Prepared by Public Affairs 312-751-4777
The amounts of compensation subject to railroad retirement tier
I and tier II payroll taxes will increase in 2006. However, the tier I tax rate
on employees and employers remains unchanged. Under the Railroad Retirement and
Survivors' Improvement Act of 2001, tier II tax rates are now determined
annually by an average account benefits ratio. Based on this ratio, the tier II
tax rates on employees and employers will also remain unchanged in 2006.
Railroad unemployment insurance tax rates paid by employers will continue to
include a 1.5 percent surcharge in 2006.
Tier I and Medicare Tax.--The
railroad retirement tier I payroll tax rate on covered rail employees and
employers for the year 2006 remains at 7.65 percent. The railroad retirement
tier I tax rate is the same as the social security tax, and for withholding and
reporting purposes is divided into 6.20 percent for retirement and 1.45 percent
for Medicare hospital insurance. The maximum amount of an employee's earnings
subject to the 6.20 percent rate will increase to $94,200 in 2006 from $90,000
in 2005, but there is no maximum on earnings subject to the 1.45 percent
Medicare rate. The increase in the amount of earnings subject to railroad
retirement and social security taxes is based on indexing to increases in
average national wages.
Tier II Tax.--The railroad retirement
tier II tax rate on employees will remain at 4.4 percent in 2006, and the rate
on employers will remain at 12.6 percent. The maximum amount of earnings subject
to railroad retirement tier II taxes, however, will increase to $69,900 in 2006
from $66,900 in 2005. Tier II tax rates under the 2001 Railroad Retirement and
Survivors' Improvement Act are based on an average account benefits ratio
reflecting railroad retirement fund levels. Depending on this ratio, the tier II
tax rate for employers can range between 8.2 percent and 22.1 percent, while the
tier II rate for employees can be between 0 percent and 4.9 percent.
Unemployment Insurance Tax.--Employers,
but not employees, also pay railroad unemployment insurance taxes, which are
experience-rated by employer. The basic tax rates range from a minimum of 0.65
percent to a maximum of 12 percent on monthly earnings up to $1,195 in 2006, up
from $1,150 in 2005. However, the Railroad Unemployment Insurance Act also
provides for a surcharge in the event the Railroad Unemployment Insurance
Account balance falls below an indexed threshold amount, and such a surcharge of
1.5 percent applied in 2004 and 2005. Since the accrual balance of the Railroad
Unemployment Insurance Account was $113.1 million on June 30, 2005, which was
less than the indexed threshold of $114.9 million, a surcharge of 1.5 percent
will again be added to the basic tax rates in 2006, but will not increase the
maximum 12 percent rate.
The unemployment insurance tax rates on railroad employers in 2006 therefore
will range from 2.15 percent (the minimum basic rate of 0.65 percent plus the
1.5 percent surcharge) to a maximum of 12 percent on monthly compensation up to
The 1.5 percent surcharge will not apply to new employers in 2006, and new
employers will initially pay a tax rate of 4.03 percent, which represents the
average rate paid by all employers in the period 2002-2004.
For 76 percent of covered employers, the unemployment insurance rate assessed
will be 2.15 percent in 2006.