One of the federal taxes taken out of employees' paychecks is labeled Fed OASDI/EE. This is how the federal government refers to Social Security. Fed OASDI/EE stands for Old Age Survivors and Disability Insurance Employee share. The federal government requires that all wage earners pay this tax. Simply stated, the Fed OASDI/EE tax provides the funds to pay out social security benefits.
The Fed OASDI/EE is charged as a percentage of your gross income. Tax rates may fluctuate from year to year. The most recent rate for 2012 was 6.2%. Employers must pay an additional 6.2% to the federal government. The employers' share is not subtracted from employee wages. Instead, the employer pays these taxes to the federal government out of its own earnings.
The federal government places a ceiling on income that is eligible to be taxed for the Fed OASDI/EE program. For example, in 2012, any income over $110,100 would not be taxed for Social Security. The ceiling for this tax fluctuates from year to year. The federal government has announced that the ceiling for the OASDI/EE for 2013 will be $113,700.
When these tax rates increase, it reflects a cost of living adjustment (COLA) for citizens on Social Security. The size of the COLA depends on inflation rates. As prices of necessities goes up, those on Social Security need to have their benefits increased to keep up with the cost of living.
Those who are self-employed have to pay the total of both the employer and employee share of the Fed OASDI/EE tax.
Employees need to remember that that Fed OASDI/EE tax is completely different from federal income taxes. The federal income tax is just what it sounds like. It is the amount of your income that is taxable. Federal income tax is determined by how much you earn and how many dependents you claim. For example, an individual can claim themselves, their spouse, and each of their children.
The federal government uses withholding tax to fund food stamps, housing assistance, national defense, meals for school children, and energy assistance. Federal income tax also pays for infrastructure and research.