Retro pay, short for retroactive pay, is compensation added to an employees paycheck to make up for a compensation shortfall in a previous pay period. Retro pay differs from back pay, which refers to compensation that makes up for a pay period where an employee received no compensation at all. Retro pay is calculated as the difference between what an employee should have received and what they were actually paid. Retro pay is typically owed to an employee when there is an error in their compensation, such as a miscalculation of overtime pay, a payroll or accounting error, or a raise that was not reflected in the payroll cycle. Retro pay can be calculated for both hourly and salaried employees. When calculating retro pay, it is important to consider the type of compensation, whether hourly or salaried, and whether the retro pay will be added to regular wages or paid as a standalone payment. Retro pay is subject to employment taxes, and the amount owed to the employee in gross wages is not the amount they will take home. Retro pay must be provided as quickly as possible to keep employees satisfied while keeping the company on the right side of labor laws.