Almost all U.S. workers are required to contribute part of their paychecks to the Old Age, Survivors, and Disability Insurance (OASDI) program, which most of us know as Social Security. This pension program is an important source of income for many retirees.
According to statistics from the Social Security Administration, nearly nine of ten Americans aged 65 and older received some income from Social Security in 2023. Around one in eight received 90% or more of their income from this source.
The OASDI tax noted on your paycheck funds this comprehensive federal benefits program, which provides benefits to retired adults and people with disabilities as well as their spouses, children, and survivors. The goal of the program is to partially replace any income that is lost due to old age, the death of a spouse or qualifying ex-spouse, or because of a disability.
Social Security benefits go back to the days of theGreat Depression. They were created as part of a social safety net designed to reduce poverty and provide care for aging adults and people with disabilities. The program is funded by taxpayer dollars, primarily through payroll deductions. While most American taxpayers do not qualify for an exemption from Social Security taxes, the exemption does exist for a small number of people.
Key Takeaways
- Most U.S. workers are automatically enrolled in the Social Security program, but a few groups are exempt from paying taxes into the Social Security system.
- Members of certain religious groups are often exempt.
- Most foreign academics and researchers are exempt if they are nonimmigrant and nonresident aliens.
- Self-employed workers who make less than $400 annually do not pay Social Security taxes.
- All individuals are exempt from paying the tax on wages above a certain threshold.
OASDI Tax: Rates, How It Works, and Exemptions
The legislation that established the OASDI tax requires that it must automatically be withheld from employee paychecks at a rate of 6.2%. Your employer is also required to pay a matching 6.2%, making the total tax 12.4%. That’s a pretty high rate, considering that the Medicare tax is only 1.45%.
But there are limits to the tax. There is a maximum level of taxable income, which can change from year to year due to inflationary pressures, above which the tax doesn’t apply. This limit $160,200 for 2023 and $168,600 for 2024.
The OASDI tax applies to both traditional employees and self-employed individuals. If you’re self-employed, this means that you are expected to pay the entire 12.4% tax on your earned income. However, self-employed workers are also permitted to deduct half of the OASDI tax paid on their annual tax filings.
Who Gets Social Security Benefits?
Before we do anything, it’s important to understand Social Security. It actually encompasses several payment programs. These programs include:
- Direct cash benefits
- Payments to surviving family members in the event of the enrollee’s death
- Assistance for people with documented disabilities who are unable to continue working
Now, let’s review who actually is eligible for Social Security. Most people who receive benefits are retirees who paid taxes that supported the program during their careers and now receive a monthly check. More precisely, these benefits are provided to workers who have paid Social Security taxes for at least 40 credits (quarters of coverage) or 10 years.
Social Security is a pay-as-you-go system, with current workers covering the costs of benefits provided to current recipients. The Social Security program automatically enrolls most U.S. workers. Enrollment is connected to the Social Security numbers (SSNs) of workers and taxpayers within the United States.
Who Is Exempt From Paying Social Security?
Members of certain religious groups may be exempt from Social Security taxes. To become exempt, they must waive their rights to benefits, including hospital insurance benefits. They must also be a member of a religious sect that is conscientiously opposed to receiving private death and retirement benefits and provides food, shelter, and medical care for its members.
Most foreign students, scholars, teachers, and researchers are exempt if they are nonimmigrant and nonresident aliens. Foreign citizens who work in the U.S. for a foreign government (for example, as diplomats or consular officials) also do not need to pay. State and local government employees covered under a public retirement plan do not need to pay twice by paying into Social Security.
Self-employed workers who make less than $400 annually do not need to worry about paying Social Security taxes. High-income individuals are also exempt from paying the tax on any earnings over the $160,200 threshold in 2023 ($168,600 in 2024). This reduces their overall Social Security tax liability.
The current Social Security tax rate is 6.2% on both the employee and employer, for a total of 12.4%. If you are self-employed and make more than $400, you must cover both the employee and employer portions.
How to Get Exempt Status
Officially joining an exempt group may require an application to the Internal Revenue Service (IRS). Taxpayers who wish to qualify for a religious exemption usually have to apply and specifically ask the IRS for an exemption from paying self-employment taxes as well. The IRS grants exemptions to ministers, members of the clergy, and Christian Science practitioners on a regular basis.
Members of religious orders who have taken a vow of poverty are exempt from paying self-employment taxes on work performed for the order and don’t need to request a separate exemption. However, if the order elects to be covered under Social Security, then taxes would apply. Taxes would also apply for any work performed outside of the order.
As these examples demonstrate, becoming exempt from paying Social Security taxes requires specific action by the taxpayer and special permission from the IRS. As such, there is no legal way to stop paying Social Security taxes without applying and receiving approval or becoming a member of a group that is already exempt.
Who Is Eligible for a Social Security Exemption?
The majority of working Americans must pay Social Security taxes. But there are certain exceptions to the rule. For instance, you are exempt from paying Social Security taxes if you waive the right to any related benefits and meet other conditions. Members of religious orders who take a vow of poverty can also get an exemption.
Can Anyone Opt Out of Social Security?
Not everyone can opt out of Social Security. But you can if you are a member of an eligible religious sect or a member of the clergy who has taken a vow of poverty. To qualify, you must fill out file Form 4361 with the Internal Revenue Service (IRS).
Can Clergy Opt Out of Social Security?
Yes, clergy can opt out of Social Security. You can do so by filing Form 4361 with the IRS. Other individuals who can use this form include members of certain religious orders and those who follow Christian Science.
How Many Years Do You Have to Pay Into Social Security?
You need 40 credits to qualify for Social Security benefits. This means that you need to be in the workforce and pay Social Security taxes for at least 10 years. If you stop working at any time, any credits that you accumulate remain intact. When you reenter the workforce, new credits are added to that balance.
The Bottom Line
OASDI tax is automatically withheld from employee paychecks at a rate of 6.2% to pay for Social Security. Most U.S. workers are enrolled in the program, but all individuals are exempt from paying the tax on wages above a certain threshold.
In addition, a few groups are exempt from paying taxes into the Social Security system. For example, most foreign academics and researchers are exempt if they are nonimmigrant and nonresident aliens. Self-employed workers who make less than $400 annually also do not pay Social Security taxes.
I've been diving into Social Security matters for quite a while now, keeping tabs on its intricacies and the various exemptions tied to it. The OASDI (Old Age, Survivors, and Disability Insurance) program, commonly known as Social Security, forms a cornerstone of financial support for numerous retirees and individuals with disabilities in the United States.
To break it down, this program is more than just a deduction on your paycheck. It's a comprehensive federal benefits initiative aiming to provide income security for retirees, those with disabilities, and their families. The depth of my knowledge in this area has been honed by understanding the historical context—it emerged during the Great Depression as a safety net to alleviate poverty and support aging adults and the disabled.
Let's start with the tax itself. The OASDI tax, automatically withheld at 6.2% from employee paychecks, works in conjunction with a 6.2% contribution from employers, summing up to a total tax rate of 12.4%. That's substantially higher than the Medicare tax, which stands at 1.45%.
However, there are thresholds to this tax. For instance, the taxable income limit was $160,200 in 2023 and increased to $168,600 in 2024. Earnings above these thresholds are exempt from the Social Security tax.
Now, who's exempt? It's not just a one-size-fits-all scenario. Members of specific religious groups and certain foreign academics, researchers, or government employees might find themselves exempt from paying into the Social Security system. Additionally, self-employed individuals making less than $400 annually are exempt, and high-income earners find relief from the tax on earnings surpassing the threshold.
Understanding who's eligible for Social Security benefits is equally crucial. Generally, retirees who've paid into the system for at least 10 years, accumulating 40 credits (or quarters of coverage), receive monthly benefits. This system operates on a pay-as-you-go basis, with current workers funding the benefits for current retirees.
Exemptions aren't handed out freely, though. They often require specific actions, such as applications to the IRS or meeting particular criteria—like being a member of a religious order that has taken a vow of poverty.
In essence, while most U.S. workers are automatically enrolled in Social Security, exemptions exist for specific groups based on religious affiliations, income levels, and certain employment statuses. Understanding these exemptions and eligibility criteria is vital for anyone navigating the nuances of Social Security and its associated tax implications.
