Key Takeaways
As a business owner, you're obligated to compensate your employees accurately. Sure, you've got the routine payroll processing handled, but what do you do if things go awry?
Sometimes clerical errors happen, or an employee's wages change mid-payroll cycle and you owe them for funds that didn't make it onto their last paycheque. In cases like that, understanding retroactive payment will help keep you in compliance.
Retroactive pay is money paid to an employee to compensate for a payment deficit calculated in the previous pay period. Also known as "retro pay" or a "retro adjustment," these funds should be issued in the upcoming pay period, or with a supplemental payment, soon after the error is found.
Retroactive pay is necessary when an employee is owed funds that weren't included on their most recent paycheque. There are several qualifying events where retro pay will be needed.
An employee earns a bonus: If you've awarded an employee a one-time monetary bonus during the week, you can pay the amount on their next pay cycle using the label "retro" next to the amount.
An employee gets a pay raise: If you've completed an employee performance review, or simply want to boost their wages due to merit, you can implement that on the next pay cycle. To compensate them for the increase in funds between the day of the raise and the next paycheque, you can enter a retroactive payment into the payroll processing.
An employee's paycheque was erroneous: If the last paycheque was miscalculated, the missing funds can be issued with a retroactive payment. This might happen when a pay raise was omitted, hours were unaccounted for, a bonus was forgotten, or an accounting error occurred.
An employee's overtime was miscalculated: If you offer your staff an increase in pay for working overtime or on holidays, it's possible to make an error in calculating the new wages. A retroactive payment can resolve the discrepancy.
An employee's commission was omitted: If you run a small business and employees have to self-report commissioned sales — but they forget to do so — you can easily compensate them for their earnings by adding a retroactive payment on the next paycheque.
As you can see, there are many reasons a retroactive payment might need to be issued. Bottom line: if an employee is owed compensation that wasn't on their most recent paycheque, a retroactive payment bridges the gap. This helps keep the employee happy and your accounting balanced.
So, what happens if the financial error isn't found right away? What if a raise isn't reflected on a person's paycheque for an entire year, or the contractual promise of a quarterly bonus is never awarded, and the employee is owed these funds?
As an employer, you are legally required to offer back pay. This differs slightly from retroactive pay in a few ways.
Back pay must be issued when an employee wasn't paid at all for money owed. Consider it money "from the past," whereas retro pay reflects a partial, current deficit. Back pay is often triggered by legal actions and is paired with fines and restitution.
If the employee is owed a flat-rate amount, such as a monetary bonus, you can simply add the dollar amount to the next paycheque and label it "retro pay." No calculations are needed.
If the employee is due funds related to a wage increase or other ongoing change in pay, first determine if the employee is hourly or salaried, then do the calculations.
Here's an example for each type of worker experiencing a wage change:
Let's assume the employee was awarded a pay raise in the middle of the current payroll cycle. When they received their paycheque, they didn't see the additional funds reflected in their pay. If they were technically under the new rate for the last five days of the previous pay cycle, they are owed the difference between their new and past rate for the hours they worked in those five days.
If an employee is promoted to a new position midweek, and it comes with a new salary, their next paycheque might not reflect the change. They should be issued a retro payment on the following paycheque for the partial week worked at their new salaried rate.
The employee worked in the new position for 3 days in the pay period for which the new salary was not reflected. If their previous salary was $80,000 and their new position pays $100,000, they will make an additional $20,000 for their contracted year. If their year consists of 260 paid days, divide $20,000 by 260 to learn that their additional daily compensation is $76.92 in the new position. Take that amount times the 3 days they are owed, and their retro payment is $230.76.
After calculating what the employee is owed, don't forget about your legal liabilities.
Retroactive pay is subject to standard payroll deductions, including:
Make your payroll management simpler with QuickBooks. Not only can QuickBooks Payroll tally your hourly and salaried employees' pay, but it can also help you make retroactive payments so you can keep employees happy and your business running smoothly.
Money movement services are provided by Intuit Canada Payments Inc.
This content is for information purposes only and should not be considered legal, accounting or tax advice, or a substitute for obtaining such advice specific to your business. Additional information and exceptions may apply. Applicable laws may vary by region, province, state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. Intuit does not have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. Intuit does not warrant that the material contained herein will continue to be accurate nor that it is completely free of errors when published. Readers should verify statements before relying on them.
We provide third-party links as a convenience and for informational purposes only. Intuit does not endorse or approve these products and services, or the opinions of these corporations or organizations or individuals. Intuit accepts no responsibility for the accuracy, legality, or content on these sites.
Call Sales: 1-888-829-8589
