What it means
OASDI is the part of Social Security that pays cash benefits, as opposed to health cover, which sits under Medicare. It supports three groups: retired workers (the old-age part), families of deceased workers (the survivors part) and workers who can no longer earn a living because of a serious disability.
The money comes from payroll taxes collected under the Federal Insurance Contributions Act, usually shortened to FICA. Employers and employees each pay a share of a worker's wages, and self-employed people pay both shares themselves.
The rate is set in law, and the amount of annual wages that is taxed is capped at a limit that is adjusted each year. For a business, OASDI shows up on two lines of the payroll.
The employer's share is a cost on top of salary, while the employee's share is withheld from pay and passed on to the government. Finance teams need to include the employer share when they work out the true cost of a new hire.
Benefits are paid out of trust funds that hold the tax receipts. When tax income is higher than benefits paid, the surplus is invested in government securities, and when benefits exceed income the funds are drawn down.
This is why economists and politicians regularly debate the long-term health of the OASDI trust funds and ideas such as changing the tax rate, the wage cap or the retirement age. A common variant is the pair of terms OASI and DI, which split the programme into retirement and survivors on one side and disability on the other.
People also confuse OASDI with the Medicare tax, which is collected separately and follows different rules. Keeping the two apart matters when you read a payslip or build a payroll forecast.
In practice
Real-world examples.
Example
A software company hires an engineer at $120,000 a year. Assuming a 6.2% employer rate, the company's OASDI cost is 120,000 x 0.062 = $7,440 on top of the salary. The recruiting manager adds this to the cost of the hire before approving the offer.
Example
A freelance designer earns $80,000 from clients and has no employer. In simple terms she pays both shares, 12.4% of $80,000, which is $9,920. She sets aside money each quarter so the bill does not surprise her.
Example
A restaurant owner dies unexpectedly, leaving a spouse and two children under 18. Through the survivors part of OASDI the family may be eligible for monthly benefits based on the owner's earnings record. The family's adviser uses these payments in planning how to keep the household running while the business is sold.
Formula
Calculation
Employer OASDI tax = taxable wages x OASDI rate
Taxable wages = the lower of the employee's annual wages and the annual wage cap
For illustration, assume a rate of 6.2% for each side and a wage cap of $150,000. The real rate and cap are set by law and the cap changes each year, so always check the current figures before budgeting. An employee earns $180,000 in the year. Taxable wages = the lower of $180,000 and $150,000 = $150,000. Employer share = 150,000 x 0.062 = $9,300. The employee also pays 150,000 x 0.062 = $9,300, so the combined OASDI tax on this employee is 9,300 + 9,300 = $18,600.Case study
Seen in the real world.
Brightwater Logistics is a fictional freight company with ten senior managers who each earn $300,000 a year. In this illustrative story, the payroll budget assumed the employer would pay OASDI at 6.2% on the full salary, which is $18,600 per manager. The finance team had forgotten the wage cap of $150,000.
Once the cap was applied, the true cost was 150,000 x 0.062 = $9,300 per manager, so the budget was overstated by $9,300 per person, or $93,000 across all ten. The team also noticed that the managers' tax stopped part-way through the year, which changed the monthly cash flow pattern. Brightwater now builds its payroll forecast month by month so the cap is applied at the right point for each person.
Watch out
Common mistakes.
- Treating OASDI and Social Security as two different programmes. OASDI is the formal name for the cash-benefit side of Social Security.
- Applying the OASDI rate to all pay. The tax stops once wages pass the annual cap, so high earners cost less per dollar of salary.
- Counting only the amount withheld from the employee. The employer pays a matching share that is a separate business cost.
Questions
People also ask.
Is OASDI the same as FICA?
Not quite. FICA is the payroll tax law, and it funds both OASDI and the Medicare hospital insurance programme.
Does OASDI pay for health care?
No. Health cover for older people is provided mainly through Medicare, which is separate from OASDI cash benefits.
Do self-employed people pay OASDI tax?
Yes. They pay both the employee and the employer share through self-employment tax.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related