Retro pay, short for retroactive pay, is compensation added to an employees paycheck to make up for a compensation shortfall in a previous pay period. It is different from back pay, which refers to compensation that makes up for a pay period where an employee received no compensation at all. Retro pay is calculated as the difference between what an employee should have received and what they were actually paid. Retro pay is typically counted as a supplemental wage, which describes any additional compensation.
Retro pay is owed to an employee for any work commenced from a previous pay period, such as the month before. It essentially defines a shortfall in an employee’s pay history. Retro pay is subject to employment taxes, and the amount an employee receives in gross wages is not the amount they will take home.
Some payroll mistakes that require retro pay include forgetting to multiply overtime hours by 1.5, failing to pay an increased rate for hours worked outside an employee’s normally scheduled shift, and miscalculating an employee’s compensation. Retro pay can be added to regular wages or paid as a one-off, standalone payment. When retro pay is calculated into wages, it is important to clarify and address any confusion because retro pay is not extra wages, but rather payments previously earned.
To calculate retro pay for hourly employees owed overtime wages, one can use the following example: if an employee is paid $10 per hour using a weekly pay frequency and worked 45 hours during one week, instead of paying them the overtime rate for the five hours of overtime, they were paid their regular rate of $10 per hour. The retro pay owed to the employee would be the difference between what they were paid ($450) and what they should have been paid ($475), which is $25.
