What Does Retro Payment Mean on a Paycheck?

A retro payment on a paycheck refers to compensation for work already completed but not correctly paid at the proper time. This payment rectifies a past underpayment, ensuring an employee receives the full amount they were owed for a previous pay period. It is distinct from regular wages or future earnings, specifically addressing a discrepancy from a prior period.

Understanding Retro Payments

A retro payment, also known as retroactive pay, specifically corrects an underpayment for work performed in a past pay period. This payment is not a bonus or an advance on future earnings, but rather a reconciliation of what should have been paid versus what was actually disbursed. It ensures employees are fully compensated according to their agreed-upon terms and applicable labor laws for hours already worked or duties already fulfilled.

One common scenario leading to retro payments involves delayed pay raises. For instance, if a raise is approved to be effective from January 1st but is not processed until March, the employee will receive a retro payment covering the difference in wages for January and February. Payroll errors are another frequent cause, such as an incorrect hourly rate being applied, missed hours not being recorded, or miscalculations in regular salary.

Miscalculations of overtime wages also frequently result in retro payments. If an employee worked overtime hours but was not compensated at the correct overtime rate, a retro payment would cover the additional wages owed for those hours. Adjustments to commission payments, where initial calculations were lower than the actual earned amount, can similarly trigger a retroactive payment.

Calculating and Taxing Retro Payments

Calculating a retro payment involves determining the exact difference between the amount an employee was paid and the amount they should have been paid for a specific past period. For example, if an employee was supposed to earn $25 per hour but was mistakenly paid $22 per hour for 80 hours, the retro payment would be $3 per hour multiplied by 80 hours, totaling $240.

Retro payments are considered taxable income and are subject to federal income tax, state income tax where applicable, and Federal Insurance Contributions Act (FICA) taxes, which include Social Security and Medicare. For 2025, the employee’s portion of Social Security tax is 6.2% on earnings up to $176,100, and the Medicare tax is 1.45% on all earnings, with no wage limit. An additional Medicare tax of 0.9% applies to wages exceeding certain thresholds, such as $200,000 for single filers.

Employers generally withhold federal income tax from retro payments using either the aggregate method or the supplemental wage flat rate method. If the retro payment is combined with regular wages, the aggregate method applies, and taxes are withheld based on the employee’s Form W-4 and the total amount. If the retro payment is paid separately, it is often subject to a flat 22% federal withholding rate for supplemental wages. The entire retro payment will be included in the employee’s gross wages on their Form W-2 for the year it is paid.