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.

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.