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The Empuls Glossary

Glossary of Human Resources Management and Employee Benefit Terms

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Retro Pay

Retro pay also known as retroactive pay are the payments made to an employee for the work that was performed in the past but was not paid at the appropriate rate or skipped. Retro pay ensures that employees receive fair compensation for their work and help maintain a positive employer-employee relationship.

What is retro pay?

Retro pay is a type of compensation received by the employees for the work they have done but needs to be adequately compensated for that time. Arises when there is a delay or maybe an error in implementing changes to an employee's compensation. It may be a salary increase, changes in benefits, or adjustment to wage rates.

Listen, recognize, award, and retain your employees with our Employee engagement software  

Does retro pay get taxed?

Yes, retro pay is generally subject to taxation, considered taxable income, and included in the same tax treatment as regular wages.

Is retro pay taxed differently?

Retro pay is subjected to the same tax treatment as regular wages. The tax treatment depends on the specific laws and regulations of the country and jurisdiction where the employee is located. According to the United States, retro pay is considered taxable income subject to federal, state, and local income tax.

The retro pay affects an employee's tax bracket for the year it is received; depending on the amount and timing of the retro pay, it may push the employee into a higher tax bracket.

How does retro pay work and be calculated?

The retro rate works as follows:

  1. Determine the retroactive period
  2. Identify the correct rate or adjustment period
  3. Calculate the difference
  4. Include any applicable tax and deductions
  5. Communicate with employees and process retro pay

1. Determine the retroactive period: Determine the period in which employees owe retro pay and a specific time frame, whether the previous month or quarter or more extended period.

2. Identify the correct rate or adjustment period: Find the correct rate or adjustment period that should have been applied to the employee's compensation during the retroactive period.

3. Calculate the difference: Calculate the difference between what the employee was paid and the time that they should have been paid based on the correct rate; this involves determining the additional amount owed to the employee.

4. Include any applicable tax and deductions: Take into account any applicable taxes, such as income tax and payroll taxes, and deduct them from the retro pay amount, and the remaining amount after taxes and deductions is the net retro pay.

5. Communicate with employees and process retro pay: After the calculations, the employer should inform the employee and the reason for the patent and specific details of the measures.

For instance: An employee is entitled to an increment from $30/hr to $35/hr, effective from Jan Due to some error, the rate was implemented on April 1. In this case, the employee would owe retro pay from January 1 to March 31.

The calculation would be:

Old rate - New rate = $35 - $30 = $5/hr

The period is for 13 weeks

40hrs/week x 13 weeks = 520 hrs

Retro pay = Difference in rate x Number of hours worked

$5/hr x 520 hours = 2600

Does retro pay include overtime?

Retro pay can include overtime if the employee was entitled to overtime wages during the retroactive period but did not receive them. If the employer fails to compensate the employee for overtime hours adequately, the retro pay would be included in the unpaid overtime.

Retro pay vs back pay: Difference?

Retro pay is the payment made to an employee to account for the change in compensation that was implemented after some time, as it is associated with a change in employment terms such as a salary increase, benefits adjustment, or wage rate change.

Whereas back pay is the payments to an employee to compensate wages, and benefits that the employee owed but were not paid or underpaid previously, may be due to mistakes, miscalculations, or failure to pay overtime.

Employee pulse surveys:

These are short surveys that can be sent frequently to check what your employees think about an issue quickly. The survey comprises fewer questions (not more than 10) to get the information quickly. These can be administered at regular intervals (monthly/weekly/quarterly).

One-on-one meetings:

Having periodic, hour-long meetings for an informal chat with every team member is an excellent way to get a true sense of what’s happening with them. Since it is a safe and private conversation, it helps you get better details about an issue.


eNPS (employee Net Promoter score) is one of the simplest yet effective ways to assess your employee's opinion of your company. It includes one intriguing question that gauges loyalty. An example of eNPS questions include: How likely are you to recommend our company to others? Employees respond to the eNPS survey on a scale of 1-10, where 10 denotes they are ‘highly likely’ to recommend the company and 1 signifies they are ‘highly unlikely’ to recommend it.

Based on the responses, employees can be placed in three different categories:

  • Promoters
    Employees who have responded positively or agreed.
  • Detractors
    Employees who have reacted negatively or disagreed.
  • Passives
    Employees who have stayed neutral with their responses.

What are some payroll mistakes that require retro pay?

Several payroll mistakes that may happen and require retro pay are as follows:

  1. Incorrect wage calculations
  2. Incorrect tax withholding
  3. Missed wage increase
  4. Overtime miscalculations
  5. Benefit calculation errors

1. Incorrect wage calculations: During calculating payroll for an employee's regular rate of pay, overtime rate, or other wages, miscalculating results in underpayment, and retro pay may be required.

2. Incorrect tax withholding: Errors like incorrect exemption or tax rates can result in underpayment of taxes and lead to underpayment. Then retro pay may be necessary to adjust the tax withholdings.

3. Missed wage increase: If an employee is eligible for a wage increase such as a raise or step increase, but the new rate needs to be implemented promptly, retro pay may be required to compensate the employee for the missed increase.

4. Overtime miscalculations: Here, retro pay may be required when errors in calculating an employee's overtime hours are seen, or the correct overtime rate is not applied.

5. Benefit calculation errors: Payroll mistakes can also affect employee benefits such as vacay pay, sick leave, or bonuses; if an employee's benefits are miscalculated, that results in underpayment or missed payments. Retro pay would be required to correct the errors.

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