What is the FICA-OASDI Tax and How Does it Work?
Demystify FICA-OASDI: understand this crucial payroll tax, its function in Social Security, and how it impacts your financial future.
The Federal Insurance Contributions Act (FICA) Old-Age, Survivors, and Disability Insurance (OASDI) tax is a mandatory payroll tax. This tax is a foundational component of the Social Security system in the United States. Its primary purpose is to fund programs that provide financial security to millions of Americans. These contributions support various benefit payments, ensuring a safety net for eligible individuals and their families.
Understanding FICA and OASDI
FICA, the Federal Insurance Contributions Act, is a federal law imposing a payroll tax on employees and employers. This tax ensures a portion of earnings contributes to federal social insurance programs. The FICA tax is composed of two main parts: Social Security and Medicare.
OASDI, or Old-Age, Survivors, and Disability Insurance, refers to the Social Security portion of the FICA tax. This segment funds the Social Security system’s core programs, including retirement, survivor, and disability benefits. While Medicare is the other FICA component, OASDI focuses on providing income security through its designated programs. These contributions support beneficiaries across various life stages.
Who Contributes and How Much
Contributions to FICA-OASDI are made by employees, employers, and self-employed individuals. Employees contribute through payroll deductions, with their employer withholding the tax from wages. Employers also pay a matching share, effectively doubling the contribution. For 2025, the OASDI tax rate is 6.2% for both the employee and the employer, resulting in a combined rate of 12.4%.
Self-employed individuals pay both the employee and employer portions of the OASDI tax through the self-employment tax. This combined rate is 12.4% of their net earnings. The annual wage base limit for OASDI contributions for 2025 is $176,100. Earnings above this limit are not subject to the OASDI tax, although Medicare taxes apply to all earned income without a wage base limit.
Benefits Funded by OASDI
The OASDI portion of the FICA tax funds three primary categories of benefits from the Social Security system. These benefits offer financial support to workers and their families in various circumstances. Contributions ensure the continuity of these programs for current and future beneficiaries.
Old-Age benefits, or retirement benefits, provide monthly income to eligible retired workers. Eligibility is based on a worker’s earnings history and Social Security tax payments over their career. The amount received is calculated based on lifetime earnings and the age benefits begin.
Survivors benefits offer financial support to eligible family members of a deceased worker who paid Social Security taxes. This can include spouses, children, and dependent parents, providing a financial cushion. These benefits help replace a portion of the income lost due to the worker’s death.
Disability benefits provide income to individuals unable to work due to a severe medical condition expected to last at least 12 months or result in death. The Social Security Administration defines disability as an impairment preventing substantial gainful activity. These benefits support those who can no longer maintain employment due to their health.