Is OASDI Tax Deductible? A Review for Different Taxpayers

Old-Age, Survivors, and Disability Insurance (OASDI) is a fundamental component of the Social Security program in the United States. It provides financial support to retired workers, individuals with disabilities, and survivors of deceased workers. This overview clarifies the deductibility of OASDI taxes for employees, self-employed individuals, and employers, addressing distinct tax implications for each group.

How OASDI Contributions Are Made

Contributions to the OASDI program are collected through payroll taxes, which are structured differently for employees, employers, and self-employed individuals.

For employees, OASDI contributions are made through Federal Insurance Contributions Act (FICA) taxes, which are automatically withheld from their paychecks. The employee portion of the Social Security tax is 6.2% of their gross wages. Employers are required to match this amount, contributing an additional 6.2% on behalf of their employees. For 2025, the Social Security tax applies to wages up to an annual limit of $176,100.

Self-employed individuals contribute to OASDI through self-employment tax, which combines both Social Security and Medicare taxes. They are responsible for paying both the employee and employer portions, totaling 12.4% for Social Security. This contribution is calculated on their net earnings from self-employment and is typically paid quarterly.

Deductibility for Employees

OASDI taxes paid by employees are generally not deductible from federal income tax. These mandatory contributions are withheld from an employee’s gross pay. The Internal Revenue Service (IRS) does not allow employees to deduct their share of Social Security taxes.

When an employer calculates federal income tax withholding, it is typically based on the employee’s gross pay before the deduction of OASDI taxes. This means the employee’s taxable income for federal income tax purposes is not reduced by the amount of Social Security tax they paid. The employee’s FICA tax payments are considered contributions to a social insurance program, rather than a deductible expense.

Even if an employee works for multiple employers and their combined wages exceed the annual Social Security wage base limit, any excess Social Security tax withheld is not a deductible expense. Instead, such excess amounts would typically be claimed as a refund on their federal income tax return.

Deductibility for Self-Employed Individuals

Self-employed individuals face a distinct set of rules regarding the deductibility of their OASDI contributions, which are paid as part of the self-employment tax. However, the tax code provides a specific adjustment to income for these taxpayers.

A self-employed individual can deduct one-half of their total self-employment tax from their gross income when calculating their Adjusted Gross Income (AGI). This deduction accounts for the employer-equivalent portion of the self-employment tax, effectively leveling the playing field with traditional employees whose employers pay half of their FICA taxes as a business expense. The deduction affects only income tax and does not reduce the net earnings subject to self-employment tax itself.

For example, if a self-employed individual’s total self-employment tax for the year is $10,000, they can deduct $5,000 (half of the total) when determining their AGI. This deduction is reported on Schedule 1 (Form 1040), “Additional Income and Adjustments to Income.” To calculate the self-employment tax, individuals typically use Schedule SE (Form 1040), “Self-Employment Tax,” after determining their net earnings from business on Schedule C (Form 1040), “Profit or Loss from Business.” This deduction is available regardless of whether the taxpayer itemizes deductions or takes the standard deduction.

Deductibility for Employers

Employers are required to contribute their share of OASDI taxes on behalf of their employees. The employer’s portion of Social Security and Medicare taxes, which includes the 6.2% OASDI contribution, is a deductible business expense. This deduction is permitted because these payroll taxes are considered an ordinary and necessary cost of doing business.

Businesses can deduct these employer-paid FICA taxes on their federal tax returns. For sole proprietors, this deduction is typically reported on Schedule C (Form 1040), “Profit or Loss from Business.” Corporations, partnerships, and other business entities report these expenses on their respective income tax returns, such as Form 1120 for C corporations or Form 1120-S for S corporations.

The ability to deduct these payroll taxes helps reduce a business’s overall taxable income. Employers must accurately report these contributions to the IRS, typically through quarterly filings like Form 941, “Employer’s Quarterly Federal Tax Return,” and annually on Form W-2 for each employee.