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Deciding how to calculate and process retroactive pay can be a difficult task. There are many options, but they all come with their own set of risks. Let’s take a look at the advantages & disadvantages associated with each option so you can decide which one is best for your business!
A payment given to an employee to make up the shortfall between what was paid and what should’ve been is known as retroactive pay (retro pay). When a salary is raised in the midst of a pay cycle or a bonus is obtained in the previous pay period, this might happen.
You can rapidly calculate retroactive pay for hourly workers, salaried employees, and even flat-rate amounts. Keep in mind that the calculator cannot account for the effect of overtime in previous pay periods when calculating payroll.
Calculations for Backpay
Here are two straightforward methods for calculating retroactive pay:
- Calculating Hourly Employees’ Retro Pay
- Calculating Salaried Employees’ Retro Pay
To calculate retro pay for an hourly employee, you’ll need to know how many hours were paid at the incorrect rate and how many hours were paid at the proper rate. To compute the gross retroactive pay amount, multiply the difference rate by the hours paid wrongly. To establish the net amount the employee should get, taxes should be subtracted from the gross amount.
Calculating retroactive compensation for salaried employees is more challenging than for hourly employees. You’ll need to figure out the difference between the employee’s actual yearly income and the amount that should have been paid. You should also be able to confirm the number of payroll days in the year (this is the number of days worked, less any holidays, weekends, or days off).
If you need to compute retro pay as part of your payroll, you’ll need to ask a few questions beforehand. For instance, how long the employee was wrongfully paid, the pay rate they were paid for the time period in issue, and the pay rate they should’ve earned for the task.
Other questions to consider include:
- Is the employee paid hourly or on a salary? (This will help you figure out which pay rate to utilize.)
- Is the employee exempt from working overtime, or must extra hours be taken into account?
- Is the retroactive pay just for one pay period or for several? Will you need to make any back-end adjustments to payroll accounting?
- Was the retroactive compensation due to missing hours, which might affect overtime calculations and necessitate extra pay, or was it just a pay rate discrepancy?
Reimbursement Processing
The ultimate objective is to reimburse the employee as soon as the mistake is discovered.
Retro pay is taxed, regardless of whether it is paid in a single amount or applied to the following payroll in your current payroll software. In any case, make sure you subtract the appropriate payroll taxes from the retroactive payment.
Some suppliers charge a fee for each paycheck produced, so processing a particular payroll run is more expensive. In most jurisdictions, waiting until the following pay cycle to add the extra amount to the employee’s check is allowed. However, if the pay period in which the error occurred includes overtime, you’ll need to compensate for extra hours and/or apply an overtime pay rate when computing retroactive compensation.
Laws governing retroactive pay
Employees should be paid on a regular basis after your organization has established a pay cycle. To stay in payroll compliance, you’ll need to pay attention to your state’s labor rules when it comes to retroactive pay. Your state may compel you to report retroactive compensation right away if an employee is fired. You may not be able to amend the mistake if it resulted in an overpayment.
Payroll Regulations for Retro Pay
Employees must be paid each pay period and no later than 12 days after the end of the pay period, according to the Department of Labor’s Wage and Hour Division.
State regulations on minimum wage, pay periods’ frequency and duration, record preservation, and whether or not a payment must be issued promptly after termination. Retroactive pay, like regular pay, must be provided as quickly as feasible to guarantee compliance with federal and state labor laws. In most jurisdictions, this entails writing a second check to the employee or giving them the retro pay for the next pay period.
It’s critical to understand your state’s rules before making payments outside of your usual pay schedule to guarantee that you remain in compliance.
Backpay vs. Retropay vs. Regular Payments
Because regular, retro, and back pay are all payments provided to workers, it’s easy to mix them up. However, distinct laws govern when and how you should pay each.
Retroactive Pay
Although some individuals incorrectly use the phrases interchangeably, retroactive pay is not the same as back pay. To recap, retroactive pay is the difference between what should have been paid and what was actually paid. Back pay refers to reimbursing someone for time worked in the past that was never compensated.
Back Pay
Back pay is usually imposed by a court, is subject to damages (which doubles the amount payable), and is uncommon. It’s a basic computation of the number of hours worked multiplied by the pay rate, just like ordinary pay. Retro pay, on the other hand, is calculated by multiplying the number of hours worked by the difference between what was paid and what should’ve been.
Regular Pay
Regular pay is the compensation you give your workers each pay period, which is usually based on a yearly salary (salary divided by the number of pay periods) or an hourly rate (hours worked x pay rate). The difference between the regular payments you should’ve dispersed and the regular payments you did is known as retroactive pay.
Situations in Which Retro Pay May Be Required
Retro pay may arise in a small firm for a variety of reasons, but it’s generally an unintended consequence of a data entry or communication mistake. For example, inaccurate information may be put on the time card, or a raise may be granted but not conveyed to the person in charge of payroll.
Here are a few additional scenarios where you may need to compute retroactive pay:
Pay Rise: An employee received a $1.15 per hour pay raise from the owner, but the owner failed to tell the payroll department; payroll calculates earnings using the old pay rate from the employee’s previous paycheck. The difference must be paid as retro pay for the 40 hours worked in the previous period, back to the day the rise was supposed to take effect.
$1.15 per hour multiplied by (40 hours paid at the incorrect rate) is $46 in gross retro pay.
Shift Differentials: An employee works as a waiter most of the time, but one shift a week they work as a supervisor for an additional 50 cents per hour. The employee was paid for all hours worked, but eight of them were paid at their normal pay rate rather than the supervisory pay rate, thus their next check will need to be amended to include $4 in miscellaneous revenue as retro pay:
$.50 shift difference x eight hours improperly paid = $4 gross retro pay due
Overtime: An employee earning $18 an hour worked 43 hours last week, but the time was recorded as 40 hours on the payroll. Because the extra three hours of retro pay were assessed as overtime in the previous pay period, they must be paid at 1.5 times the standard pay rate.
$27 overtime pay rate = $18 regular pay rate x 1.5 overtime rate $81 gross retro pay due to x $27 overtime pay rate x three hours paid wrongly
Bonuses: The employee was entitled to a $300 bonus, but it was not paid during the pay period. The bonus may be paid retroactively with a second $300 check. You must subtract taxes, however, you may gross up the bonus calculation to guarantee that your employee gets a certain amount after taxes if you wish.
Conclusion
In most jurisdictions, however, you may wait and apply the retro pay to your following pay period’s wages.
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