Electric discharge machining (EDM) is used widely in machining titanium alloys, but the modified layer formed can weaken the mechanical properties of the parts. The present study examined the formation of craters and the evolution of the modified layer (melting layer + heat-affected layer) in RC-type EDM using a fluid–solid coupled temperature field model. This model adopts the level set method to track the liquid–solid two-phase and the driving force equation to control the recoil pressure. The results showed that the discharge energy has a significant effect on the formation of the modified layer. The formation of the modified layer showed phased characteristics with time. The variation law and formation mechanism of the modified layer are described in detail. A verification experiment showed that the diameter and depth of the crater were in good agreement with the simulation results. These results can provide an important reference for EDM to formulate the machining parameters.