What Are OASDI Taxable Wages? A Simple Explanation

Old-Age, Survivors, and Disability Insurance (OASDI) is the official designation for the federal Social Security program in the United States. This program provides income support to retirees, individuals with disabilities, and their families. It also offers benefits to survivors of insured workers. The funding for OASDI comes primarily from dedicated payroll taxes.

Understanding OASDI Taxable Wages

OASDI taxable wages represent the portion of an individual’s earnings on which Social Security taxes are levied. This generally includes most forms of compensation an employee receives for services performed. Both employees and their employers contribute to these taxes, with self-employed individuals paying both portions.

The purpose of these taxes is to finance the Social Security program. The Federal Insurance Contributions Act (FICA) governs these payroll taxes. If compensation is considered “wages” for income tax purposes, it is generally also considered wages for OASDI purposes, unless specifically excluded by law.

Common Included Wages

Regular salaries and hourly wages paid to employees are the most common examples of OASDI taxable wages. Commissions earned by sales professionals are also included in this category. Bonuses, whether performance-based or discretionary, are subject to OASDI taxes.

Tips reported by employees, particularly if they exceed a certain amount, also constitute OASDI taxable wages. Payments for vacation time and sick leave are similarly included. Severance pay, which is compensation provided to an employee upon termination of employment, is also subject to OASDI taxation. Certain fringe benefits that are considered taxable income, such as non-accountable expense reimbursements or the personal use of a company car, are also included.

Common Excluded Wages

Not all forms of compensation are subject to OASDI taxes; several types of payments are generally excluded. Employer contributions to qualified retirement plans, such as 401(k) or 403(b) plans, are typically not considered OASDI taxable wages at the time of contribution. Similarly, employer payments for health insurance premiums are usually excluded from OASDI taxable wages.

Qualified educational assistance and qualified dependent care assistance provided by an employer are also commonly excluded. Certain fringe benefits, specifically those defined as “de minimis” benefits (of minimal value), “no-additional-cost services,” or “qualified employee discounts,” are generally not subject to OASDI taxes.

Workers’ compensation benefits received due to a work-related injury or illness are also excluded from OASDI taxable wages. Additionally, unemployment benefits, which are payments provided to individuals who have lost their jobs, are not subject to OASDI taxation. Reimbursements for business expenses, provided they are properly accounted for under an accountable plan, are also excluded.

The Annual Wage Base

A specific limit exists on the amount of earnings subject to OASDI tax each year, known as the annual wage base. Once an individual’s total earnings for the year reach this predetermined amount, no further OASDI tax is withheld from any earnings above that threshold. This cap applies only to the OASDI portion of Social Security taxes, not to other payroll taxes like Medicare.

The annual wage base is not a static figure; it is adjusted periodically, typically each year, to account for changes in average national wages. This adjustment ensures the system remains relevant to current economic conditions. The concept of the wage base is designed to balance the funding needs of the Social Security program with the tax burden on higher earners.