What is retroactive pay?

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Retroactive pay

Retroactive pay, or retro pay, is used to pay employees back when they’re not initially compensated for the agreed-upon amount.

What’s the difference between retroactive pay (retro pay) and back pay?

Retroactive pay is compensation added to an employee's paycheck to make up for a compensation shortfall in a previous pay period. This differs from back pay, which refers to compensation that makes up for a pay period where an employee received no compensation at all.

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What leads to retro pay being added to employees’ paychecks?

Retroactive pay is most frequently added to an employee paycheck because a raise is issued in the middle of a pay cycle or because an accounting error is made. Specific and helpful examples provided by QuickBooks (March 2021) include:

  • A pay increase was authorised but not reflected on the employee’s paycheck
  • A payroll or accounting error occurred when processing payroll
  • An employee worked overtime hours but overtime pay wasn’t calculated accurately
  • A bonus, commission, or other special type of pay wasn’t accounted for or was underpaid

In addition to the examples of retroactive pay above, there are certain cases where retroactive pay may be court-ordered for victims of discriminatory pay, overtime violations, or minimum wage violations.

How is retroactive pay calculated and processed?

Retroactive pay should be clearly identified and processed in accordance with Generally Accepted Accounting Principles (GAAP) and applicable regulatory standards.

  • As a general guideline, calculate the difference between what the employee received and what the employee should have received, factoring in all pay differentials, to obtain the gross amount of retroactive pay due to the employee.
  • The retroactive payment is typically issued to the employee on their next paycheck, but a separate paycheck can also be issued.
  • When companies make retroactive payments to employees, they still need to withhold the appropriate amount based on the sum of the retro pay.

Does retro pay show up on employees’ pay stubs?

All compensation paid to an employee must appear on their pay stub, therefore retroactive pay will appear on the employee pay stub. Whether the retroactive pay will clearly be identified as such on a paystub will vary based on the way the retroactive pay is processed. It’s possible the employer will not identify the retroactive pay separately from the employee’s standard wages on the employee’s paycheck.

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