What is Retro Pay?

Retro pay, short for retroactive pay, is the additional compensation an employer owes an employee when they were previously underpaid. It corrects payroll mistakes such as missed raises, incorrect overtime calculations, or overlooked shift differentials.

Unlike back pay (which covers entirely unpaid wages or missed hours), retro pay specifically makes up the difference between what was paid and what should have been paid.

How is Retro Pay Calculated?

The formula is simple:

Retro Pay = Correct Pay – Actual Pay Received

The calculation differs slightly depending on whether the employee is hourly or salaried:

For Hourly Employees

Example:

• Regular rate: $15/hour
• Overtime rate: $22.50/hour
• Hours worked: 48 (40 regular, 8 overtime)
• Paid incorrectly at $15/hour for all hours

Correct wages: (40 × $15) + (8 × $22.50) = $780
Paid wages: 48 × $15 = $720
Retro pay owed = $60

For Salaried Employees

Example:

• Annual salary: $40,000 (biweekly = $1,538.46)
• Raise: +$5,000 → New salary = $45,000 (biweekly = $1,730)
• If the raise was not applied for one pay period:

Correct pay: $1,730
Paid: $1,538.46
Retro pay owed = $191.54

Is Retro Pay Taxable?

Yes. Retroactive pay is treated as supplemental wages and subject to payroll taxes, including:

• Federal income tax
• State and local income taxes
• Social Security and Medicare (FICA)

Employers must ensure correct withholding before issuing retro pay.

Common Reasons for Retro Pay

• Overtime miscalculations
• Missed pay raises or promotions
• Errors with shift differentials or commission payouts
• Incorrect application of bonuses or supplemental wages
• Delays caused by collective bargaining agreements
• Court-ordered payments for wage disputes, discrimination, or FLSA violations

How to Issue Retro Pay

Employers can correct underpayments by:

1. Communicating with the employee about the adjustment
2. Running retro pay through payroll systems
3. Adding the owed amount to the next paycheck or issuing a separate check
4. Documenting the correction on the pay stub for transparency
5. Ensuring compliance with federal, state, and local labor laws

Key Takeaway

Retro pay ensures employees receive the full compensation they’ve earned and helps employers stay compliant with labor laws. By addressing payroll errors quickly and transparently, businesses maintain employee trust and avoid costly legal issues.