Back pay owed to employees for a prior payroll period due to a wage increase, correction, or legal settlement. Retro pay is taxed as supplemental wages in the period it is actually paid.
Why Retroactive Pay matters for employers
Retroactive pay most commonly arises when a wage increase is approved but the payroll system is not updated before the next pay cycle runs, when a payroll error is discovered and corrected, or when a settlement agreement requires back wages. The IRS treats retro pay as supplemental wages, taxed at the flat 22% federal rate unless aggregated with regular wages in a combined payroll run. State income tax treatment varies.
Employers must also pay the employer share of FICA on retro pay and report it on the W-2 for the year in which it is actually paid, not the year to which it relates. Correcting payroll errors promptly limits compounding interest and penalty exposure from underpayment of taxes in prior periods.
How BEG handles Retroactive Pay for clients
BEG Managed Payroll handles Retroactive Pay as part of a fully managed payroll service at $25-$45 per employee per month. Clients do not need to track compliance rules, filing deadlines, or calculation methods related to Retroactive Pay on their own. Everything is included. Learn about BEG Managed Payroll.
Frequently asked questions
Do employers have to manage Retroactive Pay themselves?
No. A managed payroll provider handles Retroactive Pay as part of full-service payroll. BEG manages this for clients at $25-$45 PEPM with no system migration required.
What happens if Retroactive Pay is handled incorrectly?
Errors related to Retroactive Pay can trigger IRS penalties, state agency assessments, or employee disputes. Catching and correcting errors before filing is far less costly than after-the-fact corrections.
How does BEG handle Retroactive Pay for managed payroll clients?
BEG tracks, calculates, and remits everything related to Retroactive Pay as part of fully managed payroll. Clients do not need to monitor compliance -- that is included in the service at $25-$45 PEPM.
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About the author
Anthony Moretti is VP of Sales at Business Executive Group, where he builds BEG's managed payroll and HR service verticals for employers across Dallas-Fort Worth and nationwide. He writes the BEG Payroll Glossary to give employers plain-English answers on payroll and compliance.
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