Retro pay, or retroactive pay, is the compensation owed to an employee after a shortfall in the previous pay period.

Retro pay is often confused with back pay, however, they mean very different things.

• Back pay: Back pay refers to missed wages, like unpaid wages, missed overtime pay, or missed hours. 
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• Retro pay: Retro pay makes up the difference between wages that have been paid to an employee versus what they were actually paid. Retro pay corrects payroll mistakes, like miscalculations or forgotten raises.

Calculating Retro Pay

When calculating missed wages, employers must subtract the amount paid from the amount that should have been paid. Hourly employees and salaried employees both qualify for retro pay, however, the calculation is different for each.

When calculating retro pay for hourly employees, consider the following factors:

• Determine the total wages paid in the week.
• Determine what the employee should’ve been paid.
• Subtract the amount of money paid from the amount they should’ve received.
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When calculating retro pay for a salaried employee, employers must be aware of the difference in their old and new salary. Employers must also know the date the raise came into effect.

• Calculate the employee’s total pay per period before their raise.
• Calculate the employee’s total pay per period after their raise.
• Subtract the amount paid from the amount that the employee should have been paid.
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Common errors in payroll processing that could lead to retro pay include:

• Miscalculating overtime pay 
• Failing to include overtime pay 
• Delay in paying commissions
• Forgetting about a salary increase
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When it comes to issuing retro pay, the employer must quickly communicate with the employee and amend the error. It should be issued in the employee’s next paycheck.