How is retroactive pay calculated for employees?

Retroactive pay is calculated by determining the difference between what an employee was paid and what they should have been paid. Once the difference is identified, the correct taxes should be applied, and payment issued to the employee. It's important to check state laws, as retroactive pay may be subject to late payment penalties in some instances.

What are the common reasons for issuing retroactive pay?

Retroactive pay can be issued when raises, promotions, or corrections for missed hours or pay rates are delayed. It may also apply when new union contracts or minimum wage laws take effect after a payroll cycle has ended.

How does retroactive pay affect payroll and tax withholding?

Retroactive pay raises an employee’s taxable income in the period it’s paid, not when it was earned. This can temporarily increase federal, state, and local tax withholdings. Employers must also factor in employee payroll taxes, such as Social Security and Medicare, when calculating the adjustment.

How do employers report retroactive pay on tax documents?

Retroactive pay can be reported as regular wages on the employee’s Form W-2, even if it’s meant to correct pay from an earlier pay period. Employers don’t need to issue a separate form unless special circumstances apply, like corrected wages from a prior year. In those cases, a corrected W-2 (Form W-2c) may be required.