The OASDI tax is popularly called Social Security tax. Social Security benefits are paid to workers who retire or are disabled and to surviving family members if a worker dies. OASDI tax revenues are placed into trust funds. The Social Security Administration then draws on the trust funds to provide benefits.
Description
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The acronym OASDI stands for Old Age, Survivors and Disability Insurance. OASDI refers to the tax authorized under the Federal Insurance Contributions Act, or FICA. Most workers must pay the OASDI tax, usually through payroll deductions. Those who are not required to pay usually work for a state government or similar employer that has set up an alternative retirement plan. Employers of covered workers also pay Social Security tax over and above the wages they pay. Medicare tax is not part of the OASDI tax, although it is sometimes lumped together with Social Security, and both employers and employees also pay Medicare tax.
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Benefits
About 96 percent of employers and their employees must pay OASDI taxes. In return, all employees who pay into Social Security for 10 years are entitled to retirement benefits. Another function of the OASDI tax is providing disability insurance. The Social Security Administration says a 20-year-old has about a 30 percent chance of facing disability at some point. Social Security pays disability benefits to people who are unable to work for a year or longer. Finally, survivors benefits help take care of your family if you should die. Survivors benefits can be paid to a spouse, child or dependent parent.
OASDI Tax Rates
The OASDI tax is a flat percentage. Workers normally pay 6.2 percent of their gross wages until they exceed a yearly limit that is periodically adjusted. For example, in 2011 a worker paid the OASDI tax on the first $106,800 earned. Employers pay an equal amount. These rates vary occasionally. For instance, in 2011 Congress temporarily reduced the employee contribution rate to 4.2 percent; although employers continued to pay the full 6.2 percent.
Self-Employment
If you are self-employed, you must pay OASDI tax. However, since you do not have an employer to pay part of the tax, you are responsible for the entire amount. This means a self-employed individual has to pay 12.4 percent of her net earnings up to $106,800, although this was also reduced for 2011 to 10.4 percent. Self-employed individuals are also responsible for the full Medicare tax, bringing the combined rate to 15.3 percent (13.3 percent in 2011).