How is back pay calculated for employees?

Back pay is calculated by comparing the actual amount an employee was paid to the amount they should have received. For hourly employees, this typically means multiplying the number of missed hours by the correct wage rate. For salaried employees, it involves determining the proper salary for each affected pay period and totaling the difference. Employers must also include any unpaid bonuses, commissions, or overtime that were earned but not paid.

What are the common reasons for issuing back pay?

Common reasons for issuing back pay include payroll errors, missed or incorrect overtime payments, delayed bonuses or commissions, and employee misclassification. This may occur if an employee is misclassified as exempt and therefore does not receive overtime compensation for additional hours worked.

How does back pay affect payroll and taxes?

Back pay is considered taxable income and is taxed in the same manner as regular wages. It’s subject to federal, state, and local income taxes, plus Social Security and Medicare taxes. Employers process it through their payroll system and withhold taxes at the time of payment. The amount appears on the employee’s W-2 Form for the year it is paid, even if the work was done in the previous year.