# How to process backpay for an employee

KB123

### Overview

Sometimes employees are underpaid in either the rate or the number of hours. The type of backpay and the period over which someone is paid will determine the process and the payment type required on the pay item.

In some cases, back payments are gross or overtime payment types and in other cases, they may be Lump sum E payment type. Please check with your accountant or payroll professional to determine the correct payment type to be applied to the back payment. If Lump sum E is used as the Payment type the pay item description must contain the Financial year the payment relates to as the first 6 characters of the description, in the format of “FYXXXX”. For example - If the back payment relates to the 2020 financial year, the pay item description would read as follows “FY2020 Backpay”

#### If the employee was not paid the correct rate of pay

In this case, create (or use) a BACKPAYRATE Pay item. This pay item does not accrue leave.

- Type: Special income
- Default rate: Custom
- Rate: 0.00
- Tick Allow user to change rate
- Default quantity: Custom
- Qty: 0.00
- Unit: Each
- Tick Allow user to change quantity
- Payment type: Check with your accountant or payroll professional for the correct payment type to use. If “Lump sum E” is selected the pay item description must contain the financial year as the first 6 characters of the description (FYXXXX).
- Check "Leave item linking" is completely clear of ticks (no leave accrues when this is paid)

#### If the employee was not paid the correct number of hours

In this case, create (or use) a BACKPAYHOURS Pay item. This Pay item should accrue leave.

- Type: Special income
- Default rate: Employee hourly rate
- Rate: 1.00
- Default quantity: Custom
- Qty: 0.00
- Unit: Hours
- Tick Allow user to change quantity
- Payment type: Check with your accountant or payroll professional for the correct payment type to use. If “Lump sum E” is selected the pay item description must contain the financial year as the first 6 characters of the description (FYXXXX).
- Check "Leave item linking" to ensure all leave items are ticked to accrue leave for this pay item (leave accrues when this is paid)

### Process

1. Create a new Pay run
2. Add the employees and go into the pay details of each one
   1. Set the Pay From and Pay To dates to reflect the pay period over which the backpay relates
   2. Remove all default pay items
   3. Add the BACKPAY items
   4. Adjust the tax using EXTRA TAX pay item so that your tax is correct (see Notes)
3. Add plenty of notes on the pay advice notes for each employee that shows the calculations clearly. Attach any spreadsheets to the pay run if necessary
4. Update and apply the pay run
5. Lodge STP

There are special treatments for tax on backpays and the way in which a backpay is taxed is beyond the scope of this help. Consult your accountant, payroll professional or the tax office for assistance in how tax should be calculated.

### Did you find this article helpful?

If this article is missing information, ambiguous, or didn’t give you clear instructions, let us know and we will make it better! Please email us and quote the KB# in the top left of this article to let us know why it didn’t help you out and we will point you in the direction of additional information.

Last edit 23/12/21