1. Payroll Taxes
Payroll taxes levied on covered employers and their employees are the primary source of income to the Railroad Retirement Account.
Payroll taxes had been paid in equal shares by employers and employees from 1937 through September 1973. From October 1973 through September 1981, the employee rate was the same as the employee rate under social security, while the employer rate was 9.5 percentage points higher than the corresponding rate under social security. The tax rate equivalent to that which would be paid under social security is commonly called the tier I tax. Payroll taxes in excess of the tier I rate are called tier II taxes.
The 1981 railroad retirement amendments raised employer tier II taxes and instituted an employee tier II tax. Amendments in 1983 and 1987 further raised both employee and employer payroll taxes. Amendments in 1989 specified 401(k) contributions and some employer-paid life insurance premiums as subject to railroad retirement payroll taxes.
The Railroad Retirement and Survivors' Improvement Act of 2001 significantly revised the financing of the railroad retirement system through provisions for the investment of railroad retirement funds in nongovernmental assets, adjustments in the payroll tax rates paid by employers and employees, and the repeal of a supplemental annuity work-hour tax. Supplemental annuities continue to be payable and are funded by the National Railroad Retirement Investment Trust.
In 2017, the employee and employer tier I tax rate of 7.65 percent is divided into 6.20 percent for railroad retirement and 1.45 percent for Medicare hospital insurance. In 2017, tier II taxes are 13.10 percent on employers and employee representatives and 4.90 percent on employees. An additional 0.9 percent in Medicare hospital insurance taxes (2.35 percent in total) is withheld from employees on earnings above $200,000.
Tier II taxes on both employers and employees are based on an average account benefits ratio. Depending on the average account benefits ratio, the tier II tax rate for employers ranges between 8.20 percent and 22.10 percent, while the tier II tax rate for employees is between 0 percent and 4.90 percent.
The account benefits ratio is, with respect to any fiscal year, the amount determined by the Railroad Retirement Board by dividing the fair market value of the assets in the Railroad Retirement Account and the National Railroad Retirement Investment Trust as described under Investments (and for years before 2002, the Social Security Equivalent Benefit Account) as of the close of such fiscal year by the total benefits and administrative expenses paid from the Railroad Retirement Account and the National Railroad Retirement Investment Trust during such fiscal year. If the ratio is not an exact multiple of 0.1, it is raised to the next highest multiple of 0.1.
Likewise, the term average account benefits ratio means, with respect to any calendar year, the average determined by the Secretary of the Treasury of the account benefits ratios for the 10 most recent fiscal years ending before such calendar year.
Tax schedules from 1937 on are available online.
Tier I taxes are ultimately transferred to the social security and hospital insurance trust funds through the financial interchange. The tier II tax is used to finance tier II benefits, supplemental annuity benefits, and also the portion of tier I benefits not reimbursed through the financial interchange.
Earnings Base
The taxable amounts of an employee's earnings are subject to tier I and tier II maximums, which are both indexed to annual increases in national wage levels. The tier I maximum is the same as the social security wage base. The tier II earnings limit is what the social security limit would be if the 1977 social security amendments had not been enacted.