Are You Handling Retro Pay Correctly?

Are You Handling Retro Pay Correctly?

Retro pay, also known as retroactive pay, is a type of payroll payment which is associated with a past pay period. It is not the same as back pay, which is given when an employer owes an employee for a pay period where they didn’t receive any payment.

When Should Retro Pay Be Given?

A retro adjustment would commonly be made for situations where wages or overtime earnings were miscalculated. For example, an employee may receive a raise, but the employer forgets to raise their payment during the proper pay period. Another example would be an employer who miscalculated the worker’s pay for the hours they put in, which caused the employer to pay them less than they should have been paid during the pay period.

A salesman may sometimes earn a large commission for a sale made on behalf of their employers, but the employer is unable to pay the commission until payment is received from the customer. This might require waiting for a future pay period before the salesman could receive their retro commission. In each case, the employee must be paid more than what they received during a past pay period.

How Retro Payments Are Made

To provide retro pay for a raise that was received during a previous pay period, you would simply have to multiply the raise amount by the amount of hours they worked. For instance, an employer who normally pays $11 per hour to an employee who works 40 hours per week, but who then receives a raise from $11 to $12 per hour, would multiply the $1 pay increase times 40 hours, which would be an extra $40 per week. Employees who work overtime will also need to have their overtime pay recalculated as well, and you would need to pay them overtime wages which are retroactive.

In cases where an employee is underpaid, the employer would want to subtract the pay which was given from the pay which should have been given. For instance, a worker who is supposed to be paid $1,400 every two weeks, but who only received $1,100 during the previous pay period, would require their employer to subtract $1,100 from $1,400, which would mean $200 owed to the worker in retro pay.

Retro Payment Options

There are two simple ways that employers can provide retro pay. The first of these methods is to add the retro payment to the next paycheck of the employee. The second option is to provide a separate check which solely contains the retro payment. In either case, it is important for the employer to notify the worker of the retro pay and why it is being provided. Make it clear to them that these are not additional wages, but are wages which the employee earned previously that were not provided to them.

It should also be noted that retro pay is subject to payroll and income taxes. The income taxes will need to be withheld at the correct rate, and the rate you choose will depend on how the retro payment is identified.

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