What Is Retro Pay on a Pay Stub and How Is It Taxed?

Retroactive pay, often shortened to retro pay, is a payment an employee receives for work performed in a prior pay period that was not compensated correctly. It addresses a shortfall between what an employee was paid and what they should have received.

Understanding Retroactive Pay

Retroactive pay corrects an underpayment from a previous pay period. It is distinct from regular wages because it addresses past discrepancies. Retro pay arises from scenarios preventing an employee from receiving full wages on time.

One frequent cause is a delayed pay raise or promotion; retro pay covers the difference between old and new rates when updates are delayed. Errors in payroll processing, such as incorrect hourly rates or miscalculated hours, also lead to underpayment. Miscalculations of overtime wages frequently result in retro pay, as federal law requires overtime at 1.5 times the regular rate for hours exceeding 40 in a workweek. Other situations include overlooked bonuses, commissions, or shift differentials. Retro pay ensures these past shortfalls are rectified.

Identifying Retro Pay on Your Pay Stub

When retroactive pay is issued, it will typically appear on your pay stub as a distinct line item to clearly indicate the nature of the payment. Common labels to look for include “Retro Pay,” “Retroactive Adjustment,” or “Prior Period Adjustment.” This separate listing helps distinguish the payment from your regular earnings for the current pay period.

While some systems might combine retro pay with regular earnings, there is usually a specific notation or a separate entry that clearly identifies the retroactive component. It is important to examine the pay period dates associated with each earning line. Retro pay will correspond to a pay period that has already concluded, indicating it covers work performed in the past. For instance, if your current pay stub covers July 1-15, but you see a “Retro Pay” line item with dates from May 1-15, this signifies that the payment is for a past underpayment in May. Some state regulations even require retroactive payments to be printed separately with an associated date range on the pay stub, allowing employees to easily identify and reconcile the payment against previous earnings.

How Retro Pay is Taxed

Retroactive pay is generally considered taxable income, similar to regular wages. This means it is subject to federal income tax, state income tax (if applicable), Social Security, and Medicare taxes, collectively known as FICA taxes. Employers are required to withhold these taxes from the gross retro pay amount before it is disbursed to the employee.

For federal income tax purposes, the Internal Revenue Service (IRS) often treats retro pay as supplemental wages. Supplemental wages are payments made in addition to an employee’s regular earnings, such as bonuses, commissions, or severance pay. Employers can generally use one of two methods for withholding federal income tax from supplemental wages. If the supplemental wages are paid separately from regular wages, or identified separately, employers can withhold federal income tax at a flat 22% rate for amounts up to $1 million. This flat rate is applied if the employer has already withheld income tax from the employee’s regular wages in the current or preceding calendar year.

Alternatively, if retro pay is combined with regular wages and not separately identified, or if it is paid concurrently with regular wages, employers can add the supplemental wages to the regular wages and calculate withholding on the total amount as if it were a single payment for a regular payroll period. For very large amounts of supplemental wages exceeding $1 million in a calendar year, a mandatory flat rate of 37% (or the highest income tax rate for the year) applies to the amount over $1 million. It is important to note that while a higher withholding rate may apply to a lump sum of retro pay, the actual income tax liability for the year is determined by the individual’s total annual income and applicable tax brackets.

Regarding FICA taxes, retro pay is subject to the same rates as regular earnings. For 2025, the Social Security tax rate is 6.2% for both the employee and employer, each, applied to earnings up to the annual wage base limit, which is $176,100 for 2025. The Medicare tax rate is 1.45% for both the employee and employer, each, with no wage base limit, meaning all covered wages are subject to this tax. An additional Medicare tax of 0.9% applies to individual earnings exceeding $200,000, or $250,000 for married couples filing jointly, with no employer match for this additional amount. State income tax withholding rules for supplemental pay can vary, with some states following federal guidelines and others having their own specific rates or methods.