Retroactive pay (retro pay) is a payment made to an employee to make up the difference between what was paid and what should’ve been.
It can occur when salary is Chicago police retro check calculator in the middle of the pay cycle or a bonus was earned in the prior pay period.
You can use our simple calculator below to quickly calculate retroactive pay for hourly employees, salaried employees, and even for flat rate amounts.
Keep in mind that the calculator cannot calculate payroll with the impact of overtime in prior pay periods.
Disclaimer: Fit Small Business does not provide legal or tax advice. Be sure to confirm your retro pay calculations with your payroll provider or tax consultant.
Retro Pay Calculator
Retro Pay Calculations
Here are two simple ways to calculate retroactive pay:
To determine retro pay for an hourly employee, you’ll need to know how many hours were paid at the wrong rate so that you can determine the correct rate to pay.
You’ll multiply the differential rate by the hours paid incorrectly to calculate the gross retroactive pay amount. Taxes should be deducted from the gross amount to determine the net amount the employee should receive.
Calculating retroactive pay for salaried staff is a little more difficult than calculating for hourly workers. You’ll need to know the difference between the annual salary the employee was paid and the salary that should have been.retro pay calculator excel
In addition, you should be able to verify the number of payroll days in the year (this is the number of days worked—making sure to deduct any holidays, weekends, and days off).
If you need to calculate retro pay while doing payroll, you need to first ask a few questions. For example, how long the employee was paid incorrectly, the pay rate they were paid for the time frame in question, and the rate of pay they should’ve received for the work.
Other questions to ask are:
Processing Retro Pay
The best practice to manage payroll payment errors like retroactive pay is to process a separate off-cycle payroll run using software like Gusto or to calculate the amount manually.
The ultimate goal is to pay the employee as soon as you realize the error.
Retro pay is taxable, whether paid as a lump sum or added to the next payroll in your existing payroll software. Regardless, you’ll need to make sure you deduct the correct payroll taxes from the retroactive payment.
Processing a special payroll run costs extra with some providers (unlike Gusto) that charge a fee for each payroll generated. In most states, it’s acceptable to wait and add the Chicago police retro check calculator amount to the employee’s check during the next pay cycle.
Keep in mind, however, that if overtime is involved in the pay period in which the mistake was made, you’ll need to adjust for overtime hours and/or use an overtime pay rate when calculating retroactive pay.
Retroactive Pay Laws
Once your company establishes a pay cycle, you should pay employees consistently. When it comes to retroactive pay, you’ll need to pay attention to your state’s labor laws to ensure that you remain in payroll compliance.
If an employee is terminated, your state may require you to submit retroactive pay immediately. And in cases when the error resulted in an overpay, you may not be allowed to correct it.
Payroll Rules Regarding Retro Pay
The Department of Labor (DOL) Wage and Hour Division states that employees must be paid each pay period and no later than 12 days from the end of the pay period.
State guidelines regarding labor laws like minimum wage, the frequency and length of pay periods, records retention, and whether or not a paycheck must be provided immediately upon termination.
Similar to regular pay, retroactive pay needs to be paid as soon as possible to ensure federal and state labor law compliance. In most states, this means cutting the employee a separate check or paying them the retro pay due on the very next pay period.
It’s important to know what the laws are for your specific state before issuing payments outside of your regular pay schedule to ensure that you are staying compliant.
For more help, check out our comprehensive guide to running payroll in your state.
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(If your state is missing, then check back as we release new state guides weekly.)
Regular Pay vs Retro Pay vs Back Pay
It’s easy to confuse regular, retro, and back pay as they are all payments made to employees; however, different rules govern when and how you should pay each.
Retroactive pay isn’t the same as back pay, although some people mistakenly use the terms interchangeably. To reiterate, retroactive pay is the difference between what was supposed to be paid and what was paid.
Back pay is paying someone for time worked in the past that was never paid in the first place.
Back pay is typically court-ordered, subject to damages (which doubles the amount of back pay due), and less common. Similar to regular pay, it’s a simple calculation of the number of hours worked multiplied by the pay rate.
Retro pay, however, is the number of hours worked multiplied by the difference between what was paid and what should’ve been.
Regular pay is the wage you pay your Chicago police retro check calculator per pay period, typically based on an annual salary (salary/number of pay periods) or hourly rate (hours worked x pay rate).
Retroactive pay is the difference between the regular pay you should’ve disbursed and the regular pay you disbursed.
Situations When Retro Pay Might Be Needed
There are common situations when retro pay might occur in a small business, though it’s usually an accident that typically happens as a data entry or communications error. For example, incorrect information is entered on the time card or a raise is given but not communicated to the person running payroll.
Here are some more examples of situations in which you may need Cleopatra slots free play calculate retroactive pay:
Pay Raises: An employee received a pay raise of $ an hour by the owner, but the owner forgot to inform the payroll department; payroll runs the employee’s last paycheck using the old pay rate to calculate earnings.
The employee will need the difference paid as retro pay for the 40 hours in the prior period back to the date the raise should have taken effect.
$ per hour x (40 hours paid at the wrong rate) = $46 gross retro pay due
Shift Differentials: An employee typically works as a server, but one shift a week they work as a supervisor with a shift differential of 50 cents extra per hour. The employee was paid for all hours, but eight of those hours were paid using their regular pay rate, not the supervisor pay rate, so their next check has to be adjusted with $4 miscellaneous income added as retro pay:
Eight hours paid incorrectly x $ shift differential = $4 gross retro pay due
Overtime: An employee whose regular pay rate is $18 an hour worked 43 hours last week, but work time was added to the payroll as 40 hours.
The additional three hours of retro pay not only need to be paid but paid at times the regular pay rate as they are calculated as overtime in the prior pay period.
$18 regular pay rate x overtime rate = $27 overtime pay rate
$27 overtime pay rate x three hours paid incorrectly = $81 gross retro pay due
Bonuses: The employee earned a $ bonus but did not receive the bonus on the pay period.
How to Calculate Retroactive Pay - Payroll Management, Inc
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Retro Pay: How to Easily Calculate Retroactive Pay
How to Easily Calculate Retroactive Pay
Retroactive pay, or retro pay, is the money you owe an employee for work performed during a previous pay period. Here’s how to make a retro adjustment.
It’s easy to think of payroll as a simple task — you pay your employees for the work they perform and the time they put in.
But the payroll process gets complex quickly, enough to require a payroll professional to navigate the constantly changing legislation and requirements on a regular basis. There are so many moving pieces that are necessary in paying a staff on time and in full.
What happens, though, when that payment is incorrect?
This results in a common process called retroactive pay (or “retro pay”). Payroll mistakes are rarely intentional, but mistakes can still happen throughout the payroll process. Business owners are often stretched thin, covering a wide range of other responsibilities. It’s entirely possible that they may run into a scenario where retroactive pay is necessary.
What Is Retro Pay?
Retroactive pay makes up for the difference between the amount an employee was paid and the amount they were owed during that time. This most often occurs when there is a change in an employee’s salary or pay rate which goes into effect in the middle of a pay period. It is often paid as a separate payment or added to the next paycheck once the discrepancy is discovered.
This is different from back pay, which sounds similar but is another process that is often discussed. Back pay means paying an employee their owed wages that were not ever paid. That is less common than retro pay, which is simply fixing a difference between what was paid and what was supposed to be paid.
How to Calculate Retro Pay
As with any payroll process, calculations depend on several factors, though these are often fairly simple to determine.
Most importantly, you will need to verify the period of time there was a payment discrepancy along with the type of pay (hourly or salaried). Keep in mind, there are several legal guidelines dictating pay periods that could affect your calculations in certain situations.
Let’s work out a couple of examples — one for an hourly employee and one for a salaried employee.
Let’s say your hourly employee has a good performance review and earns a pay raise from $22 per hour to $25 per hour. The raise takes effect on the first of the month, which happens to fall four days before the end of a pay period.
First, you calculate the difference in hourly rate, which in this example is three dollars per hour. Then, you calculate how many hours were incorrectly paid at the old rate. If the raise took effect with four days to go in the pay period, that means four days of pay (using eight hours per day based on a hour workweek) need to be accounted for in the retro adjustment.
- New rate of $25 per hour – Old rate of $22 per hour = $3 per hour difference
- 4 days X 8 hours per day = 32 hours of payment at the old rate
- $3 per hour X 32 hours = $96 due in retroactive pay
In this example, the employee would be owed $96 in gross retro pay.
Though the process of calculating retroactive pay for salaried employees is similar, there is an extra step. Here, you need to factor in the pay periods. Are they semimonthly, such as the 15th and 30th of each month, or simply every two weeks?
Semimonthly would mean dividing the annual salary by 24 (12 months times two), while biweekly pay would mean dividing the annual salary by 26 (52 weeks in a year divided by two).
Let’s assume for this example: a salaried employee reaches a work anniversary that is accompanied by an agreed-upon raise, bringing their annual salary from $60, to $65, This company pays on a semimonthly basis, meaning there are 24 pay periods in each year. The raise took effect at the start of the month but will not be reflected in paychecks until the second pay period of the month, meaning a full pay period should be accounted for in retro pay.
- Old Annual Salary of $60,/24 Pay Periods = Old Rate of $2, per pay period
- New Annual Salary of $65,/24 Pay Periods = New Rate of $2, per pay period
- New Rate of $2, – Old Rate of $2, = Difference of $ per pay period
- $ per pay period X 1 Pay Period = $ is due in retroactive pay
Only one pay period needed to be remedied in this example, so the employee would be owed $ in gross retro pay.
No One-Size-Fits-All Approach
Of course, these examples are purely hypothetical and simplified to explain the process. There are a variety of reasons for retro adjustments to be made, including bonuses that need to be paid out, and several correlating methods of calculating the pay that is due. There are also tax implications that need to be factored into these payments, as wages are still subject to any necessary payroll taxes.
Navigating the retro pay process represents another complexity that leads many business owners to seek outsourced payroll and workforce management expertise. From calculating and executing retro pay to providing a new employee orientation checklist to simplify your onboarding process, contact your local payroll pros at Payroll Vault. That way, you can focus on the business operations that truly fill your passion.
Originally posted on PayrollVault.com.
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Retro Pay: How to Easily Calculate Retroactive PayPhoneSign In
Mistakes happen in business, even with your payroll. Sometimes you accidentally underpay your employees. If so, you will owe them retroactive pay (or retro pay), and you’ll need to make a payroll correction.
Keep reading to learn:
- What retroactive pay is
- How to calculate retroactive pay
What Is Retroactive Pay?
Retroactive pay refers to pay that you owe an employee for work they did in a previous pay period. You would owe an employee retroactive pay if you paid them less than what you should have paid them.
For example, say that you have an employee named Todd. Todd earns $30 per hour as a project coordinator. In the last two weeks, Todd worked a total of 80 hours. However, due to a payroll mistake, you only paid Todd for 70 hours of work.
In this case, you now owe Todd $ in retroactive pay for the 10 hours you missed.
Situations that might create a need for retroactive pay include:
- Raises: You gave a raise but didn’t immediately change the rate in your payroll system.
- Payroll Errors: You paid for the wrong amount of time or experienced another unexpected glitch.
- Overtime Miscalculations: You calculated an overtime payment incorrectly.
- Multiple Pay Rates For Different Positions: If an employee earns two different pay rates, you may have used the wrong rate when calculating their earnings for a given period.
Retroactive Pay vs Back Pay
Back pay might sound like another way to say retro pay, but they are different.
Retroactive pay is used as a correction when you paid an employee less than they should have earned. Back pay corrects any type of missed wages. It refers to any wages you owe your employee when you don’t pay them.
Examples of situations where you might owe back pay include:
- Unpaid Wages Or Bonuses
- Wages For Overtime
The main difference is that back pay is money that you haven’t paid your employees yet. Retro pay is money that you owe your employees because you underpaid them in a previous pay period.
Court Ordered Retroactive Pay
Retroactive pay is usually necessary because of simple human error with payroll. However, there are some cases where a court can legally order a business to provide retroactive pay.
- Discrimination: When one group of employees receives preferential treatment over another (i.e., all men receive raises, but no women do)
- Breach Of Contract: When a business intentionally pays employees at a lower rate than their contract states
- Retaliation: When a business owes wages because they fired an employee for whistleblowing
- Failure To Pay Overtime: When a business commits an overtime violation
How Does Retroactive Pay Affect Taxes?
When you pay employees retro pay, you still need to withhold payroll tax.
For tax purposes, retroactive pay is treated as supplemental wages. Supplemental wages are wages that employees receive in addition to their regular income.
Since supplemental wages are non-regular wages, the method for withholding taxes is a bit different.
When you give retroactive pay, you still need to withhold federal income tax and FICA taxes (Social Security and Medicare Taxes).
Calculating Federal Income Tax
The amount you withhold for federal income tax depends on how you pay retroactive wages. There are two methods: aggregate and percentage.
The aggregate method involves combining the supplemental wages (i.e., retroactive pay) with regular wages in one lump sum.
In other words, you can add retroactive wages to an employee’s next paycheck. If you choose this option, reference the federal withholding tables in IRS Publication
On the other hand, if you provide retroactive pay as a standalone payment, you need to withhold a flat-rate tax of 22%. This is known as the supplemental method.
How To Calculate Retroactive Pay By Employee Type
When you calculate retro pay, you simply need to find the difference between what you owe your employees and what you paid them.
Remember to use gross wages when calculating retroactive pay. Once you know the difference, then you can calculate the tax withholdings.
Calculating Retroactive Pay For Salaried Employees
Retroactive pay is most commonly needed with salaried employees when you give your employee a raise but don’t update their gross wages right away.
So, to calculate retroactive pay in this scenario, you need to know:
- Old Annual Salary
- New Annual Salary
- Number Of Pay Periods In A Year
Let’s say that you have an employee named Susan. She earns an annual salary of $40,, but you have given her an $8, raise. However, you forgot to adjust payroll wages after the effective date of her raise had already passed. You pay bi-weekly wages, giving you 24 pay periods in a year.
Start by calculating her original gross pay per period. To do that, divide her old annual salary by the number of pay periods.
$40,/24 = $1, gross pay per period
Next, calculate her new gross pay per period after her salary increase by dividing her new annual salary by the number of pay periods.
$48,/24 = $2, gross pay per period
Last, subtract the amount you paid Susan from the amount you should have paid her to find the difference.
$2, - $1, = $
In this example, you owe Susan $ for each pay period that she was underpaid. If three pay periods went by before you updated her gross pay, you owe her a total of $ in retroactive pay ($ multiplied by 3 pay periods).
Calculating Retroactive Pay For Hourly Employees
Let’s say you have an employee named Owen. Owen worked 40 regular hours plus 7 overtime hours. However, by mistake, you paid him for 47 hours at his standard pay rate.
Owen earns an hourly rate of $12 per hour and an overtime rate of $17 per hour. Here is how you calculate the retroactive wages for his overtime pay:
First, calculate the difference in hourly payment.
$17 - $12 = $5 per hour difference in pay
Second, multiply the per hour difference in pay by the number of overtime hours.
7 overtime hours x $5 per hour = $35 gross retro pay owed to Owen
On the other hand, if you gave Owen a raise from $12 to $14 per hour, you would simply multiply the per hour difference by his entire pay period. Let’s say you gave Owen a raise, and he worked 40 hours during his pay period.
First, calculate the difference in hourly payment by subtracting his old rate from his new rate.
$14 - 12 = $2 per hour difference in pay
Second, multiply the per hour difference in pay by the number of hours worked during the period.
40 hours x $2 per hour = $80 gross retro pay owed to Owen
Let’s Wrap It Up: Take The Pain Out Of Retroactive Pay
Payroll mistakes aren’t common, but they do happen. In most cases, it’s an accident.
When you make a payroll mistake, don’t fret. Just make sure that you remedy your oversight in a timely manner. Ultimately, you want to treat your employees fairly and pay them what they’ve earned.
To learn more about paperless payroll solutions, explore Hourly’s Payroll Platform today.
How to Calculate Back Pay
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The bonus can be paid with a separate $ check as retro pay. You will need to deduct taxes, though you do have the option to gross up the bonus calculation to ensure your employee receives a certain amount after taxes, if you’d prefer.
There’s no retro pay calculation for this because it’s a flat amount.
Retro pay situations happen, and you must address the problem sooner rather than later.
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A best practice is to pay the employee with a separate payment as soon as you discover they’ve been paid incorrectly. However, in most states, you’re allowed to wait and add the retro pay amount onto the next pay period’s earnings.
The best way to avoid retro pay issues is to use software like Gusto, a full-service payroll system that helps you calculate and pay your employees—plus payroll taxes.
It also has a simple time tracking system you can use to ensure employee work hours are accurate, which helps to prevent the need for retro pay. It can handle retro pay and any taxes you need to pay on it. Sign up for a free trial.