If you don’t pay your employee their full wages, you may owe them back pay—an extra payment that will make up the difference between what they were paid and what they should have been paid.
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You may have heard of back pay during the 2018-2019 government shutdown: federal employees would receive payment for the time they worked after the government reopened. Owing back pay is common, and can be caused by an unpaid bonus or missed overtime, among many other reasons.
What leads to back pay?
There are several situations when you would need to pay your employees back pay. They include:
- Commissions: If an employee earned a commission, but you either missed the payment or were unable to pay it in the pay period it was due, you will owe back pay.
- Bonuses: If you intended to pay a bonus that was never received, back pay makes that possible.
- Overtime or missed hours: Did you accidentally not pay an employee for the hours they worked? You will owe back pay to make up the difference. And if it turns out those missed hours pushed the employee into overtime, you will owe overtime pay as well.
- Wrongful termination: If a judge rules you fired an employee wrongfully, they can require you to give your former employee their job back. You would also have to pay the wages they would have earned while terminated as back pay.
What is retroactive pay, then?
The back pay definition may make it sound like you’re paying retroactive wages — but you’re not.
Retroactive pay, or “retro pay,” is somewhat rare, and only comes into play if you paid your employee the wrong wages. For example, if you give an employee a retroactive salary increase, that’s retro pay, not back pay.
How can I pay back pay?
You can fix your error a few different ways. Here are the three ways to provide back pay for employees.
- Issue a separate payroll run for the historical period(s). You’ll want to label this paystub with BACK PAY so you don’t confuse your employee.
- Include—and identify—the back pay on the next regular check. Again, don’t forget to label it BACK PAY.
- Combine back pay and regular wages on the next regular paycheck. You don’t need to use the BACK PAY label for this option. (Not every state allows this option, so make sure to check with your accountant or payroll processing company.)
You’ll also need to withhold normal taxes, like social security, Medicare, and any applicable state and local taxes.
However, the process does change a little when it comes to income tax. The IRS defines back wages as “supplemental wages”—that’s money paid outside of an employee’s normal salary.
Exactly how you withhold income taxes depends on how you paid the back pay.
If you ran a separate payroll or included and identified the back pay on the next paycheck, you have two options:
- Withhold a flat 22% in income tax from the back pay sum.
- Combine the back pay and normal wages amount from either this payroll or the previous payroll. Then use that sum to figure out the appropriate federal income tax withholding, and subtract the amount withheld or that has already been withheld from the normal wages. Withhold any leftover amount from the back wages.
If you chose the third option and added the back pay sum to the next check without specifying what amount was back pay, you’ll withhold federal income taxes from the combined amount like you would for a normal payroll.
What if I don’t pay the back pay my employees are owed?
Employees who believe they are owed back pay can file a complaint with the Fair Labor Standards Act (FLSA). They may do this if they believe you aren’t paying minimum wage or overtime, or if you haven’t paid your employees for all the hours they’ve worked.
If the FLSA rules in your employee’s favor, a few things may happen:
- The Department of Labor may order you to pay back wages or get an injunction to prevent you from continuing to violate labor laws.
- You may be sued by the Secretary of Labor for back wages and an equivalent amount to cover damages.
- You may be sued privately by your employee for back wages, damages, attorney’s fees, and court costs.