As an employer, you may encounter instances when you owe an employee or contractor retro earnings. This can happen for a variety of reasons, including a salary increase or bonus that is delayed, a commission payment that must be collected from a client, or another cash bonus that is late in coming.
Many larger businesses officially offer pay raises and/or bonuses once per year, as part of succession planning and employee evaluations. However, the large volume of employees in need of reviews, etc., might make it impossible to make the individual determinations in a timely manner.
In these instances, employees receiving later reviews aren’t penalized by losing a month or two of wages at the higher rate. Instead, the raises (or salary adjustments) are issued retroactively. This additional amount will either be paid in a separate check or folded into the next paycheck. The retro earnings will generally include an amount equal to the balance of all additional money owed from the moment the actual salary adjustment occurred.
Employees should also be aware that tax payments and other withholdings must also be adjusted to accommodate the higher rate of pay. It won’t be a “flat rate” adjustment that is made to cover the differences between former salary and the new rate of pay. The correct tax rate should be calculated based on the tax rate established by the employee’s standard rate schedule. It’s important to note that retro payments can also be made in order to add time missing from a former time sheet or to correct past payroll underpayments.
This article has been provided by Patriot Software, Inc., developer of online small business software for U.S. employers, including payroll software, applicant tracking software, time and attendance software, an employee self-serve portal and 1099 processing software. Patriot Software also offers a payroll tax filing service for payroll customers. For more information, visit www.PatriotSoftware.com.