A common and popular example for retro payments is commissions. In jobs where employees earn a commission, this commission is usually not paid until the client himself pays. As a result, employers usually resort to retro payment, and employees are paid in the next payment cycle.
Another popular case of retro payment is when a wage miscalculation occurs. This can be due to a normal miscalculation or simply to failing to get the right number of overtime hours that an employee has worked. When this happens, the payment is transferred to the next pay cycle in the form of retro payment.
Other forms of retro payment also include bonuses and salary increases that were supposed to be effective from previous payment cycles. Despite seeming to be simple, preparing retro payments is more complicated than it seems to be.
Taxes can make what is supposed to be a simple retro payment really complicated. As tax laws can vary from one place to the other, you should always be sure that you’re complying with the local tax laws.
Retro Payment Options
After you’ve figured out the amount of retro payment that you owe your employee/employees, you need to choose the right way to actually make that payment.
When it comes to retro payments, there are two payment methods that are the most common. Companies and employees are most used to these two methods when making or receiving a retro payment.
Adding payment to the next paycheck
This is probably the most common way of making retro payments, which is adding the amount to the employees next paycheck. When using this option, the retro amount is added to the employees’ paycheck and no special paycheck is issued.
Separate retro paycheck
In this method, the retro payment is paid to employees with a separate paycheck. Instead of just adding the owed amount to the employee’s regular paycheck, a separate paycheck with the amount is issued. This method has an advantage over adding the amount to the regular paycheck, which is the fact that the employees are more aware of why exactly they are receiving this payment.
Whatever the payment method that you choose for your retro payments, you should also be sure to notify your employees of what exactly is this payment for. By doing so, you spare yourself lots of confusion that can result from unclear retro payments.
When you’re preparing retro payments, there are things that you should always keep in mind. Not only will this help you calculate the retro payment amount accurately, it’ll also make the process much easier.
Automate as much as possible
Calculating retro payments manually can be a nightmare. Unlike normal paychecks -which are much easier to create, retro payments involve so many variables. Everything from overtime hour rates to tax categories can be different with retro payments.
If you have a large company, you’ll find that this is a process that can consume lots of time unnecessarily. To solve this problem and make calculating retro payments as simple as possible, try to automate the process as much as you can. Pre-made forms or digital solution can take the hassle out of the process entirely.
It’s true that setting an automated process for this type of payments can be time-consuming at first. However, this is something that’ll definitely pay off in the long term.
Choose the retro payment model that’s right for your industry
Choosing a retro payment model is something that should be determined by your industry. Adding retro payment to the standard employees’ paycheck might be a great idea in one industry, and a horrible one for another.
If you’re in an industry with regular retro payments like sales, opting for a separate retro paycheck is definitely the way to go. This way, your employees will be able to tell their basic salaries from their commission with ease, helping you avoid any unnecessary confusion.
On the other hand, if your industry has retro payments that are far and in between, adding retro payments to the employees’ paychecks can be the simpler solution. As this isn’t something that’s done regularly, you can just explain the payment to each employee separately.
How to use retro payments
- Calculating retro payments amount that you need to pay.
- Making any deductions like taxes (if needed).
- Deciding on a payment method.
- Paying the amount.
- Adjusting your records.
Used for paying an employee an amount of money owed to them from a different pay period.
- Account for your payroll and income taxes.
- Always make what the retro payment is for as clear as possible to your employees.
- Choose the payment method that’s most convenient to your workflow.