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While there are many things that you are responsible for as an employer, ensuring that your employees are paid the correct amount, on time, and consistently stands at the top of the list. Your employee's paycheck is essential to their quality of life and financial well-being.
If their paycheck is late, incorrect or doesn't come through at all, you run the risk of interfering greatly with their life. Payroll mistakes can have critical repercussions and should never be taken lightly.
For these reasons and many more, it's so important to ensure that they are paid correctly and on time and have a full understanding of the legalities surrounding payroll and the role you play as an employer. This includes, but isn't limited to, retroactive pay!
In this article, we are going to take a closer look at retroactive pay laws, federal law regarding employee earnings, how to distribute Retro-Pay and more. Read on for everything that you need to know about retroactive pay!
Retroactive Pay 101: What is Retro-Pay?
Retroactive pay is defined as the compensation owed to an employee after a shortfall in the previous pay period.
Put simply; retroactive pay is used to make up the difference between what is owed to an employee and the amount they were actually paid. Retro-pay affects both the employer and the employee, as the employer is responsible for acting promptly, and the employee must accommodate for the delayed funds.
Retro-Pay often helps to correct payroll mistakes, such as:
- A miscalculation or payroll error per the annual salary or hourly wages
- Missed overtime payment
- Unpaid bonuses
- Delay in paying commissions
- Forgetting about a recent pay raise or salary increase
Once the error has been detected, it is imperative that the employer notify the employee immediately. Employees should receive their Retro-Pay owed by the next pay period or via a separate payroll.
Now that you have a better understanding of the meaning of retroactive pay meaning, we can take a closer look at the importance of understanding retro-pay!
Importance of Understanding Retroactive Pay
Understanding retroactive pay is important for both employers and employees.
Employers must understand Retro-Pay to ensure that employees are provided with their unpaid wages in a prompt and legal way.
Employees must understand retro-pay to protect themselves. Knowledge is power, especially when it comes to employment and payroll errors.
The Difference of Retro-Pay and Back Pay
Retroactive pay is often confused with back pay.
While the terms sound similar and are often mistaken for one another, they do mean different things:
Back pay
Back pay refers to funds that make up for missed wages. For example, unpaid wages missed pay from overtime or missed hours.
Retro-Pay
Retro-pay is used to make up the difference between wages that are owed to an employee versus what they were actually paid. Retro-pay is used to correct payroll mistakes, such as miscalculations or forgotten raises.
Calculate Retroactive Pay
Following payroll errors, employers must act promptly to rectify the problem.
The employer can correct the issue by issuing a Retro-Pay for the missing wages. This is done by subtracting the amount from what should have been paid. The only difference in approach applies to whether or not they are an hourly employee or salaried employee. While both can qualify for Retro-Pay, how an employer calculates retroactive pay differs for each.
Employers should consider the following when calculating Retro-Pay for employees paid an hourly rate:
- Determine the total wages paid in the week.
- Determine what the employee should’ve been paid.
- Subtract the amount paid from the amount they should’ve received.
Are you issuing Retro-Pay for a salaried employee recently given a raise that wasn't reflected in the most recent pay period? It's important to consider the difference between the old and new salary and the date that the raise went into effect.
- Calculate the employee’s total pay per period before their raise.
- Calculate the employee’s total pay per period after their raise.
- Subtract the amount paid from the amount that the employee should have been paid.
Calculating Back Pay
Back pay is a little simpler to calculate than retroactive pay.
Simply assess the payroll information from the affected pay period or pay periods to identify what was paid. From there, you can identify the missing amount, whether it be from overtime hours or an incorrect pay rate.
Once the amount has been identified and confirmed, back pay can be issued to the employee.
Frequently Asked Questions About Retroactive Pay
Will retroactive pay affect federal income tax?
Yes, retroactive pay can affect the federal income tax for an employee.
When an employee receives retroactive pay, it's typically treated as taxable income in the year they received it. This means that the retroactive pay will be added to their annual income, which may push them into a higher tax bracket. It can also increase their overall tax liability.
For most employees, this calculation will be done by the payroll team or accounting department, so they won't have to worry about having to calculate it themselves. Suppose the employee would like to take matters into their own hands and confirm that federal income taxes or local income tax were not negatively impacted. In that case, they can consult with a tax professional or use tax software.
How do I notify my employer of a payroll issue with a previous pay period?
If an employee finds a payroll issue, their employer must be notified promptly. We suggest that employees take the following steps to notify an employer:
1. Gather all relevant information
Collect all documents and/or records that can help to support your claim. This may include pay stubs, timecards, or emails related to the issue. Having this information ready will help you present your case!
2. Contact the payroll or HR department
Reach out to the appropriate department in your company responsible for payroll, such as the HR department, administrative or accounting team. If you're unsure, ask your supervisor or a colleague for guidance.
3. Explain the issue in detail
Clearly describe the problem you encountered in the previous period. You must be specific about the dates, hours worked (if applicable), and the nature of the issue. Providing as much detail as possible can help the payroll department investigate and resolve the issue promptly and more effectively.
4. Communicate politely and professionally
Approach the conversation with a calm and professional demeanour. Avoid getting defensive or confrontational, as it may hinder the resolution process. Remember, your goal is to work with your employer to find a mutually beneficial solution!
5. Request a meeting or follow-up
Ask for a meeting or follow-up with your employer to discuss the issue further. This can allow you to provide any additional information and clarify any questions the payroll department may have.
6. Keep records of your communication
Maintain copies of any emails, letters, or notes exchanged with your employer regarding the payroll issue. These records will serve as evidence of your efforts to resolve the problem if further action is necessary.
7. Follow up on the progress
If your employer doesn't resolve the issue promptly with a retroactive payment, politely follow up with them to check on the progress. Persistence may be required to ensure that the matter is addressed and resolved satisfactorily.
Always remember that it's important to approach the situation professionally and provide your employer with a reasonable amount of time to investigate and correct any errors.
What is overtime pay?
Overtime pay refers to the additional compensation employees receive for working more than standard hours. The standard working hours are often defined by either their employer or by labor laws. Generally, overtime is calculated as a higher hourly rate - usually 1.5 times the regular hourly wage.
Overtime hours can vary depending on the country and organization in question. In the United States, they are generally any hours worked beyond a 40-hour workweek. Payment for hours worked in overtime is a legal requirement in many jurisdictions to help ensure that employees are fairly compensated for their extra work.
How do you calculate Retro-Pay?
Here are guidelines to help you calculate retro-pay:
1. Determine the effective date
Identify the date from which the retroactive pay adjustment should be applied. For example, if there was a raise effective January 1st, and now April 1st, the effective date would be January 1st.
2. Collect the necessary information
Gather the relevant data required for the calculation. This includes the old and new pay rates, the number of hours worked during the retroactive period and any additional factors that may impact the calculation. For example, overtime, bonuses, or commissions.
3. Calculate the difference
Subtract the old pay rate from the new pay rate to find the increase in gross wages for hourly and salaried employees. For example, if the old rate was $15 per hour and the new rate is $17 per hour, the difference is $2.
4. Determine the number of retroactive pay periods
Calculate the number of pay periods that need to be adjusted. The number of pay periods is usually based on the number of weeks or months since the effective date.
5. Calculate the retroactive pay amount
Multiply the difference in pay by the number of hours worked during each retroactive pay period. This will give you the amount of retroactive pay owed for each period.
6. Add up the retroactive pay amounts
Sum up the retroactive pay amounts for each pay period to get the total retroactive pay owed.
7. Communicate with payroll
Once you have calculated the retroactive pay amount, inform your employer's payroll department about the issue and provide them with the necessary details. They will make the necessary adjustments in the payroll system and ensure that you receive the correct payment.
Remember, it's important to approach the issue professionally and respectfully when communicating with your employer.
What does it mean to be paid retroactively?
Being paid in retro, or receiving retroactive wages, refers to an employee's payment for past work that was not properly compensated at the correct rate. Retroactive wages are typically given when there has been a change in the employee's pay rate, such as a salary increase or a correction of an error in wage calculation.
It is intended to make up for the difference in pay between what was originally received and what should have been received. Retro-pay is often provided in a lump sum payment or distributed over multiple pay periods.
What are retroactive employee benefits?
Retroactive employee benefits refer to benefits that are granted to employees for past periods. These benefits are given retrospectively, meaning they are applied retroactively to a specific effective date. Retroactive benefits include pay increases, bonuses, vacation accrual, or changes in retirement contributions.
They are typically granted when there has been a change in company policies or collective bargaining agreements that affect the employee's entitlements. Retroactive benefits are usually provided in a lump sum or can be distributed over multiple pay periods to compensate employees for the period they were not properly compensated.
How do I calculate retro-pay taxes?
Calculating retro-pay taxes can be a complex process. This is because it depends on various factors, such as the employee's tax bracket, the type of Retro-Pay, and the duration over which it is paid.
Here are some general steps to help you calculate retroactive pay taxes:
- Determine the total amount of Retro-Pay received by the employee.
- Identify the period(s) during which the Retro-Pay applies.
- Calculate the employee's tax liability for each period separately.
- Determine the employee's tax bracket based on their income.
- Apply the appropriate tax rates to the Retro-Pay for each period.
- Sum up the tax amounts calculated for each period to determine the total retro-pay taxes owed.
It's also important to note that the tax laws and rates can vary by jurisdiction. For this reason, it's recommended to consult with a tax professional or use tax software to ensure accurate calculations.
Our Final Thoughts on Retro-Pay
With the right approach, employers can ensure that employees are paid correctly and on time. But in the case of a payroll error or multiple payroll errors, having a comprehensive understanding of what Retro-Pay is and how to correct the problem is absolutely necessary.
Not only can Retro-Pay help to ensure that employees are paid exactly what they are owed, but also so that federal income tax isn't affected by overtime miscalculations or when other mistakes in payroll happen.
The proper implementation of retroactive pay can also have an effect on the employee's compensation and income tax, which is why it's so important that employers have a complete understanding.
Quality Payroll Solutions With Borderless
Are you considering a new approach to paying your employees?
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For more information or help getting started, contact our team of international employment experts at Borderless today!
Disclaimer
Borderless does not provide legal services or legal advice to customers, contractors, employees, partners, or the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
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