How OASDI Taxes Affect Your Retirement Benefits
Old-Age, Survivors and Disability Insurance taxes fund Social Security’s various benefits programs. Most people pay 6.2% of their income up to $160,200. Paying more OASDI taxes while employed entitles you and your family to higher retirement and survivors benefits in the future.
- Written by Terry Turner
Senior Financial Writer and Financial Wellness Facilitator
Terry Turner has more than 35 years of journalism experience, including covering benefits, spending and congressional action on federal programs such as Social Security and Medicare. He is a Certified Financial Wellness Facilitator through the National Wellness Institute and the Foundation for Financial Wellness and a member of the Association for Financial Counseling & Planning Education (AFCPE®).Read More
- Edited BySavannah Hanson
Senior Financial Editor
Savannah Hanson is a professional writer and content editor with over 16 years of professional experience across multiple industries. She has ghostwritten for entrepreneurs and industry leaders and been published in mediums such as The Huffington Post, Southern Living and Interior Appeal Magazine.Read More
- Financially Reviewed ByToby Walters, CFA®
Toby Walters, CFA®
Chartered Financial Analyst and Paraplanner
Toby Walters, CFA®, has over 25 years of financial research experience. With a knowledge and understanding of researching and analyzing financial data, he has developed a unique and experienced viewpoint on money matters. He has been a chartered financial analyst since 2003, and most recently a portfolio analyst and paraplanner.Read More
- Published: March 22, 2023
- Updated: April 28, 2023
- 5 min read time
- This page features 10 Cited Research ArticlesKey Takeaways
- OASDI taxes fund Social Security.
- OASDI taxes get paid by two parties — the employee and the employer. Employees pay 6.2% of their wages, and their employer pays another 6.2%.
- Self-employed people must pay both parts for a total of 12.4%.
- The more OASDI taxes you pay, the higher your Social Security retirement benefits and your family’s survivors benefits will be.
- Even if you receive Social Security benefits, you still must pay OASDI taxes on all of your earned income.
What Are OASDI Taxes?
Old-Age, Survivors and Disability Insurance (OASDI) taxes are payroll taxes that fund the federal Social Security program. Employers, employees and people who are self-employed must pay these taxes each month or each quarter.
All collected OASDI taxes go into one of two trust funds. One is for retirement benefits. The second goes toward disability benefits. Some funds are then redistributed to people who currently draw Social Security benefits. The rest is invested with the goal of growing the funds for future claimants.OASDI Tax Rates
Employees Self-Employed People Amount Paid by the Individual 6.2% 12.4% Amount Paid by the Employer 6.2% N/A Total Tax Rate 12.4% 12.4%Source: Social Security Administration
OASDI taxes only apply to earnings up to a certain threshold. For the 2023 tax year, that threshold is $160,200. All income above this amount is not subject to OASDI taxes.
The OASDI taxes you pay over your working life play a significant role in your retirement income. Understanding how the program works is a key component of smart retirement planning.OASDI is the part of Federal Insurance Contributions Act (FICA) taxes that pay for Social Security. Eighty-five percent of each OASDI tax dollar goes to benefits to current retirees and their families and to surviving spouses and children of workers who have died. Calculating OASDI taxes for self-employed workers can be difficult. It might be helpful to consult with an accountant. Paying OASDI taxes can also be burdensome. Paying on a monthly or quarterly basis might make more sense than paying a large annual bill.
How OASDI Taxes Impact Retirement Benefits
The amount you pay in OASDI taxes during your working life directly affects the monthly payments you’ll get in retirement benefits. The more you pay into the fund, the more you’ll receive.
The Social Security Administration uses a complex formula to determine your Social Security benefit amount based on your past wages. You can get a rough idea of how much you’ll receive by putting your earnings history into SSA’s online calculator. Higher earnings result in a higher full retirement age benefit.
The maximum full retirement age Social Security benefit for 2023 is $3,627. To receive this much, you will need to have met or surpassed the OASDI tax threshold in all 35 of your highest-earning years.
OASDI Taxes and Self-Employment
Because they act as their own employer, people who are self-employed pay both parts of the OASDI tax. This makes their OASDI tax rate 12.4%.
To offset this higher tax burden, self-employed individuals can claim the employer portion of their OASDI taxes as a business expense. This significantly reduces their taxable income for the year.
Some self-employed people don’t have OASDI taxes automatically withheld from their paychecks as people who work for someone else do. If you’re self-employed and you don’t use a payroll service, you’ll need to set this money aside yourself and remit it to the IRS.
OASDI Taxes and Working in Retirement
The IRS levies OASDI taxes on all paid work regardless of the worker’s age or whether they claimed any Social Security benefits. This means you’ll still owe OASDI taxes on your earned income if you worked after you’ve started collecting Social Security.
However, OASDI taxes don’t apply to unearned income. You won’t have to pay taxes on your Social Security income, income from private pensions, income from investments, or any other sources of passive income used to fund your retirement.
OASDI Taxes and Estate Planning
OASDI taxes can also factor into estate planning. You won’t pay OASDI taxes on your estate, but the amount you pay during your working life affects how much your family could receive in the form of Social Security survivors benefits after your death.
Social Security survivors benefits go to spouses, ex-spouses, dependent parents, minor children and disabled children of workers who have passed away.Details of benefits payouts include:
- Your spouse could receive up to 100% of your full retirement benefit if they claim survivors benefits when they reach full retirement age.
- Your children receive 75% of your full benefit if they’re under 18 years old or are disabled.
- Your dependent parents each receive 75% of your full benefit if both are still living. If one parent is still living, their payment rate is 82.5%.
Resources for Learning About OASDI TaxesStill curious about OASDI taxes? The resources below will help you learn more about them.
- The SSA provides an infographic with a simplified explanation of FICA taxes, like OASDI taxes, and how the funds they raise are distributed.
- This document from the Social Security Office of Retirement and Disability Policy outlines the OASDI program and how it’s changed over history.
- The University of Texas at Austin offers detailed instructions on how to calculate the OASDI taxes you owe, including information on how to find out how much money your employers have withheld from your paychecks to pay this tax.
Frequently Asked Questions About OASDI TaxesAt what age is Social Security no longer taxed?OASDI taxes apply to all earned income regardless of your age. If you earn money through work, you must pay OASDI taxes on that income. You won’t owe OASDI taxes on any money from Social Security benefits or any other form of retirement income.Who is responsible for paying OASDI taxes?All employers and people who earn income from either employment or self-employment must pay OASDI taxes. Self-employed people must pay 12.4% of their net earnings. Employed people and their employers must each pay 6.2%.Is OASDI different from Medicare?OASDI and Medicare are separate and OASDI taxes do not fund Medicare. A separate 2.9% tax funds Medicare. People sometimes refer to both the Medicare tax and OASDI taxes collectively as Federal Insurance Contribution Act (FICA) taxes, but they are not the same thing.Advertisement
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10 Cited Research Articles
- Internal Revenue Service. (2023, April 7). Topic No. 751 Social Security and Medicare Withholding Rates. Retrieved from https://www.irs.gov/taxtopics/tc751
- University of Texas at Austin. (2023, January 9). Calculation of Federal Employment Taxes. Retrieved from https://payroll.utexas.edu/payroll-info/calculation-employment-taxes
- Social Security Administration. (2023, January 3). What Is the Maximum Social Security Retirement Benefit Payable? Retrieved from https://faq.ssa.gov/en-us/Topic/article/KA-01897
- Social Security Administration. (2023, January). If You Are Self-Employed. Retrieved from https://www.ssa.gov/pubs/EN-05-10022.pdf
- Social Security Administration. (2017, March). What Is FICA? https://www.ssa.gov/thirdparty/materials/pdfs/educators/What-is-FICA-Infographic-EN-05-10297.pdf
- Social Security Administration. (2014, May 27). Social Security Quick Calculator. Retrieved from https://www.ssa.gov/OACT/quickcalc/
- Social Security Office of Retirement and Disability Policy. (2013). Social Security (Old-Age, Survivors, and Disability Insurance) Program Description and Legislative History. Retrieved from https://www.ssa.gov/policy/docs/statcomps/supplement/2013/oasdi.html
- Social Security Administration. (n.d.). Contribution And Benefit Base. Retrieved from https://www.ssa.gov/oact/cola/cbb.html
- Social Security Administration. (n.d.). Frequently Asked Questions: What Happens if I Work and Get Social Security Retirement Benefits? Retrieved from https://faq.ssa.gov/en-us/Topic/article/KA-01921
- Social Security Administration. (n.d.). If You Are the Survivor. Retrieved from https://www.ssa.gov/benefits/survivors/ifyou.html
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