RETROACTIVE PAYMENT: APPLICATION, CALCULATION AND EXAMPLES - DUDAS - 2025

The retroactive payment refers to the income owed to an employee for work done during a previous payment. It is the difference in the amount between what an employee should have received and what was paid.

A retroactive payment is different from a late payment. The second occurs when wages are owed to an employee, which have not been paid at all, whereas back pay is when an employee is paid less than what should have been paid.

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This payment can happen for various reasons, such as incorrect wages, wages for hours worked, or a salary increase. Whatever the reason, as a small business owner, you are supposed to ensure that the respective employee receives the correct amount of back pay.

This is not an additional payment, but rather payments that the employee previously earned. You must include "retro" on the pay stub in order to have the adjustment recorded.

When can it be applied?

Salary increases

When an employee is offered a raise, the payroll could have been run using the old pay rate.

Miscalculated wages

No matter how many times payroll is run, errors happen. Miscalculated wages occur when the wrong rate of pay or the wrong number of hours worked is entered.

Miscalculated overtime income

When an employee works more than 40 hours in a workweek, they must be paid the overtime rate for the additional hours.

An employee's overtime pay is miscalculated when he forgets to multiply the normal hour rate by the factor of 1.5.

Shift differentials

You can forget to pay an employee a shift differential if they work part or all of their hours at different pay rates.

Shift differentials occur when an employee has to be paid a higher wage rate for working outside normal business hours, such as a night shift.

Multiple pay rates for different positions

If an employee has two or more positions in the company and therefore earns different pay rates, the wrong rate can be used when running payroll.

commissions

Unless the commission versus pay system is used, sales commissions may not be paid to an employee until the customer pays.

Bonds

When an employee earns a bonus during a pay period, they cannot pay it until a later period.

How is it calculated?

Before you begin calculating the actual amount due for back pay, you must first find out what the employee actually received.

For example, during the last weekly pay period, an employee was compensated for 35 hours, but should have been paid for 40 hours. On the next payroll, the employee is paid five hours in addition to the hours worked in this pay period.

Estimate hourly pay

After calculating the number of hours owed, the rate of pay that must be paid is determined.

Regular hours must be offset against the employee's normal hourly rate, and retroactive overtime pay should be offset against the overtime rate for the pay period where retroactive pay is effective.

Calculate retroactive salary

To arrive at the retroactive amount for an employee, what was paid is subtracted from what he should have received.

For example, an employee normally receives $ 2,000 biweekly. However, in the previous pay period you received only $ 1,800. Therefore, $ 200 must be paid retroactively.

Retroactive pay increase

If an employee receives a salary increase that was effective in a previous pay period, his back pay will be the difference between what he was paid and what he should have been paid.

For example, an employee earns $ 11 per hour. You received a $ 1 per hour pay increase, effective in the last two biweekly pay periods, in which you worked 80 hours each.

Therefore, 80 hours were paid in each biweekly pay period at the previous rate of $ 11, when it was due at $ 12.

The difference in the pay rate of $ 1 must be multiplied by 160 hours (80 hours for two pay periods) to arrive at the back pay of $ 160.

Examples

Calculation of retroactive overtime pay

Suppose an employee earns $ 10 per hour, with a weekly pay frequency. The employee worked 45 hours for a week. Instead of being paid the overtime rate for the five overtime hours, he was paid the regular rate of $ 10 per hour.

First, it is calculated how much the employee was paid for the week. The gross salary was $ 450 ($ 10 × 45). Then, how much the employee should have been paid for overtime is calculated.

To find the overtime rate, the normal hourly rate is multiplied by 1.5, then multiplied by the number of overtime hours worked. The employee should have received $ 75 ($ 10 × 1.5 × 5) as overtime pay.

It is calculated how much the employee should have been paid during the week, adding the overtime and the regular salary. The normal salary is $ 400 ($ 10 × 40). The employee's salary should have been $ 475 ($ 400 + $ 75).

Finally, what was paid to the employee ($ 450) is subtracted from what he should have received ($ 475) to determine the back pay. Then $ 25 in back pay is owed.

Calculation of retroactive salary increase

An employee earns $ 35,000 annually. He is given a raise of $ 7,000 per year, increasing his annual salary to $ 42,000.

In the next two pay periods, you forget to run your payroll using the new pay rate. There are 24 annual periods under a biweekly payment frequency.

You need to first know the employee's salary by period before increasing it. The employee earned a salary of $ 1,458.33 per pay period, before his increase ($ 35,000 / 24).

Then, it is determined how much the employee must be paid with the increase. Divide the new annual salary of $ 42,000 by 24. The employee's biweekly salary should now be $ 1,750.

Finally, the amount that was paid to the employee in salary is subtracted from what should have been paid ($ 1,750- $ 1,458.33). $ 291.67 is owed per period.

By forgetting to include the increase in two payrolls, the correct back pay is multiplied by $ 291.67 by 2. $ 583.34 is owed in back pay.

References

1. Grace Ferguson (2018). How to Compute Retroactive Pay. Small Business - Chron.com. Taken from: smallbusiness.chron.com.
2. Mike Kappel (2018). For Payroll Adjustments, There's Retro Pay. Patriot Software. Taken from: patriotsoftware.com.
3. Laura Handrick (2018). Retro Pay: How to Calculate & Process Retroactive Pay. Fit Small Business. Taken from: fitsmallbusiness.com.
4. Workspirited (2018). What is Retroactive Pay and How to Calculate it? Taken from: workspirited.com.
5. Wikipedia, the free encyclopedia (2018). Retroactive overtime. Taken from: en.wikipedia.org.