If you are here, you most probably have come across an OASDI tax deduction on your paycheck and are wondering what it is? Besides, considering that there may be many other deductions that hugely cut on your earnings, is OASDI important and why?
What is OASDI Tax?
OASDI, commonly referred to as social security or medicare, stands for Old Age, Survivors and Disability Insurance. Working individuals are expected to make a periodic contribution towards it. Your contribution guarantees you; Monthly benefits to replace your income once you retire. Payments sometimes start as early as 62 years of age. However, for people born after 1960, the retirement age is 67. However, individuals may choose to start collecting their benefits later than this. People who start collecting after 70 years may end up with higher benefits due to the delay.
- In case of your death, your survivors will receive a sustenance lumpsome income to handle expenses. Survivors include spouses or children.
- You acquire disability insurance when necessary and are eligible for vocational rehabilitation services.
- Combined with medical hospital insurance trust funds, you can access Healthcare services like inpatient hospital care and home health care.
Brief History on OASDI Tax
In the year 1935, president Franklin D. Roosevelt issued an official go-ahead to OASDI taxation. This was during a time when the US economy was in a very low state. According to Investopedia, about 222,000 people benefited from it with earnings of $22.60 per month. OASDI taxation has since grown over the years to benefit millions of people within the U.S.
Now, about 63million people collect benefits courtesy of OASDI taxation. According to FindLaw, employers are necessitated to make a 6.5% deduction from each of their employees’ paycheck to go towards OASDI. They are also required to pay an additional matching amount referred to as the employer’s share. For the self-employed, they are required to contribute both the employee’s and employer’s share.
However, not every income is eligible for OASDI taxation as the federal government has placed a ceiling on income that is eligible to be taxed and this keeps fluctuating from year to year. In the year 2020, this amount stands at $137,700. This means that any income amount above this will not be taxed.As mentioned above, to benefit, employees, employers and the self-employed each have a role to play in OASDI taxation. Let’s have a closer look at the specific roles of each party.
1. Employees Obligations
Employees are expected to ensure they contribute OASDI tax as required since, in the end, it is for their benefit. They should also keep track of the total amount of tax they are deducted yearly to ensure it is the right amount. There have been cases whereby employees get overcharged. For example, if you work several jobs and your total income surpasses the $137,700 limit, there is a high chance that each of your employers may each deduct OASDI tax from your paychecks hence lead to an overpayment. In this case, one has the right to a refund of the overpaid amount. To avoid such occurences, it is wise to inform your employers about your other jobs and how much you earn from each.
2. Employers Obligations
Employers are required to deduct OASDI taxes from their employees and also set aside an equal amount for each employee. They are also mandated to report the total amount deducted each quarter on IRS Form 941. The same information should also be availed to their employees every year. This way, employees can keep track of their income and total OASDI deductions.
3. Self-Employed person Obligations
As a corporate owner, you are not obligated to pay the OASDI tax from your dividends. However, if you are an employee in your business, as you file your tax returns, you will also be required to calculate the total amount of self-employment tax you owe. Usually, OASDi tax and Medicare taxes are combined to come up with the self-employment tax.
Who is Exempt from OASDI tax?
It is important to note that not every working person is expected to contribute OASDI. There are specific groups of people who are legally exempt from these taxes. They include:
- Individuals who work within the U.S. but do not possess U.S. citizenship. This includes their families and domestic workers.
- Foreign students and educational professionals,
- Students who work part-time in the institution they are enrolled in, based on their continued enrollment.
- Employees of foreign governments working on official capacity.
- Members of certain recognized religious groups.
Nevertheless, each of these groups of people has to adhere to the terms and conditions set by the government so as to be exempted from this tax.
The Future for OASDI Tax
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 2019 OASDI Trustees Report there are suggestions that if the OASDI tax were to be raised to 7.55% it would be sufficient enough to keep the social security program solvent, at least, for the next 75 years. Should this ideology be adopted, employees will have to bear with a larger cut from their paychecks.
However, if you are not elated by such a move, there is no need to worry as few seem excited about changing the 6.2% rate. Considering it’s been effective since the 1990’s, there is no urgency in changing it. What’s more, the government has up to 2030 to resolve social security funding issues before such cuts become a necessity.
If you are the kind of person who likes to secure their future then the OASDI tax offers you an opportunity to do so. It ensures you will have a reliable income during your old age or when you encounter eventualities lead to disability. Your loved ones are also safeguarded in case you die. To ensure you derive maximum benefits from it, always contribute your share as required.