Retroactive pay laws come into play when an employee wasn’t fully (or correctly) paid for work they’ve already done and been paid for. Why does this happen? Most often, it’s because of payroll errors, miscalculated wages, overlooked overtime, shift differentials, or adjustments to an employee’s salary after the fact.
What you’ll learn
What you’ll learn
Updated: August 26, 2025
Key takeaways
- Retroactive payment refers to wages that are added to an employee’s paycheck to make up for a past payment shortfall
- Retro payments often involve payroll errors, miscalculated wages, overtime issues, or salary adjustments
- Your business can face legal and compliance issues if you don’t manage retro payments well, leaving employees underpaid
In this guide, we’ll cover how to reflect retro pay on pay stubs, how it fits with overtime and taxes, what an employer’s responsibilities and legal obligations are, and how to calculate retro pay – while offering tips and strategies for positive employee communication.
When retroactive pay applies in the workplace
Retro payments apply when an employee is owed additional compensation for work they have already performed, but were either underpaid or not paid at all. The most common reasons for retroactive pay include:
- Payroll errors
- Delayed pay increases
- Miscalculation of overtime or misclassified hours
- A promotion or job change
- Adjustments in employment contracts
Many of these scenarios can lead to delayed payments or miscalculations that impact an employee’s paycheck. Back pay is required promptly in these situations.
Key employer obligations under retroactive pay law
Under retroactive pay laws, your organization has several obligations to keep up with:
- Payments must be made in a timely manner. Ideally, the employee should be paid for back wages in the next paycheck.
- You must document missing payments. Make sure your business maintains good records that track missing payments and catch-up payments.
- Federal and state laws apply: You have a legal duty to correct underpayments and provide retroactive pay. The Fair Labor Standards Act (FLSA) requires retro pay no later than 12 days after the end of the pay period where the error occurred. In addition, the Equal Pay Act (EPA) mandates equal pay for equal work, and state and local regulations may also come into play.
Though it may not be the most comfortable situation, communicating with employees so they understand why the shortage occurred and when it will be addressed is a must.
How to calculate retroactive pay correctly: Step-by-step
Calculating retro pay varies depending on whether the employee is hourly or salaried. To calculate retroactive pay, you must determine the difference between an employee’s pay and what they should have been paid, then account for taxes and deductions.
For hourly employees:
- Determine the rate difference: Calculate the difference between the old and new hourly rates.
- Identify the hours in question: Determine how many hours the employee worked at the old rate that should have been paid at the new rate.
- Calculate retro pay: Multiply the rate difference by the affected hours.
- Deductions and taxes : Apply all relevant taxes and deductions to the calculated retro pay amount.
Example:
An hourly employee’s rate increased by $5, from $20 to $25, effective July 15. Before the change was implemented in the payroll system, this employee worked 150 hours at the old rate.
- Rate difference: $25 – $20 = $5 per hour
- Retroactive pay: $5 x 150 hours = $750
For salaried employees:
- Determine the salary difference: Calculate the difference between the old and new annual salary.
- Calculate the difference per pay period: Divide the salary difference by the number of pay periods, then identify the number of pay periods in question.
- Calculate retro pay: Multiply the difference by the number of affected pay periods.
- Deductions and taxes: Apply all relevant taxes and deductions to the calculated retro pay amount.
Example: A salaried employee’s annual salary increased from $60,000 to $65,000, effective July 15. The employee is paid weekly.
- Annual salary difference: $65,000 – $60,000 = $5,000.
- Weekly difference: $5,000/52 = $96.15
- Retroactive pay: $96.15 x number of weekly checks since July 15
Retro pay calculations can be managed by automated payroll software, offering an easy way to perform retro payments.
Adjusted hourly rate after raise
In the case of an adjusted hourly rate after a pay raise, you would use the hourly example above to compute the needed back payment. Retroactive pay increases must be managed in a timely manner.
— David Kindness, CPA and OnPay contributor
Missed overtime compensation
If you miss an overtime payment, you need to determine the amount of pay that should have been received based on hours worked or that employee’s salary, and determine how many pay periods or hours were affected.
Example: If an hourly employee should have received an extra $100 in overtime pay per week for four weeks, here is how you would calculate it:
- Underpayment per week: $100
- Affected pay periods: 4
- Total retroactive pay: $100/week x 4 weeks = $400
Correcting missed payments as soon as possible isn’t just necessary to keep you in compliance and avoid penalties and fines, but it also keeps employee morale high.
How retroactive pay affects payroll taxes and reporting
As you probably guessed, retro pay will also affect your payroll taxes and reporting obligations. It is subject to the same federal and state tax withholding rules as regular wages, so you must withhold income taxes as well as Social Security and Medicare taxes from any retro payments. In addition, you must pay your portion of payroll taxes on retroactive payments.
One thing to note: Since retroactive pay is added to the employee’s income, it could bump that worker into a higher tax bracket for that pay period, which could increase the amount of tax that needs to be withheld.
Finally, retro pay must be included on annual W-2 forms as part of total annual wages. If, however, the pay adjustment is made in a different tax year, tax documents will need to be corrected and updated.
Guidelines for documenting retroactive pay on pay stubs
For the sake of transparency, it’s important to accurately document retroactive pay on worker pay stubs (and keep employee questions from getting hard to keep up with).
After providing a written explanation to the employee affected, you should clearly label the retroactive payment as such on the pay stub. This should note the pay periods affected, what the retro payment covers, and the total amount.
Make sure you maintain comprehensive records related to any retro payments.
Communicating retroactive pay to employees
Here are some tips for communicating retroactive pay to affected employees:
- Let employees know what happened as soon as you are aware of the issue. Also, let them know how and when it will be resolved.
- Provide written communications and document everything related to the missed payment.
- Make sure the next pay stub includes clear information on the retro payment.
“OnPay is pretty flawless. It puts me in control of data entry, lets me do multiple pay runs without any extra cost, and employees can access their own payroll records. I’ve had terrible experiences with other payroll companies making mistakes and leaving me to clean up the mess. But OnPay’s customer support is great — any issue or question that I have encountered is addressed almost instantly.”
— Chris Loverro, The Hazel Room
How payroll software can help ensure retro pay compliance
Fortunately, payroll software can help your organization ensure compliance with retro pay laws. By automating calculations and reducing errors, payroll software supports legal compliance and proper paydays.
Your business also has the option of customizing pay stubs, and using the right software means you will always have a clear audit trail showing your compliance.
Understanding retroactive pay law is worth the lesson
Understanding retroactive pay law is a worthwhile investment for any business. Getting familiar with how it works keeps you prepared should the need arise, and while handling payroll corrections takes time, occasional mistakes come with the territory.
If your business wants to streamline its payroll process, OnPay can help. Our automated payroll software makes the entire process — including potential retro pay — seamless for your organization. Get started with OnPay today for accurate, on-time payroll support.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.