The U.S. Department of Labor states that payment on a salary basis means that the employee receives a predetermined amount of pay each pay period. This pay can constitute all of his pay, or a portion of it. Salary is an amount the employee can count on. Employers give salary increases based on individual performance: where one salaried worker receives a three percent raise, another may receive five percent. Regardless of the amount, or if there is a cost of living increase for all employees, there is a standard way to calculate the increase.
1. Determine the yearly salary before the increase. This is the annual gross figure the employee received prior to the raise; for example, $50,000.
2. Compute the raise based on the percentage or the flat amount given. Percentage example: $50,000 x 4 percent (.04) = $2,000 annual increase. Therefore, the new annual salary is $52,000. The flat amount example would be: $50,000 + $1,500 = $51,500, the new annual salary.
3. Divide the new annual salary into the annual pay periods to arrive at the new salary per pay period. The weekly pay period rate would be: $52,000 / 52 weeks = $1,000 per week. The biweekly pay period rate would be: $51,500 / 26 biweekly pay periods = $1,980.77 biweekly.
4. Check the effective date of the pay raise to determine if retroactive pay is due. If the new salary takes effect in a pay period prior to the current one, the employee is owed retroactive pay. For example, say the employee’s annual salary went from $49,000 to $51,000 (an annual increase of $2,000), effective at the start of the prior biweekly pay period. Previous biweekly pay: $49,000 / 26 biweekly pay periods = $1,884.62. New biweekly pay: $51,000 / 26 biweekly pay periods = $1,961.54. Retroactive pay: $1,961.54 - $1,884.62 = $76.92. The retroactive pay would be $76.92 because this is the difference between what the employee got paid and should have been paid for the prior pay period. Going forward, the employee should receive her new rate of $1,961.54.
- If the retroactive pay is for a large amount (such as over $500), you can pay it on a separate check from the salary to lower the amount of taxes withheld.
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