Tips for Managing Retroactive Pay

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Even if you have a good payroll system in place, there are times when mistakes might result in an incorrect paycheck. The mistakes could be on the part of the employee, the manager, or even the payroll processing system. It is important that you take action right away, to ensure that the employee doesn’t feel like you purposefully cheated them out of their paycheck.

When is Retro Pay Needed?

Mark Rowley, Owner
RandR Payroll Services

When is it appropriate for retro pay to be applied to an employee’s paycheck? Here are a few examples of situations where retroactive pay might be needed:

  • An employee was given a pay raise, but the change wasn’t entered into the computer system before payroll was processed
  • Worked hours were recorded incorrectly during the pay period, so the employee wasn’t compensated for all the hours they spent at the office
  • Adjustments were made with benefits withholdings, and a refund needs to be given
  • Overtime hours were miscalculated, and the person needs to be paid time and a half instead of their regular hourly wage

Retro pay happens anytime an employee should have received more money than what they received. If compensation is added to a check for a previous pay period, then you will need to be careful about the adjustments to consider taxes and more.

Separate Check or New Pay Period?

Depending on the amount that is owed, you can choose to cut a separate check or simply roll the retro amount to the next pay period. Make sure that you communicate the payment timeframe so that the employee understands how the errors are being corrected.

Retro pay is subject to payroll taxes, including the employer portion of these payments. It is essential that the correct rates are used to calculate the taxes that need to be withheld, depending on the type of pay that is given. For example, different tax rates might be needed if the retro pay is for a bonus instead of regular work hours.

The easiest solution is to hire a payroll processing team to handle these details. For more information about payroll services, talk to R&R Payroll & Bookkeeping Services at (951) 296-0412.