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We have already covered the topics of pensions, annuities, and Social Security benefits and their taxation in our most recent newsletters. What we have not touched so far are the railroad retirement benefits (RRB).
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Whether a regular fan or a chance reader of our newsletters, you may have noticed that, whenever Social Security benefits are mentioned, they are typically accompanied by the phrase “and equivalent railroad retirement benefits” or RRB.
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It is now a good time to explain this term and also bring to your attention some specific groups of taxpayers who are exempt form paying Social Security taxes on their employment and self-employment income and, as such, do not receive Social Security benefits.
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- In a nutshell, railroad retirement replaces the social security system for railroad workers.
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Legislation was enacted in 1934, 1935, and 1937 to establish a railroad retirement system separate from the Social Security Act of 1935. Under Railroad Retirement provisions, service was credited back to 1936 and rail workers received a somewhat higher benefit than they would have under Social Security. Additional legislation passed in 1974 restructured railroad retirement benefits into two tiers to coordinate them more fully with social security benefits. Of course, since then, railroad employment declined dramatically, mostly due to new technologies and increased productivity.
The taxes under the railroad retirement system are included in two tiers. The first tier is based on combined railroad retirement and social security credits, using social security benefit formulas. The second tier is based on railroad service only and is comparable to the pensions paid over and above social security benefits in other heavy industries.
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Because this is a separate system for railroad employers, payments subject to railroad retirement taxes are specifically excepted from FICA, FUTA, and the Self-Employment Contributions Act (SECA).
Railroad employment taxes consist of employer and employee taxes. The employer and employees pay certain taxes at different rates and some are only paid by one or the other, though all taxes are collected by the employer and the employer makes deposits of these taxes.
Retirement benefits are calculated the same way as Social Security retirement benefits, but the eligibility requirements differ. To be eligible for railroad retirement benefits, a worker must have been employed by the railroad for just five years (if the employment was after 1995), or ten years if the employment was before 1995. There is a reduction in retirement benefits, however, if the worker was employed by the railroad for less than 30 years.
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Just like with Social Security, a railroad worker is not entitled to take retirement benefits until the age of 62. If benefits are taken at this age, it is considered early retirement, and benefits will be permanently reduced. Normal railroad retirement age is between 65 and 67, depending on the birthdate of the worker. This is the same as for Social Security.
However, unlike Social Security, RRB allows a person to get full retirement benefits at the age of 60 if he or she has worked for at least 30 years for an RRB covered employer.
A small additional annuity payment is available to someone who (a) has worked for at least 25 years for an RRB covered employer, (b) began working for the railroad before October 1, 1981, and (c) is currently connected to the railroad company.
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To receive this additional annuity, the worker must be either 60 years of age, with at least 30 years of work with an RRB covered employer, or 65 years of age, with 25 to 29 years of work with an RRB covered employer.
The RRB follows the same definition of disability as the SSA, meaning that to be eligible for RRB disability, a worker’s disability must be severe enough to prevent him or her from performing substantial gainful activity (SGA) for at least one year. For 2017, SGA was defined as earning $1,170 a month from working.
Spouses of railroad employees who qualify for railroad retirement may also qualify for benefits equal to about half of the covered spouse’s payment.
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Children of railroad workers can technically only get RRB if the covered parent has died. On the other hand, RRB includes a minimum payment provision to make sure that a family who is covered by RRB will get the same amount in benefits as a similarly situated family who is getting Social Security benefits. So a family with child under 18 will get an increase in their retirement or disability benefits to account for the child.
To be eligible for RRB survivors benefits, the deceased railroad worker must have at least 10 years of RRB covered service or five years of RRB covered service after 1995, and have had a current connection to the railroad when he or she died or retired.
If the criteria for RRB survivors benefits can’t be met, any credits that were earned while performing RRB covered work are transferred to Social Security. The transferred credits can then be used to get Social Security survivors benefits.
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Beneficiaries of the railroad retirement plan may receive two tax statements, one is Form RRB-1099, Payments by the Railroad Retirement Board, which shows the Social Security Equivalent Benefit (SSEB) portion of tier I or special minimum guaranty payments made during the tax year, the amount of any such benefits that an annuitant may have repaid to the RRB during the tax year, and the net amount of these payments after subtracting the repaid amount. The amount of any offset for workers' compensation and the amount of federal income tax withheld from these payments are also shown.
The other statement is Form RRB-1099-R, Annuities or Pensions by the Railroad Retirement Board, which shows the Non-Social Security Equivalent Benefit (NSSEB) portion of tier I, tier II, vested dual benefit, and supplemental annuity paid to the annuitant during the tax year, and may show an employee contribution amount. |
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| If part of a SSEB benefit is taxable, how much is taxable depends on the total amount of a beneficiary's benefits and other income. Usually, the higher that total amount, the greater the taxable part of a beneficiary's benefit. Generally, up to 50% of a beneficiary's benefits will be taxable. However, up to 85% of his or her benefits can be taxable if either of the following situations applies: |
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- The total of one-half of a beneficiary's benefits and all his or her other income is more than $34,000 ($44,000 if a beneficiary is married filing jointly);
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- A beneficiary is married filing separately and lived with his or her spouse at any time during the year.
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The NSSEB portion of tier I, tier II benefits, vested dual benefits, and supplemental annuities are all treated like private pensions for federal income tax purposes.
In some cases, primarily those in which early retirement benefits are payable to retired employees and spouses between ages 60 and 62, some occupational disability benefits, and other categories of unique RRB entitlements, the entire annuity may be treated like a private pension. This is because social security benefits based on age and service are not payable before age 62, social security disability benefit entitlement requires total disability, and the Social Security Administration does not pay some categories of beneficiaries paid by the RRB.
As mentioned earlier, there are other exemptions from paying SS taxes available to some specific groups of taxpayers.
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When the Social Security system began, it didn't cover state and local government employees, because they were typically covered under their own retirement plans. Over time, many state and local government workers have gotten Social Security coverage, either because those government entities have made special agreements with the SSA or because they're not covered by a qualifying public pension system that's functionally equivalent to Social Security.
Nevertheless, there are still some state and local employees who don't get Social Security coverage and are, therefore, exempt from paying Social Security taxes. Most of these employees have money deducted from their paychecks as contributions to a public pension plan, and the exemption from Social Security effectively prevents their payroll income from being taxed twice.
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Members of certain religious groups are allowed under certain circumstances to declare themselves exempt from Social Security taxes. To do so, they must be members of a recognized religious sect that is conscientiously opposed to accepting retirement or healthcare benefits under a private plan. The religious sect must also have an established track record since 1950 of making reasonable provisions for food, shelter, and medical care for its members. Examples of qualifying religious sects are the Amish and the Mennonites.
Exemptions under the religious group provision aren't automatic. To claim them, a member must file IRS Form 4029 with the Social Security Administration. Doing so keeps them from having to pay tax, but it also forces them to waive any benefits they would otherwise be eligible to receive under Social Security.
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In general, Social Security tax is imposed even if you're not a U.S. citizen. Working in the U.S. is enough to subject most foreign nationals to the payroll tax. However, there are situations in which these workers are exempt.
Foreign government employees are typically exempt if they're working in an official capacity related to their position with the government. Foreign students and educational professionals staying in the U.S. on certain classes of temporary visas also don't have to pay tax on their earnings from related activities.
Children under 18 who work for their parents in a family-owned business don't have to pay Social Security payroll tax. In addition, those under 21 who work as babysitters, housekeepers, yard-care workers, or similar domestic jobs are exempt from the tax.
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Not paying Social Security tax can increase your take-home pay, but it can also lead to lower benefits at retirement. Be sure to look closely at the short-term and long-term effect of an exemption from Social Security payroll tax when you're considering a position in which you would be exempt.
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And remember, you’re always at an advantage with a tax or financial advisor in your corner in almost any circumstance.
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