OASDI Tax Explained: An Essential Guide

If you manage payroll or HR operations, you’ve likely encountered the term OASDI tax on employee pay stubs. But what exactly is it, and why is it deducted? OASDI, which stands for Old Age, Survivors, and Disability Insurance, is a critical component of the U.S. Social Security system. This tax helps fund retirement, disability, and survivor benefits for millions of Americans. Understanding how OASDI tax works is essential for HR professionals, payroll administrators, and business owners to ensure compliance and avoid costly mistakes.

This guide will break down everything you need to know about OASDI tax, including its purpose, how it’s calculated, employer responsibilities, and common employee questions.

What Is OASDI Tax?

OASDI tax is a payroll tax that funds the Social Security program, which provides financial assistance to retired workers, individuals with disabilities, and surviving spouses or children of deceased workers. Established in 1935 under the Social Security Act, OASDI tax ensures that American workers have a financial safety net for retirement or unforeseen hardships.

Employers and employees both contribute to this tax. Each paycheck, a portion of an employee’s earnings is withheld and matched by the employer before being sent to the Internal Revenue Service (IRS). The funds are then distributed by the Social Security Administration (SSA) to eligible beneficiaries.

How OASDI Tax Works: Rates, Limits, and Calculations

HR professionals and payroll administrators need to understand how OASDI tax is calculated to ensure accurate deductions and compliance. Here are the key factors:

• OASDI Tax Rate: The current OASDI tax rate is 6.2% for employees and 6.2% for employers, totaling 12.4% of taxable wages. If you are self-employed, you are responsible for the full 12.4% through the self-employment tax.

• Wage Base Limit: The OASDI tax only applies up to a certain income level. In 2025, the wage base limit is $168,600. This means that any earnings beyond this amount are not subject to OASDI tax.

• Example Calculation: If an employee earns $100,000 annually, their OASDI tax deduction would be $6,200 (6.2% of $100,000), and the employer would match this amount, contributing another $6,200.

• Impact on Higher Earners: If an employee’s wages exceed the annual wage base limit, they stop paying OASDI tax on any additional earnings beyond that threshold.

Managing OASDI Tax in Payroll Systems

HR teams must ensure that payroll systems accurately calculate and withhold OASDI tax to maintain compliance and avoid penalties.

One of the most effective ways to manage OASDI tax is by using payroll software. Most modern payroll platforms automatically calculate and withhold the correct tax amounts, reducing the risk of errors and ensuring compliance with federal regulations. 

However, it is crucial to also conduct manual checks to ensure that your payroll and withholding is updated – this can be done by regularly reviewing the OASDI wage base limit, which changes annually. Since Social Security taxes only apply to wages up to a certain threshold, payroll systems must be updated each year to reflect the latest limit set by the Social Security Administration. Failing to adjust these settings could lead to incorrect withholdings and potential compliance issues.

Additionally, performing routine payroll audits is key to maintaining accuracy. Regularly reviewing payroll records helps identify discrepancies or miscalculations before they become costly mistakes. Audits ensure that OASDI tax is correctly applied, preventing under- or over-withholding and protecting both the company and employees from financial complications.

Employer Responsibilities for OASDI Tax

Employers must ensure that OASDI tax is withheld correctly and reported properly. Here’s what HR and payroll teams need to do:

1. Withhold OASDI Tax from Employee Paychecks
   Employers must deduct the correct percentage of OASDI tax from each employee’s paycheck. This is an automated process for most payroll systems.

2. Match Employee Contributions
   Employers must contribute an equal amount to the OASDI tax fund. For example, if an employee contributes $3,000 annually, the employer must also pay $3,000 on their behalf.

3. Report and Remit Taxes to the IRS
   Payroll taxes, including OASDI tax, must be reported and paid to the IRS through quarterly filings (Form 941) and annual filings (Form W-2 and Form 940 for unemployment taxes).

4. Ensure Compliance and Accuracy
   Mistakes in OASDI tax calculations can result in IRS penalties. HR professionals must stay updated on wage limits and tax rates to avoid under- or over-withholding.

Compliance, Audits, and Penalties

Failure to properly withhold and remit OASDI tax can lead to severe financial and legal repercussions for employers. Noncompliance disrupts business operations and can also result in government intervention, financial penalties, and employee disputes and/or lawsuits. Below are the main consequences of failing to adhere to OASDI tax obligations:

1. IRS Penalties and Interest Charges

The IRS imposes steep penalties on employers who fail to deposit payroll taxes, including OASDI, on time. The penalties increase based on the length of the delay:

• 1–5 days late: 2% penalty

• 6–15 days late: 5% penalty

• 16+ days late: 10% penalty

• More than 10 days after receiving an IRS notice: 15% penalty

Additionally, interest accrues on the unpaid amount until the balance is settled. In extreme cases, persistent noncompliance can trigger Trust Fund Recovery Penalties (TFRP), holding business owners and financial officers personally liable for unpaid payroll taxes.

2. IRS Audits and Investigations

The IRS conducts payroll tax audits to verify that businesses correctly withhold and remit Social Security and Medicare taxes. These audits can be triggered by discrepancies in filings, employee complaints, or random selection. If an audit reveals underpayment, businesses may owe back taxes, penalties, and interest.

3. Employee Disputes and Legal Claims

Errors in OASDI tax withholding can lead to disputes with employees, who may discover discrepancies when reviewing their Social Security statements. This can result in formal complaints to the Department of Labor or lawsuits for wrongful withholding.

If OASDI is under-withheld, employees may owe additional taxes when filing their returns. If over-withheld, they may demand refunds, leading to administrative burdens. Employers who intentionally misclassify employees or fail to withhold payroll taxes can be sued for wage theft or subjected to class-action lawsuits.

For example, FedEx paid out a $2.4 million settlement in 2020 for misclassifying 192 drivers as independent contractors instead of employees. This misclassification led to incorrect payroll tax withholdings, including OASDI contributions. 

Employee FAQs About OASDI Tax

HR teams often receive questions from employees about their paycheck deductions. Here are some common inquiries and how to address them:

1. Why is OASDI tax deducted from my paycheck?
OASDI tax funds Social Security benefits for retirees, disabled individuals, and survivors of deceased workers. Paying into the system ensures you will receive benefits when you retire or if you become disabled.

2. What happens if I reach the wage base limit?
Once your earnings exceed the annual wage base limit ($168,600 in 2024), you stop paying OASDI tax for the remainder of the year. However, you will still be subject to Medicare tax, which has no wage cap.

3. Can I opt out of paying OASDI tax?
Generally, no. OASDI tax is mandatory for most employees. Exceptions exist for certain government employees, religious exemptions, and some nonresident aliens.

4. How does OASDI tax impact my future Social Security benefits?
The amount you contribute to OASDI tax throughout your career affects your Social Security retirement benefits. The more you earn (up to the taxable wage limit) and contribute, the higher your benefit amount will be in retirement.

5. What happens if my OASDI tax is withheld incorrectly?
Employees should notify HR or payroll immediately if they notice errors. Employers may need to issue a correction or adjust future withholdings. Employees who overpay due to multiple jobs may be eligible for a refund when filing their tax return.

Final Thoughts

Understanding OASDI tax compliance is crucial for HR professionals and business leaders managing payroll. Ensuring accurate withholding, timely remittance, and clear employee communication can help businesses avoid costly errors and penalties. 

GoCo’s all-in-one HR and payroll platform simplifies compliance by automating OASDI tax calculations, ensuring accurate deductions, and keeping up with ever-changing tax regulations. With GoCo, businesses can seamlessly manage payroll, stay compliant, and maintain accurate records – all in one easy-to-use system. Take a free tour or book a demo today to see how GoCo’s modern HR platform makes it easy to streamline payroll and HR compliance.