What Is Retro Pay? Explanation and Real-Life Example
Learn what retro pay is with a clear example showing how employees are compensated for unpaid wage differences.
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A retro pay example involves compensating an employee for the difference between what they were paid and what they should have been paid. For instance, if an employee's hourly wage was increased from $15 to $17 effective from a past date, and they worked 40 hours after that date but were still paid at the $15 rate, the employee would be owed retro pay of $80 ($2 increase x 40 hours) to make up for the discrepancy.
FAQs & Answers
- What is retro pay in payroll? Retro pay is the compensation given to an employee for the difference between what they were originally paid and what they should have been paid for a previous period.
- How is retro pay calculated? Retro pay is calculated by multiplying the wage difference by the number of hours worked during the time the employee was underpaid.
- When do employees receive retro pay? Employees receive retro pay when a wage increase or payroll correction is applied retroactively to a previous pay period.
- Is retro pay taxable? Yes, retro pay is considered supplemental income and is subject to withholding taxes like regular wages.