Question 194: I work for a law firm representing a bankrupt railroad. The railroad is entering into a settlement agreement to pay lump sum amounts to certain former employees to settle their claims against the railroad.
An advisor to the employees, who is from a railway labor organization, has indicated that around 24% of the settlement payments will need to be deducted and deposited with Railroad Retirement; I'm not sure what he's referring to. Would this be FICA-type payroll taxes or a special surcharge that Railroad Retirement imposes on legal settlements?
Answer: The 24% figure is approximately the railroad's payroll tax rate for Railroad Retirement in 2002. Like FICA employers, railroads pay Railroad Retirement taxes based on the earnings paid to their employees.
In 2002,the Tier 1 tax rate for railroads is 7.65% on the first $84,900 earned by an employee. (Employees also pay 7.65%.) This is the same rate that FICA imposes, and includes 1.45% for Medicare.
Railroads also pay a special Tier 2 tax of 15.60% on the first $63,000 earned by an employee. (Employees also pay 4.90%.) This supports the Tier 2 private pension portion of Railroad Retirement.
So the total employer tax rate in 2002 on the first $63,000 earned by an employee is 23.25%, and is 15.60% on the amount earned by the employee (if any) between $63,000 and $84,900.
In 2002, an employee will pay 12.55%(7.65% for Tier 1 & 4.90% for Tier 2) on the first $63,000 of their earnings in 2002 and 7.65% (Tier 1 only) on earnings between $63,000 and $84,900. Both employers and employees pay 1.45% in Medicare tax on any earnings above $84,900.
Recent legislation lowered the Railroads' Tier 2 taxes in 2002 and beyond, from over 16%. Also, the seperate additional tax to support the Supplemental Annuity program was eliminated beginning with 2002. So if the settlement had taken place before this year, an even larger percentage would have gone for Railroad Retirment taxes.
If you have questions about the payment of Railroad Retirement taxes, you should contact the IRS, which administers the Railroad Retirment Tax Act.