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Retroactive pay is payment for work already completed, often given as a lump sum or small payments. It can be due to labor negotiations, employer rewards, or employee mistakes. Payroll taxes are also retroactive and may result in owing taxes at the end of the year.
Retroactive pay is pay due to an employee for work that has already been completed. It is often set up in the form of a lump sum where the difference between what the employee was paid and what the employee should have been paid is recovered in a check. Sometimes an arrangement can be reached where the employer makes small payments with each paycheck until the difference has been made up. There are various reasons why people may be entitled to retroactive pay.
The most common reason behind this situation is ongoing labor negotiations. While negotiations are underway, the employer continues to pay employees at the set rate. At the end of the negotiations, they can include a clause that employees are entitled to retroactive wages, starting on a pre-specified date, as part of the agreement provides for a salary increase. The employer is obliged to compensate the difference within the framework of the general enactment of the agreement.
It is also possible for an employer to offer this type of pay raise. This can be done to reward or retain employees by not only providing them with a raise, but by recognizing their hard work in previous pay periods. It is important to note that, in most cases, employers cannot commit to a retroactive pay cut; if wages are to be cut, employees must be notified at the beginning of the pay period in which the cut takes effect so they can decide whether to accept the cut or look for other jobs.
Retroactive pay can also occur when an employee identifies a mistake. An employee may realize that he is graded with the wrong grade, that the math was done improperly, or that the employee was entitled to overtime and was not getting it. In these cases, the employee brings the discrepancy to the attention of the employer and the employer is required to remedy it. Usually people need to identify these situations within a certain time frame or they will lose some of the pay they are entitled to.
Employees are required to pay payroll taxes retroactively, and the payroll will be recorded as part of their overall wages for a given year. People should be aware that because their withholdings may be based on their lower income, they may end up owing money in taxes at the end of the year due to the change in pay.
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