How the Tier 1 Railroad Retirement Tax Works

The Railroad Retirement Board (RRB) manages a federal retirement benefits program for railroad workers in the United States, which operates independently from the Social Security system. This program is structured with two main components: Tier 1 and Tier 2. The Tier 1 portion provides benefits that are equivalent to what a worker would receive under Social Security, while Tier 2 offers an additional benefit similar to a private pension.

Tier 1 Tax and Social Security Equivalence

The foundation of the railroad retirement system is its two-part structure, with Tier 1 designed to mirror the benefits provided by the Social Security Administration. The Railroad Retirement Tax Act (RRTA) governs the payroll taxes that finance these benefits, and its provisions for Tier 1 are aligned with the Federal Insurance Contributions Act (FICA).

By law, the tax rates for the Tier 1 retirement component are identical to the Social Security tax rates. The portion of the Tier 1 tax for Medicare is also levied at the same rate as the Medicare tax paid by other employees. This link means that as FICA tax rates or wage bases change, the corresponding Tier 1 RRTA taxes adjust in unison. A worker’s earnings from both railroad employment and any non-railroad jobs are combined to determine eligibility for and the amount of the Tier 1 benefit.

Calculating Tier 1 Tax Liability

The calculation of an employee’s and employer’s Tier 1 tax liability is a direct process, divided into two distinct parts that mirror FICA taxes. The first part is the retirement portion, which is analogous to the Social Security tax. For 2025, both the employee and the employer pay a tax of 6.2% on the employee’s creditable earnings up to an annual wage limit of $176,100. Compensation earned above this threshold is not subject to the Tier 1 retirement tax.

The second part is the Medicare hospital insurance portion. For 2025, both the employee and employer contribute 1.45% of the employee’s earnings to this part of the tax. A significant distinction for this component is that there is no annual wage base limit, so all covered compensation is subject to the 1.45% Medicare tax.

A further calculation applies to higher-income employees through the Additional Medicare Tax. This tax is an extra 0.9% levied only on the employee’s share of earnings that exceed specific income thresholds: $200,000 for single filers, $250,000 for those married filing jointly, and $125,000 for those married filing separately. Employers are required to begin withholding this additional tax once an employee’s wages surpass the $200,000 mark.

Reporting and Paying the Tax

Railroad employers are required to use Form CT-1, Employer’s Annual Railroad Retirement Tax Return, to report and pay both Tier 1 and Tier 2 RRTA taxes to the IRS. This form serves a similar purpose to the Form 941 used by non-railroad employers but is tailored to the two-tiered structure of railroad retirement taxes. The Form CT-1 is due to the IRS by the last day of February for the preceding calendar year.

Railroad employers must deposit these taxes electronically through the Electronic Federal Tax Payment System (EFTPS). The frequency of these deposits is determined by the employer’s total RRTA tax liability. Failure to file Form CT-1 or pay the taxes on time can result in penalties and interest charges.

For employees, the evidence of these tax payments appears on their annual Form W-2. A railroad employee’s form will typically have boxes 3 through 6 left blank, with the details of RRTA withholdings itemized in Box 14.

Taxation of Tier 1 Retirement Benefits

When a railroad worker retires, the tax treatment of the benefits they receive from the Tier 1 plan is governed by the same rules that apply to Social Security benefits. The taxability of these benefits depends on the retiree’s “combined income,” a figure calculated by taking the retiree’s Adjusted Gross Income (AGI), adding any nontaxable interest, and then adding 50% of their Tier 1 benefits for the year.

The amount of Tier 1 benefits subject to federal income tax hinges on where this combined income falls in relation to specific thresholds. For a married couple filing a joint return, if their combined income is between $32,001 and $44,000, up to 50% of their benefits may be taxable. For those with a combined income exceeding $44,000, up to 85% of their benefits can be included in taxable income.

Retirees receive Form RRB-1099, “Payments by the Railroad Retirement Board,” each year. This document is similar to the Form SSA-1099 that Social Security recipients get. Box 5 of the Form RRB-1099 shows the net amount of Tier 1 benefits paid for the year, which is the figure used in the combined income calculation. Retirees use this information to determine the portion of their benefits that must be reported as taxable income.