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 may 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 to it regularly. 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 because of the delay.
- In the event of your death, your survivors will receive lump-sum income support to handle expenses. Survivors include spouses or children.
- You purchase disability insurance when necessary and are eligible for vocational rehabilitation services.
- Combined with hospital health insurance trust funds, you can access health care services such as inpatient hospital care and home health care. Current situation
Now, about 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 both the part of the employee and the part of the employer.
However, not all income is eligible for OASDI taxes, as the federal government has set a limit on income that is eligible to be taxed and this keeps fluctuating from year to year. In the year 2020, this amount rises to $137,700. This means that any amount of income above this will not be taxable. 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.
Obligations of employees
Employees are expected to ensure that they 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 work multiple jobs and your total income is over the $137,700 limit, there is a high chance that each of your employers will be able to deduct the OASDI tax from your paychecks and thus lead to a payment in excess. In this case, one is entitled to a refund of the overpaid amount. To avoid this type of situation, it is advisable to tell your employers about your other jobs and how much you earn from each one.
Obligations of employers
Employers must deduct their employees’ OASDI taxes and also set aside 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 must also be made available to your employees each year. In this way, employees can keep track of their income and total OASDI deductions.
Obligations of the self-employed
As a business owner, you are not required to pay OASDI tax on your dividends. However, if you are an employee of your company, when you file your tax returns, you will also be asked to calculate the total amount of self-employment tax you owe. Generally, OASDi taxes and Medicare taxes are combined to generate the self-employment tax.
Who is exempt from the OASDI tax?
It is important to note that not all workers are expected to contribute to OASDI. There are specific groups of people who are legally exempt from these taxes. They include:
- People who work within the US but do not hold US citizenship. This includes their families and domestic workers.
- Foreign students and education professionals,
- Students who work part-time at the institution in which they are enrolled, based on continuous enrollment.
- Employees of foreign governments 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. According to the 2019 OASDI Trustees Report, there are suggestions that if the OASDI tax were raised to 7.55%, it would be enough to keep the social security program solvent for at least the next 75 years. If this ideology is adopted, employees will have to put up with a further reduction in their paychecks.
However, if you’re not happy with such a move, there’s 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.
conclusion
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 in your old age or when you encounter eventualities that lead to disability. Your loved ones are also protected in the event of your death. To ensure you get the most out of it, always contribute your share as needed.
