What Is Retroactive Pay on a Pay Stub?

Retroactive pay refers to a payment made to an employee for work performed in a past pay period that was not accurately compensated at that time. It typically appears as a distinct entry on a pay stub, providing transparency regarding this specific financial correction. Understanding this entry is important for employees to grasp how their total compensation is structured and reconciled.

Reasons for Retroactive Pay

One frequent reason involves delayed wage increases. If a raise is approved with an effective date in the past but is not immediately processed into the payroll system, the difference between the old and new rates for the preceding period is paid retroactively. This ensures the employee receives the higher rate from its intended start date.

Another common cause is the correction of overtime hours. If an employee worked overtime but was underpaid or if the overtime was missed entirely in a previous pay period, the additional compensation is owed. Errors in calculating or applying commissions and bonuses can also necessitate a retroactive payment. General payroll errors, such as incorrect salary entries or miscalculations of hours worked, are also frequent reasons for these adjustments. Sometimes, adjustments for new hires, if their initial pay rate was incorrect or delayed, may also result in retroactive pay.

Calculating Retroactive Pay

The process of calculating retroactive pay involves determining the discrepancy between what an employee should have received and what they actually were paid for a specific past period. This begins by identifying the exact effective date from which the underpayment occurred. For instance, if a raise was effective from the first of the month but applied later, the calculation covers the days or weeks between these dates.

Next, the difference in the pay rate (e.g., hourly or salary per period) is determined. This difference is then multiplied by the number of hours or pay periods affected within the retroactive period. For hourly employees, this means multiplying the hourly rate difference by the total underpaid hours. For salaried employees, it involves multiplying the per-period difference by the number of affected pay periods. The resulting figure represents the gross retroactive amount, before any taxes or deductions are applied.

Identifying Retroactive Pay on Your Stub

Retroactive pay typically appears as a separate line item on an employee’s pay stub. Common labels used by payroll systems for this entry include “Retro Pay,” “Retroactive Adjustment,” “Wage Adj,” or “Back Pay.”

This amount is usually listed under the earnings section, distinct from regular wages, overtime, or bonuses. The amount displayed on the pay stub for retroactive pay is generally the gross amount before any withholdings. In some cases, the pay stub might also include a brief description or reference to the specific period to which the retroactive payment applies.

Tax Treatment of Retroactive Pay

Retroactive pay is considered taxable income and is subject to standard payroll tax withholdings. This includes federal income taxes, and typically state and local income taxes, depending on the jurisdiction. Additionally, FICA taxes, which encompass Social Security and Medicare taxes, are also withheld from retroactive payments.

While the gross amount of retroactive pay might seem substantial, the net amount received by the employee will be lower due to these mandatory withholdings. For federal income tax purposes, the Internal Revenue Service (IRS) often treats retroactive pay as supplemental wages. Employers may withhold federal income tax from supplemental wages using either a flat rate, such as 22%, or by combining the retroactive payment with regular wages and applying the standard withholding tables.