Local Payroll Pros Provide Retroactive Pay Insight
Payroll processing involves many steps and from time to time an honest mistake can happen. When payroll is calculated incorrectly and an employee is underpaid due to a math or clerical error, retroactive payments are necessary. While it might seem simple to fix a payroll mistake, there are some best practices to remember to ensure the retroactive payment is made correctly.
Our team of payroll experts is based right here in the Bay Area, and we help local businesses as well as clients from across the country with their payroll needs. We have worked with companies of all industries and sizes, and our goal is to take on our clients’ payroll needs to allow them to focus on running the other areas of their business.
In the sections to follow, we will discuss retroactive pay, how to calculate it correctly, and a few best practices for administering retroactive pay correctly.
Take New Pay Rates Into Account
One of the most common reasons retroactive pay becomes necessary is when a pay raise is given. Oftentimes, a pay raise can be promised and agreed to, but the pay raise isn’t reflected on the proceeding pay period. When this happens, employers might have to calculate the difference in the previous pay rate and the new pay rate, and pay the employee for the duration of time where the new rate wasn’t paid.
Account for Overtime when Necessary
Aside from pay rate changes, miscalculation of hours worked can also cause retroactive payment to be due. Whether a time punch was missed or an addition error occurred, it’s important to remember how overtime pay works. Overtime is essential for hourly employees when they work more than 40 hours in a week. This means when retroactive pay comes into play, you must determine how many hours were previously accounted for in the week in question and add in the retroactive hours. Any hours beyond 40 in this instance must be paid as overtime.
Determine Which Payment Method to Use
You have a choice when determining how to pay out retroactive payments. You can either make a one-time payment outside of your regular pay period to make up for the difference, or you can wait until the next pay period and add the retroactive pay to the employee’s next check. Whichever route you choose, you should make it the standard in your company’s payroll policy in order to keep things consistent for future retroactive payments which may be needed.
Correctly Withhold Taxes
Which retroactive payment method you choose will determine the correct amount of taxes to withhold. If the retroactive payment moves the employee into a new tax bracket, you might have to tax it at a higher rate. Also, FICA withholdings are still necessary for retroactive pay, so make sure you and your employee both have the right amount held out of this payment.
If you have questions about retroactive pay or any other part of the payroll process, our team of experts would be happy to help. Contact us today to learn more about how we can help.
