What Is Social Security Tax?
How OASDI Grants Social Security Credits
The Old Age, Survivors, and Disability Insurance program was set up by Congress as part of the original Social Security Act in 1935 to provide benefits to the elderly, survivors of those eligible to receive benefits, and to disabled individuals. The original Social Security Act was called the Old Age, Survivors, and Disability Insurance (OASDI) Act.
How the OASDI Program Works
The Social Security (OASDI) program grants Social Security credits to workers and self-employed small business owners for their wages, salaries, and other earnings over their work lifetime, up to a maximum amount of earnings each year.
The program is funded by contributions from employees and employers through a FICA tax. This tax is based on a percentage of the employee's gross pay, and both employee and employer contributions in equal amounts. Small business owners also pay a similar tax, called SECA (or self-employment tax), based on the net income of their businesses. Both employees and self-employed persons also pay a tax for the Medicare/Medicaid fund, which is part of the FICA tax.
What Employers Need to Know About OASDI
As an employer, you have several responsibilities relating to OASDI and FICA taxes:
- Employers must withhold FICA taxes from all paychecks of all employees until the employee has reached the Social Security maximum.
- Employers also must set aside (as "payroll taxes payable") an equal amount for each employee for each pay period, as the employer portion of FICA taxes.
- Employers must report the amounts withheld from employee paychecks each quarter on IRS Form 941.
- Make periodic payments to the IRS for the employee and employer contributions to FICA taxes.
- Report to employees each year on their total income and Social Security income for the previous tax year, on Form W-2.
What Small Business Owners Need to Know About OASDI
Each year, when you complete your small business tax return on IRS Schedule C, you will need to calculate the amount of self-employment tax you owe. This calculation is done on Schedule SE. The OASDI and Medicare taxes are added together to make up self-employment tax.
Then, you will need to pay these self-employment taxes in addition to your federal income tax for the year. Both of these taxes are based on the net income from your business.
Note that self-employment taxes are not deducted from amounts you take from your business as an owner, so you may need to pay estimated taxes during the year if your tax liability is too high. Check with your tax professional for more information on self-employment taxes and estimated taxes.
Corporate owners do not have to pay Social Security and Medicare taxes on dividends received, but they do have to pay these taxes if they work as employees in their businesses.