When you work for a railroad, you're not subject to the same tax withholding rules as most other taxpayers. The Federal Insurance Contributions Act, which defines how money gets taken out of paychecks for Social Security and Medicare, doesn't apply to you. Instead, your paychecks and your retirement and pension are covered by the Railroad Retirement Tax Act, which has tiers of taxes.
Generally, railroad retirement benefits (Tier 1) are benefits a railroad employee or beneficiary would have received under the Social Security system. They’re commonly called the Social Security equivalent benefit (SSEB) portion of Tier 1 benefits. Tier 1 railroad retirement benefits are equal to Social Security benefits. Consequently, payments into the system are treated the same way as Social Security withholdings and payments. The 2nd tier is based on railroad retirement credits only and may be compared to the retirement benefits paid over and above social security benefits to workers in other industries.
The Tier 2 pension benefit taxes your first $84,300 of earnings at 4.4 percent, with your employer paying a 12.6 percent rate.
Tier 1, 2 and 3 of your RRTA tax normally aren't taxable. Like Social Security and Medicare tax, tiers 1 and 3 essentially don't matter when it comes to your taxes -- you pay tax on the income you used to pay your share of the taxes. Tier 2 is also not taxable, much like how your contributions to a workplace 401(k) aren't taxed.
Since I paid taxes on this money when I contributed to my Retirement, why am I being taxed now? If these amounts aren't taxable, why am I being charged Federal Income Tax?
The tier 1 is social security equivalent and the tier 2 contributions are to the pension plan. These are the amounts taken from your pay for contributions to those two government entities.
If you had wages paid to you during the year in addition to the contributions to tier 1 social security equivalent and the tier 2 railroad pension plan, then the federal taxes withheld are on the wages paid.
It is just reported on the railroad W2 differently instead of being reported in the boxes like a regular W2 would be since railroad pay is definitely broken down differently.