What Are Tier I and Tier II Contributions on a W-2?

If you work for a railroad, you may notice Tier I and Tier II contributions listed in Box 14 of your annual Form W-2. These numbers represent taxes withheld from your paycheck for future retirement benefits.

Tier I Contributions

Tier I taxes are a railroad retirement benefit that is similar to Social Security payroll tax. As of the time of publication, the Tier I tax withholding rate for employees is 6.2 percent and the rate for employers is also 6.2. Tier I withholding is a Social Security equivalent tax, which means that you're paying into your personal Social Security fund. As with Social Security payroll taxes for other individuals, you'll only pay taxes on the first $118,500 of your annual income.

Tier II Contributions

Tier II taxes are withheld for the benefit of the private railroad pension system. Like payroll taxes, these taxes are obligatory. The current withholding rate for Tier II taxes is 4.9 percent for employees and 13.1 percent for employers. Tier II taxes are only levied on the first $87,000 of your annual earnings. Because you pay into the railroad pension system, you'll be eligible for a railroad retirement along with traditional Social Security benefits.

Tier I and II Overwithholding

Because these taxes are only levied on a certain portion of your income, railroad employees with two or more employers are at risk of overpaying into the system. The IRS notes that railroad employees who overpaid into Tier I can claim the excess as a tax credit on their income tax return. If you overpaid into Tier II, you can request a refund by filing Form 843, Claim for Refund and Request for Abatement, along with your income tax return.