If you’re here, chances are you’ve come across an OASDI tax deduction on your paycheck and are wondering what it is. Also, considering that there can be many other deductions that greatly reduce your earnings, is OASDI important and why?
What is the OASDI tax?
OASDI, commonly known as social security or medicare, stands for Old Age, Survivors, and Disability Insurance. Workers are expected to contribute periodically to this. Your contribution guarantees you; Monthly benefits to replace your income once you retire. Payments sometimes start at age 62. However, for people born after 1960, the retirement age is 67. However, people can choose to start collecting their benefits later. People who start collecting after age 70 may end up with higher benefits due to the delay.
- In the event of your death, your survivors will receive a lump sum support income to handle expenses. Survivors include spouses or children.
- You purchase disability insurance when necessary and are eligible for vocational rehabilitation services.
- In combination with hospital health insurance trust funds, you can access health care services such as inpatient hospital care and home health care.
A brief history of the OASDI tax
In 1935, President Franklin D. Roosevelt issued an official go-ahead for OASDI taxes. This was during a time when the American economy was in a very low state. According to Investopedia, about 222,000 people benefited from earnings of $ 22.60 per month. Since then, OASDI taxes have grown over the years to benefit millions of people within the U.S.
Now, around 63 million people receive benefits thanks to OASDI taxes. According to FindLaw, employers must take a 6.5% deduction from each of their employees’ paycheck to go toward OASDI. They are also required to pay an additional matching amount called the employer share. In the case of the self-employed, they must contribute with both the employee and the employer.
However, not all income is eligible for OASDI taxes, as the federal government has set a limit on the income that is eligible to be taxed and this continues to fluctuate from year to year. In 2020, this amount rises to $ 137,700. This means that any amount of income greater than this will not be subject to tax. As mentioned above, to benefit, employees, employers and the self-employed have a role to play in OASDI taxation. Let’s take a closer look at the specific roles of each part.
1. Obligations of employees
Employees are expected to make sure to contribute OASDI tax as required, as it is ultimately for their benefit. They should also keep track of the total amount of taxes that are deducted annually to make sure it is the correct amount. There have been cases where employees are overcharged. For example, if you have multiple jobs and your total income exceeds the $ 137,700 limit, there is a high probability that each of your employers will be able to deduct OASDI tax from your paychecks and therefore lead to a payment in excess. In this case, one is entitled to a refund of the overpaid amount. To avoid such situations, it is wise to inform your employers about your other jobs and how much you earn from each one.
2. Obligations of employers
Employers must deduct their employees’ OASDI taxes and also reserve an equal amount for each employee. They are also required to report the total amount deducted each quarter on IRS Form 941. The same information should also be available to your employees each year. This way, employees can keep track of their income and total OASDI deductions.
Who is exempt from the OASDI tax?
There are specific groups of people who are legally exempt from these taxes. They include:
- People who work within the US but do not have US citizenship. This includes their families and domestic workers.
- Foreign students and education professionals,
- Foreign government employees working in an official capacity.
- Members of certain recognized religious groups.
However, each of these groups of people must comply with the terms and conditions established by the government to be exempt from this tax.
The future of OASDI taxes
In the future, there is a high possibility that employees will have to contribute more than 6.2% of their earnings to the OASDI tax.
However, if you are unhappy with such a move, there is no need to worry as few seem enthusiastic about changing the 6.2% rate. Considering that it has been effective since the 1990s, it is not urgent to change it. Additionally, the government has until 2030 to resolve social security funding problems before such cuts become a necessity.
If you are the type of person who likes to secure your future, the OASDI tax offers you the opportunity to do so. It assures you that you will have a reliable income during your old age or when you encounter eventualities that lead to a disability. To ensure you get the maximum benefits from it, always contribute your share as needed.