What Are Tier One Contributions on Your Taxes?

Set at the same level as Federal Insurance Contribution Act (FICA) and Medicare taxes, Tier 1 contributions cover three separate areas: Old Age & Survivors Insurance (OASI), Disability Insurance (DI), and Health Insurance (HI) benefits. Those taxes are calculated from employee earnings up to a maximum wage base in a similar fashion as the Social Security wage base for that year. Employers and employees split the tax equally. So if you see Tier 1 deductions on your pay stub, think FICA and Medicare.

In addition to their Tier 1 contributions, which fund benefits similar to Social Security, railroad workers pay Tier 2 contributions that provide a benefit similar to a private pension. The base is smaller than that for Tier 1 payments and the employer is responsible for a larger portion. For example, in 2013 the Tier 1 base is the first $113,700 of earnings while the Tier 2 base is only the first $84,300.

Even though they're lumped together as part of Tier 1 contributions, the HI contribution -- also called Medicare -- is set at a separate rate and doesn't have a maximum taxable earnings. So, unlike other railroad worker payroll taxes, which are only calculated on earnings up to the wage base, the Medicare portion applies to the employee’s entire earnings. That means a worker who earned $140,000 in 2013 would owe Tier 1 contributions on $113,700, Tier 2 contributions on $84,300 and Medicare contribution on $140,000.

While the Internal Revenue Service collects all payments for railroad retirement benefits, administering the program is the responsibility of the Railroad Retirement Board. All the taxes contribute to funding an annuity that provides both Social Security-like retirement benefits, as well as private pension income for railroad employees. In order to qualify for railroad retirement benefits, you must have worked either 10 years in total or at least five years since 1995. Your benefit is reduced if you quit before reaching retirement age.