What is Back Pay? With Key Steps for Calculating Back Pay
In recent years, it has been revealed that American corporations owe $163.3 million in back payments alone. This number, although huge, directly correlates with the 39.6 million Americans who left their jobs in 2024.
But what is back pay? How does it affect the regular working Joe, and what kind of regulations does the federal government have when it comes to this practice? Read on to learn more about retroactive pay, some IRS regulations surrounding it, and key steps to calculating back pay as well.
What is back pay?
Back pay refers to the wages a company still owes its salaried employees after they leave but have not yet paid. This can range from work that was completed but was not compensated, work that an employee could have done but was prevented from doing, or a job that should have been paid differently at the time.
Otherwise known as retroactive pay, the most common reason why it is claimed by employees is due to either wrongful termination. However, keep in mind that underpaid employees, discriminated employees, and employees who are passed over for promotions are also eligible to receive it.
Employers should also note that it falls under the Fair Labor Standards Act (FLSA). This means that companies that failed to provide it to their employees may be sued and can face bigger fines in the long run.
Most companies can prevent themselves from calculating it in the first place by utilizing competent and efficient compensation planning software. Systems like these can easily manage a company’s payroll systems and detect backpay for every employee, essentially ensuring a smooth process.
Examples of back pay
When it comes to back pay, it’s important to note that there can be plenty of stipulations that can affect it. For instance, it can take effect after a payroll miscalculation that gave an employee less than they deserved or if they were unlawfully terminated and were barred from working for no apparent reason.
However, it can also occur when an employer either forgets to put an employee’s bonus in their paycheck, either by mistake or by clerical error. In this case, the companies have the choice to either add it to their employee’s next paycheck as a regular wage or include it in a different payroll run.
Alleviating the latter can be done with the help of multipurpose compensation planning software that can help plan a company’s salary strategies. It can help companies not just streamline their compensation practices, but can help them avoid a future lawsuit as well.
Special regulations surrounding back pay
As mentioned earlier, the practice falls under the FLSA. This ensures that every company is legally required to provide it to their employees whenever it’s applicable. Under the act, a two-year statute of limitations applies, but it can be extended to three years in the case of willful violations.
According to the Department of Labor, listed below are the steps that employees can take when it comes to recovering unpaid wages.
Report any unpaid wage to the Wage and Hour Division of the Department of Labor.
The Secretary of Labor brings the suit as an equal amount in liquidated damages.
An employee may file a private suit. This can contain the equivalent of the lost pay as liquidated damages, along with the attorney’s fees and court costs.
The Secretary of Labor can then file an injunction that restrains anyone from violating the FLSA. This includes unlawfully withholding the minimum wage and overtime pay.
Keep in mind that interest rates also apply as well, which the IRS updates every 1st of January, April, July, and October every year.
What are the IRS regulations with back pay?
Even if the IRS still considers back pay as wages, they treat it as wages in the year paid. This means that employers should also add it in their employee’s’ W-2 Forms, Wage and Tax statements, or electronic wage reports, and report it as salary in the year that they’ve paid the employee.
However, keep in mind that in some cases, it can be considered a special wage payment and can be excluded from wages counted under the Social Security test.
How to calculate back pay
Calculating back pay can be relatively easy, especially for employers. Below is the formula that employers can use.
Determine the number of pay periods per year
Divide the salary by pay period
Multiply it by the number of pay period employees are owed for
For this article’s sake, let us assume that we’re using Salary.com’s data for financial accountants. According to Salary.com’s Real-Time Job Salary Report, financial accountants have an annual salary of 64,070 in the U.S. Let us also assume that they were owed two semimonthly pay periods. Thus, the formula would look similar to the figure below:
24 pay periods per year (twice every month)
$64,070 (yearly salary) / 24 (pay periods) = $2,670
$2,670 x 2 (pay periods owed) = $5,340
Thus, we can assume that a financial accountant in the U.S. who is owed two pay periods can get $5,340. The formula works the same for hourly employees as well but will need to have several deviations.
FAQs
Here are some frequently asked questions about calculating back pay.
How to compute retroactive pay in the U.S.?
The formula for computing retroactive pay is essentially the same but will have several deviations like subtracting the newer pay rate and the old, proper minimum wage to acquire an employee’s retro pay.
How do you calculate back pay?
Calculating back pay is relatively simple – all an employer has to do is to determine the employee’s number of pay periods per year, divide their yearly salary by pay period to get the bimonthly rate, and multiply the number of pay periods is owed.
What is the formula to calculate back pay?
The formula can be seen below:
Salary per pay period x pay periods missed.
What is the best way to calculate back pay?
Although employers and payroll managers can easily calculate it manually through the formula provided above, companies can use a trustworthy payroll provider to ease the burden and allow them to easily make changes on the fly and allows for easy back pay calculations.
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