What is retro pay?
Retro pay makes up a shortfall in pay already given. It is different from back pay in everyday use: back pay is usually wages never paid at all, such as unpaid hours, while retro pay is the gap between the rate paid and the rate that applied. The IRS treats both the same way for tax.
- A raise agreed with an effective date before the payroll that first used it.
- A new union contract or pay scale backdated to an earlier date.
- A rate keyed into payroll wrongly, found after one or more paydays.
- Hours or a shift premium left off a past pay period.
How to calculate retro pay
- List the pay periods between the effective date and the last payday at the old rate.
- For hourly staff, take the regular hours in those periods and multiply by the rate difference.
- Take the overtime hours in those periods and multiply by 1.5 times the rate difference.
- For salaried staff, take the new and old pay per period, and multiply the difference by the number of periods (or part periods) affected.
- Add them up. That is the retro pay to put on the next pay stub.
Overtime is the part most often missed. The Department of Labor's rule at 29 CFR 778.303 says a retroactive increase raises the regular rate for the whole period it covers: its own example is a 10-cent raise, owed as 15 cents for every overtime hour worked in that period. A lump sum for a past period has to be spread back over the hours it covers, in the same way as a bonus.
Overtime calculator Pay raise calculator: the new rate per paycheck
Worked example: an hourly raise paid late
An employee paid every two weeks gets a raise from $20.00 to $21.50 an hour, effective June 1, 2026. Payroll keeps paying $20.00 for two pay periods, June 1 to 14 and June 15 to 28, then switches to $21.50. The difference is $1.50 an hour.
| Hours | Hours worked | Owed per hour | Retro pay |
|---|---|---|---|
| Regular | 160 | $1.50 | $240.00 |
| Overtime | 6 | $2.25 (1.5 × $1.50) | $13.50 |
| Total | $253.50 |
For a salaried employee the sum is per period. A raise from $52,000 to $55,120 a year, paid every two weeks, is $3,120 ÷ 26 = $120.00 a period; two periods missed is $240.00.
How retro pay is taxed
IRS Publication 15 lists retroactive pay increases and back pay as supplemental wages, taxed as wages in the year they are paid, not the year they were earned. How you withhold income tax depends on how you pay it:
| How it is paid | Withholding |
|---|---|
| Added to regular wages, not shown separately | Withhold on the total as one regular payment |
| Shown as its own amount, and you withheld income tax from regular wages this year or last | Either a flat 22%, or the aggregate method (add it to regular wages, withhold on the total, subtract what was already withheld) |
| Shown as its own amount, no income tax withheld from regular wages this year or last | The aggregate method |
| Supplemental wages over $1 million in the year | 37% on the excess |
Social security (6.2% up to $184,500 in 2026), Medicare (1.45%) and FUTA apply in full whichever method you use. In the example, a flat 22% on $253.50 is $55.77, social security is $15.72 and Medicare is $3.68. State withholding rules on supplemental pay vary.
Source: IRS Publication 15 (2026), sections 5 and 7, read on October 8, 2026. This page is general information, not tax or legal advice.
How retro pay shows on a pay stub
Retro pay goes on its own earnings line with the dates it covers, so the employee can check it and your records show the addition to pay, which the Department of Labor's recordkeeping rules ask for. The current period's pay is shown at the new rate as usual.
| Line | Hours | Rate | Amount |
|---|---|---|---|
| Regular pay | 80.00 | $21.50 | $1,720.00 |
| Retro pay, Jun 1–28: regular | 160.00 | $1.50 | $240.00 |
| Retro pay, Jun 1–28: overtime | 6.00 | $2.25 | $13.50 |
| Gross pay | $1,973.50 |
In the PayDocs pay stub generator, enter the current hours and the new rate as usual, then use "Add earnings line" for each retro line, with the dates in the label. The amount flows into gross pay, year to date and net pay. PayDocs works out federal income tax, Social Security, Medicare and supported state taxes for 2026 pay dates (see what we calculate).
Questions
What is retro pay?
Retro pay, short for retroactive pay, is money owed for past pay periods when an employee was paid less than the rate that applied, usually because a raise took effect before payroll used it. It is paid as a separate line on a later paycheck.
Does retro pay include overtime?
Yes. A retroactive raise increases the regular rate for the whole period, so overtime hours are owed 1.5 times the rate difference. The Department of Labor's example: a 10-cent retro raise means 15 cents more for each overtime hour.
Is retro pay taxed more?
Not at a higher rate of tax. The IRS treats it as supplemental wages, so if it is shown separately you may withhold a flat 22% federal income tax. The employee's actual tax is settled on their return, as for any wages.
Which year is retro pay taxed in?
The year it is paid. Retro pay for December 2026 paid in January 2027 goes on the 2027 Form W-2, and 2027 social security and Medicare rules apply.
Should retro pay be a separate line on the pay stub?
It should, with the dates it covers. A separate line lets the employee check the figure, lets you use the supplemental withholding rules, and keeps the addition to pay visible in your payroll records.
Sources
- eCFR — 29 CFR 778.303, Retroactive pay increases
- IRS — Publication 15 (2026), (Circular E), Employer's Tax Guide: supplemental wages
- U.S. Department of Labor — Fact Sheet #21: Recordkeeping requirements under the FLSA
Official sources checked October 8, 2026. This guide explains how pay documents work; it is not tax or legal advice.
