can retire at any time after you are 62. Collecting work credits after the full retirement age increases benefits. • For those born in 1937 or earlier, the FRA is 65. • For those born between 1938 and 1959, the FRA gradually increases from 65 to 67. • For those born in 1960 or later, the FRA is 67. |
| Survivor Benefits: | Survivors of a deceased worker are eligible for benefits only if the worker was eligible for OAASSDI benefits. They should be related to the deceased at the time of his death. A person who divorced his/her spouse before death is not eligible for the benefits |
| Disability Benefits: | A person should meet the Recent Work Test, which is subject to his work history and age. Similarly, he must meet the Duration Work Test, which looks into the length of his work career. The duration and severity of the disability are also looked into. |
| Eligibility Requirements for OASDI Benefits |
How OASDI Retirement Benefits Are Calculated
- Defining the employee’s gross wages: This is the employee’s total salary before any deductions, like 401k, health insurance, and social security.
- Multiplication by 0.062: Multiply the gross salary by 0.062. This will be the OASDI to be deducted from the employee’s salary.
Example Calculation:
Let’s say your AIME is $5,000:
- Calculate the PIA:
- 90% of the first 1,115=1,115=1,003.50
- 32% of the next 3,885(3,885(5,000 – 1,115)=1,115)=1,243.20
- Total PIA = 1,003.50+1,003.50+1,243.20 = $2,246.70
- If your FRA is 67 and you start benefits at 67, you will receive $2,246.70 per month.
- If you start benefits at 62, your benefits will be reduced by about 30%, so you would receive approximately $1,572.69 per month.
- If you delay benefits until 70, your benefits will increase by 24% (8% per year for 3 years), so you would receive approximately $2,786.91 per month.
Primary Insurance Amount (PIA)
The Primary Insurance Amount (PIA) is the monthly Social Security benefit that one gets upon retiring at his full retirement age. Average Indexed Monthly Earnings (AIME) is an important criterion for calculating PIA. AIME is the average of the highest earnings made over a defined period, but it is adjusted for inflation.
Then, the Social Security formula is used to calculate benefits. When you understand PIA, you get an estimate of your potential Social Security retirement income and plan accordingly. Visiting the Social Security Administration’s website is the right way to find your estimated PIA. Alternatively, you may want to contact them directly.
Benefit Computation Formula
The benefit computation formula is used to calculate an employee’s retirement benefit. The key factors in the formula are final average earnings and years of service. Besides, a predetermined percentage is used.
To use the formula, the relevant data for the employee is gathered upon which the formula is applied. Now, post-retirement, the employee receives retirement benefits, characteristically in the form of an annual payment. They may receive it for a specified period or the rest of their lives.
Working While Receiving Benefits
An individual can work and receive Social Security retirement benefits at the same time. For an individual below his full retirement age who makes more than the yearly earnings limit, benefits are reduced.
However, post-retirement age, the benefits are not reduced, no matter how much one makes.
Disability Coverage under OASDI
A section of the revenue that the OASDI tax generates goes towards a trust that the Social Security Disability Insurance (SSDI) program administers. This is for the benefit of individuals unable to work and their families. The Social Security Administration has outlined these disabilities.
Survivors Benefits and Family Protection
Spousal Benefits
If the surviving spouse is over 60 but has not reached the full retirement age, he/she will get between 71% and 99% of the worker’s basic benefit amount. In case the surviving spouse has a child below 16, he/she gets 75% of the worker’s benefit amount, irrespective of his/her age.
Unmarried Children’s Benefits
Similarly, a deceased worker’s child gets 75% of his/her benefit amount.
- Under age 18 (or up to age 19 if still in high school).
- Any age if they were disabled before age 22 and remain disabled.
Maximum OASDI Benefits and Limitations
In this section, we will discuss OASDI’s Benefits and Limitations. As we all pay this tax, this is a very important thing to know about. We will discuss facts and numbers regarding this tax in the section below.
Annual Earning Limits
The annual taxable income for FICA tax was capped at $168,600 for 2024. Annual taxable income is now capped at $176,100 as of Feb 2025. This is also known as the wage base limit and is indexed to inflation.
Benefit Caps
The OASDI benefit cap for retirement is subject to when you decide to start receiving benefits. One receives the maximum possible benefits when he is 70 and the lowest possible benefits when he is 62.
- If you retire at your full retirement age, which is 67 for anyone born in 1960 or after that, your maximum monthly benefit would be $4,018 in 2025.
- If you intend to start receiving benefits at 62, your maximum monthly benefit would stand at $2,831 in 2025.
- Now, if you choose to wait till 70 to start receiving benefits, the maximum monthly benefit is $5,108 in 2025.
The Future of OASDI and Program Sustainability
Two programs combine to make Social Security. They are Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI). Both these programs have their trust fund.
Currently, Social Security collects less revenue each year and spends more on benefits for OASI. The trust is presently draining.
“Current projections demonstrate that by 2033, Social Security’s OASI Trust Fund will be depleted. This further tells us that there will be a 21% reduction in benefits for payouts at the rate that the current law promises and sufficient funds won’t be there.“
When we theoretically combine this fund with the DI Trust Fund, the OASDI trust Fund exhausts by 2035. There will, then, be a 17% reduction in benefits following this time.
The aging population is an important factor that is leading to this program’s financial shortfall. The nation’s demographics change. The number of beneficiaries grows at a quicker rate than the number of workers contributing to the program.
In 1964, there used to be four workers per beneficiary. But now, there are only 2.7. This rate will continue to decline by the year.
Conclusion: Securing Your Future with OASDI
OASDI limit for 2024 was higher. Your Social Security game plan also changes accordingly. However, one should remember that if the wage base is higher, it only means that you’ll be receiving additional cash when you retire. Deductions for social security are made in every salary that you receive. Annual taxable income is now capped at $176,100 as of Feb 2025. Even as an employer, one has to budget business expenses accordingly. Then, retirees are likely to come across even more benefits in the future.