The annuity programs of the railroad retirement system are funded by mandatory employment taxes on both employees and employers under the Railroad Retirement Tax Act (RRTA). Under the RRTA, sick pay is subject only to Tier I tax. Sick pay is not subject to Tier II tax or supplemental tax.

Under the RRTA, the Tier I tax is collected by the Internal Revenue Service (IRS) and compensation is subject to the tax rates and earnings bases in effect when payment is made. In other words, taxation under the RRTA is on a paid basis and is always reported in the payment year.

Sick Pay: Taxed When Paid, Reported as Taxed

Under the Railroad Retirement Act (RRA), sick pay is creditable only by virtue of the fact that it is subject to Tier I employment tax. Consequently, sick pay should be reported for the period when payments are made; in other words, when the tax is imposed.

In this respect, sick pay differs from regular railroad retirement earnings. The general definition of compensation relates the creditability of compensation to the performance of service for which the remuneration is earned. When crediting compensation under the RRA, rail carrier employers may choose to report regular compensation either to the period in which the services were rendered (earned basis) or to the period in which payment is made (paid basis). But sickness payors should simply report the sick pay for the period when paid. It is immaterial when the employee actually took the sick days which resulted in the payment.

Summary: For sick pay, the tax treatment of a payment under the RRTA should be consistent with the manner in which the payment is credited as compensation under the RRA.

Tier I Tax: Retirement and Medicare

Tier I tax is divided into two parts, retirement and Medicare. The amount of compensation subject to each part is different. Tier I retirement tax (6.20% rate) applies to the Tier I maximum earnings base. There is no maximum limit for the Tier I Medicare tax (1.45% rate). Ordinarily, sickness payments received by an individual in a year would not exceed the Tier I maximum earnings base.

The aggregate amount paid for each part of the Tier I tax paid to all payees in a year is reflected on line entries on the Form CT-1 .

Form CT-1, Employer's Annual Railroad Retirement Tax Return

Sick pay employers must file an annual tax return, Form CT-1, Employer's Annual Railroad Retirement Tax Return, with the IRS. Other third party sickness payors must provide the information to the railroad employer to be included on their CT-1. All Forms CT-1 are filed at the Kansas City Service Center of the IRS because railroad retirement tax operations are centralized there. The due date for the Form CT-1 is the same as for the Railroad Retirement Board's (RRB's) Form BA-10: the last day of February for the preceding calendar year.

Form CT-1 is an IRS form, not a RRB form. Form CT-1 and its separate instructions are released to CT-1 filers by the IRS in December. If you do not receive a Form CT-1 by December 31, contact your local office of the IRS. If the IRS office is not responsive to your request for forms, we may be able to intervene on your behalf or provide you a contact at the IRS.

Tax Deposits

Railroad retirement tax deposits are made to an authorized financial institution or a Federal Reserve bank or branch, not to the IRS directly or to the RRB. In general, the amount of taxes you owe determines the frequency of your deposit schedule. Under the rules for determining your deposit schedule, you are either a monthly or semi-weekly depositor. The IRS will notify you each November what your deposit status is for the coming calendar year, based on the total RRTA taxes reported on your Form CT-1 for a calendar lookback period. This lookback period is the second calendar year preceding the current calendar year. The deposit rules and exceptions are in the Form CT-1 instructions.

The law provides penalties for late filing of a Form CT-1, late payment of taxes, or late deposits. Interest is charged on taxes paid late at the rate set by law.

Completing Form CT-1

Form CT-1 is the only form on which Medicare taxes are shown. There is no report which must be filed with the RRB showing the amount of Medicare tax deducted from the sick pay received by an individual.

Disregard all references to the supplemental tax or the safe harbor election which is related to the supplemental tax on Form CT-1 and the CT-1 instructions. These four lines on Form CT-1 relate specifically to the Tier I tax liability on sick pay; Tier I Employer Tax; Tier I Employer Medicare Tax; Tier I Employee Tax; and Tier I Employee Medicare Tax. How these lines are completed depends upon what type if sick benefit is being paid and who is making the payments. See Chapter 4. The following CT-1 examples illustrate how sick pay tax may be shown on those lines.

Example 1: A Third party sickness payor is liable for only the employee portion of the tax. Therefore, complete only the lines showing the employee portion of the tax. Enter a 0 (zero) for all other lines.

Example 2: A railroad employer which contracts with a sickness payor should pay the employer Tier I tax and complete only the employer tax lines with respect to sick pay.

Example 3: A railroad employer which pays sick pay pursuant to a self-administered plan should complete the lines for both employee and employer tax. The employer is directly responsible for withholding employee tax, and paying that tax.

Example 4: A railroad employer is responsible for payment of the employer tax on sickness payments paid to its employees by the RRB pursuant to the Railroad Unemployment Insurance Act. Based on the ID-6 information provided to the employer, the employer should complete the lines for employee tax.

Example 5: This example combines the circumstances of Examples 3 and 4. The sick pay amount subject to employer tax will not match the sick pay amount subject to employee tax on From CT-1.

IRS/RRB Coordination

The IRS and the RRB have coordination procedures for their respective functions in connection with railroad retirement. A copy of each payor's completed Form CT-1 is sent to the RRB for tax reconciliation with that payor's reported creditable compensation for the year. The total creditable compensation under the RRA reported to the Division of Compensation and Certification (DCC) for your payees for a given calendar year should be consistent with the total taxable compensation reported to the IRS on Form CT-1 for that calendar year.

Taxation Authority

Because the RRTA is under the jurisdiction of the IRS, the RRB has no authority to provide definitive answers to railroad retirement tax questions. A staff member in the DCC's Quality Reporting Service Center may be able to help you with basic information about railroad retirement taxes or Form CT-1. If not, you will be referred to a railroad retirement tax specialist at the IRS.