Sickness benefits paid under the Railroad Unemployment Insurance Act, with the exception of sickness benefits paid for an on-duty injury, are considered income for Federal income tax purposes. Each year, the RRB sends railroad employees Form W-2, Wage and Tax Statement, showing the amount of sickness benefits paid during the preceding calendar year. The amount shown on Form W-2 is the amount of benefits payable before deduction of Tier I railroad retirement tax. The amount includes benefits payable but withheld to offset a debt to the RRB. A Form W-2 is not issued if all benefits paid to an employee were for an on-the-job injury. A Form W-2 is also not issued if all benefits paid to an employee in a tax year are repaid in the same year.
You may file Form W-4s, Voluntary Tax Withholding, with the nearest RRB office if you want the RRB to withhold Federal income tax from your benefits. To change or end withholding you must file another Form W-4s with the RRB. Form W-4s is available upon request from the Internal Revenue Service.
The Railroad Unemployment Insurance Act specifically exempts railroad sickness benefits from State income taxes.