Understanding Retroactive Pay: What You Need to Know

Ever get a pleasant surprise in your paycheck and wonder where that extra money came from? There’s a big chance that it was retroactive pay. Retroactive pay is money you earn for work you have done. Your company may have negotiated a new union contract or salary structure and now owes you back pay for the difference.

This article will explain retroactive pay and what you can do if you think there was a mistake in the computation.  

Defining Retroactive Pay and How It Works

Let us say you are out to dinner and decide to order a steak. The steak arrives from the kitchen but is raw in the middle. This time, you return the old one, and they give you a new, perfectly cooked steak after complaining.

Nobody wants to foot the bill for the raw steak. You will pay for the cooked steak, even though it took a little longer to get to you.

Retroactive pay is the same way. Even if your employer takes time to pay what they owe you, you still need to receive it. In this part, you will learn how to calculate your back pay:

• Your new salary or wage: Pertains to the amount you will earn each pay period.
• The date your new pay rate took effect: When you started earning the new, higher amount.
• Remember the number of pay periods between then and now: How often should you have received the higher pay already?

Multiply your new salary by the number of former pay periods to determine your total retroactive pay. For example, say you got a raise of $500 per month starting January 1, but payroll processed it in March. That is three months of back pay owed to you, so your retroactive pay is $500 x 3 = $1,500.

Ensure you get paid for any overtime or bonuses you earn during that time. Be sure the number of pay periods matches the times you got paid to ensure proper compensation.

Receiving retroactive pay should come as good news, even if the delay was annoying. But calculating it right is up to you, so review your pay stubs and be sure the numbers add up. You earned that money, so do what it takes to get paid in full.

Calculating Retroactive Pay: Steps and Examples

Remember that when you talk about retroactive pay, this refers to the overall amount you'll receive for the hours or days you've already worked. These steps can help you calculate your payment correctly:

First, determine the time the retroactive pay covers. This is the period you worked without pay—for example, January 1 to March 31.

Next, review your regular pay rate during that time. Let us say you earn $20 an hour. Note: You will use this rate to start calculating your retroactive pay.

After that, calculate the total hours you’ve worked during that duration. Let’s say, for instance, that you reported working 10 hours per week for 3 months (12 weeks), or about 120 hours total.

This time, multiply the hours worked by the hourly pay rate. In this example, 120 hours x $20 per hour = $2,400. This is your full retroactive pay before any deductions.

Finally, deduct required withholdings like taxes from your total retroactive pay. The amount left over is what you will receive in your paycheck or direct bank deposit.

Frequently Asked Questions About Retroactive Pay

After learning about retroactive pay, you may have questions. For you to better understand it, here are a few FAQs to help you:

How is retroactive pay calculated?

Your retroactive pay is the difference between your old and new adjusted rates. It spans the pay increase's due date and implementation. You will get retroactive pay for January-March to make up for a 5% pay increase retroactive to January 1 but received in April.

Do I have to do anything to get retroactive pay?

Usually, no. Your employer automatically calculates and distributes retroactive pay to you. They will decide the effective date of your pay raise and give you extra money to cover the difference from that date until now. Your stub will show retroactive pay for the period you got paid.

Is retroactive pay taxable?

Retroactive pay is taxable like regular wages. Your retroactive pay may bump you into a higher tax bracket for the year, so you will want to plan for the tax impact. You may need to adjust your withholdings to avoid owing taxes when you file your return.

When will I receive my retroactive pay?

Most employers send retroactive pay within 1 to 2 periods after an increase is effective. If you get a pay increase, you will get your retroactive pay for the first three months of the year in the next two paychecks. The timing depends on your employer's payroll processing schedule.

Conclusion

While it can initially seem complicated to calculate, the basic formula for calculating retroactive pay is straightforward. Remember that retroactive pay makes up for lost wages, not a bonus. Ensure you understand how your employer calculated your new retro pay amount, so there are no surprises.

If you have any questions or feel your retroactive pay amount needs to be corrected based on your new pay rate, feel free to speak up. You worked hard for that raise, so you deserve fair compensation.