What is back pay?

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The holidays are coming and that means time for bonuses, raises, and more! It also means that many employers will be issuing back pay to their employees. If you’re already lost and are not using online payroll software to automate this, don’t panic because Knit People’s Senior Accounting Associate Guriqbal ‘Guri’ Singh is here to answer “what is back pay?” and tell you what you need to know about it.

Back Pay Explained

In a nutshell, back pay is past wages or benefits paid to any employee retroactively. Put differently, it is the difference between what an employee was paid and the amount that they should have been paid. It is often paid out in the form of a separate paycheque or added to a regular-cycle paycheque. Back pay is very common and can come into play during a number of different scenarios:

  • Commissions: It can take time to calculate commissions. In the case where an employee earns commission during a pay period, but they are not paid during that same pay period, you would have to back pay them for the commission earned.
  • Bonuses or raises: If an employee earned a bonus or received a raise that needs to be retroactively applied, you would need to back pay them.
  • Terminating an employee: If an employee is terminated but owed wages, you may need to run an off-cycle payroll to pay them back.
  • Payroll errors: If an employee is not paid appropriately for the hours they worked due to a payroll error, you will have to back pay them for the correct amount.

Back Pay & Deductions

Okay, so now that you know when back pay comes into play, you have to consider the deductions. As the CRA explains, any bonuses, retroactive pay increases, or irregular amounts require you to deduct the following:

  • Canada Pension Plan (CPP) contributions (without taking into consideration the annual basic exemption amount if the payment is made separately from their regular pay)
  • Employment Insurance (EI) premiums
  • Income Tax

To calculate these payroll deductions, you can use the CRAs Deductions Online Calculator, or automate the process with services such as Knit.

Disclaimer: This article provides general information and should not be construed as tax advice. Since tax rules may change over time and can vary by location and industry, please consult a CPA or tax advisor for advice specific to your business.