How to Calculate a Retroactive Salary Increase

When performance evaluations are put on the back burner but a well-performing employee is due a raise, the employer owes employee retroactive pay for the amount of the increase, from the date on which it became effective. An employee may have been anticipating the increase for some time, such as wanting to catch up on bills or perhaps splurging to celebrate a good evaluation, so the sooner the employer can process the retroactive pay, the better.

Verify the Employee's Current Pay

Check with the payroll department or the payroll processor to verify the employee's current rate of pay. While you are verifying the rate of pay, determine when the retroactive pay will be disbursed. For example, if you check on the 2nd of the month and the payroll for the 15th of the month is already in process, estimate that the retroactive pay will be paid with the next payroll date, which in some instances will be the last day of the month.

Give yourself enough time to process the retroactive pay to ensure you correctly calculate it. From an employee's perspective, few things are worse than getting pay that's late and inaccurate.

Confirm the Employee's Salary Increase

Check with the employee's supervisor or the human resources department to confirm the rate increase. The purpose of many performance evaluations is to determine the amount of salary or wage increase an employee will receive for her performance rating. According to the Society for Human Resource Management, in 2017 and 2018, the typical increase was approximately 3 percent; however, companies determine individually how to reward employees and it could be based on profits or even the windfall many companies expected to receive as a result of the Tax Reform and Jobs Act of 2017.

For example, let's assume the employee currently earns $100,000 annually and she is to receive a 3 percent increase, which would raise her salary to $103,000 per year.

Determine Retroactive Date and Due Date for Increase

Let's further assume that her pay increase was to become effective January 1 and that the next payroll date for you to process her increase is March 1. If you process payroll semi-monthly on the 15th and on the last day of the month, this means that she is due retroactive pay for four pay periods: January 1 and 30; February 1; and on the last day of February, which most years is February 28.

Calculate Current and New Pay Rates

For an employee who earns $100,000 annually and receives a 3 percent increase, her salary increases to $103,000 annually. For payroll processed semi-monthly, her paycheck before deductions is currently $4,166.67 for 24 pay periods, and will increase to $4,291.67 for 24 pay periods. These amounts are before taxes and other deductions. The difference between her current and increased pay is $124. 99, or rounded up to $125.00 per pay period. For four pay periods, the amount due is $125.00 multiplied by 4, which equals $500.00 again, before taxes and other deductions.

Because the retroactive pay increase is probably because of a delay in the employer's performance appraisal and payroll processes, do the employee a favor, and ask if she wants the retroactive amount added to her regular paycheck or if she wants a separate check. Processing it as a separate check may reduce the tax liability, instead of having a larger-than-typical amount for a regular paycheck.