JULY 29, 2024

Retro Pay: How to Easily Calculate Retroactive Pay

 

Payroll may seem like a simple concept: you pay your employees for the work they perform and the time they put in. But the payroll process gets complex quickly, and sometimes employees don’t get the pay they’ve earned. That’s when you have to provide them with retroactive pay, or “retro pay.” Let’s look at the definition of retro pay, how to calculate it, and ways to make it easier for yourself, such as hiring a third-party service provider like Payroll Vault.  

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What Is Retro Pay?

 

Retroactive pay is money owed an employee for work previously completed. Business owners are often stretched thin, covering a wide range of other responsibilities. This can lead to mistakes in payroll that cause one or more employees to be underpaid. Hiring and job search platform Indeed.com lists several common payroll mistakes which result in issuing retroactive pay:  

 

  • Raises issued mid-pay period or overlooked when running payroll.  
  • Forgetting to factor in overtime.  
  • Using the wrong number of hours worked or the wrong pay rate.  
  • Forgetting per diem rates.  
  • Forgetting shift differentials.  
  • Using the incorrect rate for work done for a certain position.  

 

Retro pay is different from back pay, which sounds similar but is another process. Back pay means paying an employee owed wages that weren’t ever paid. Retro pay, meanwhile, is paying the difference between what was paid and what was supposed to be paid. 

Calculating Retro Pay

 

As with any payroll process, calculations depend on several factors. In all cases, you’ll need to verify the period of time there was a payment discrepancy and the type of pay issued (hourly or salaried). The U.S. Department of Labor has 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. 

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Hourly 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.  

 

  1. Calculate the difference in hourly rate, which in this example is $3 per hour.  
  2. 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 need retro pay adjustment, at eight hours per day, which comes to 32 hours.
  3. Multiply the hours to be adjusted by the difference in the rates. For 32 hours at a $3 per hour difference, that comes to $96 in gross retroactive pay.   

Salaried Employee

 

The process of calculating retroactive pay for salaried employees is similar, but you also need to factor in the pay periods. For example: a salaried employee receives a raise, bringing their annual salary from $60,000 to $65,000. This company pays semi-monthly, meaning there are 24 pay periods each year. The raise took effect at the start of the month but won’t be reflected in paychecks until the second pay period, meaning a full pay period should be accounted for in retro pay. 

 

  1. Calculate how much the employee received per pay period at the old salary. For $60,000 over 24 pay periods, that comes to $2,500 per period. 
  2. Calculate the per pay period amount of the new salary. For $65,000, that comes to $2,708.33 per period. 
  3. Calculate the difference between the per period pay of the new rate and the old rate. For $2,708.33 and $2,500, the difference is $208.33 per pay period. 
  4. Multiply the difference by the number of pay periods to be adjusted. For this example, it’s only one period, so $208.33 is owed in gross retro pay.  
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Avoiding Retro Pay Trouble

 

Of course, these examples are hypothetical and simplified. There are a variety of reasons for retro adjustments to be made and several correlating methods of calculating the pay that is due. Retro pay is also subject to any necessary payroll taxes you deduct from regular wages.  

 

To avoid the trouble of retro pay, and make it easier if it still becomes necessary, there are best practices to use. Preventative measures such as self-audits and payroll system reviews help ensure your staff is getting what’s owed, but that still means doing the work yourself. Hiring a third-party service provider like Payroll Vault helps by putting your payroll process in the hands of experts, who’ll make a customized payroll plan for your business, provide various payroll solutions and services, and ensure accurate payroll reporting and business tax filing.  

Keep Your Payroll Accurate with Payroll Vault

 

We’re pleased to offer you the payroll solutions you need for your small business. Contact Payroll Vault - Fort Collins/Oahu at (970) 682-6603 or find your nearest Payroll Vault location to learn more about what we can do for your business.