Back pay¶

Back pay is money you owe an employee from an earlier period and pay to them later. It is sometimes called a back payment or arrears. It can happen for a few reasons — a pay rise that was agreed to start on an earlier date, a correction to an amount that was underpaid, or hours that were missed in a previous pay.

Back pay is still part of the employee's earnings. It is taxed, just like the rest of their pay. The main difference is that the tax on a back payment is worked out using special rules set by the Australian Taxation Office (ATO).

In one line

Back pay is an amount you owe an employee from an earlier period. It is still earnings, it is taxed, and the ATO sets the rules for working out the tax.

Why this matters¶

If you agree to a pay rise from an earlier date, or you find you have underpaid someone, you need to pay them the difference. Knowing that back pay is normal earnings — and that it is taxed — helps you pay the right amount and avoid a second mistake on top of the first.

What you will learn¶

What back pay is and when it happens
That back pay is still earnings and is taxed
That the ATO sets the rules for the tax on a back payment

Understanding the concept¶

Back pay is a catch-up payment. It covers something the employee should have been paid earlier but was not. Common examples are:

A backdated pay rise — you agree a higher rate that starts from a past date, so you owe the difference for the weeks already worked.
A correction to an underpayment — you find an employee was paid too little in an earlier pay and you fix it.
Missed hours — hours that were left out of a previous pay.

Because it is money earned for work, back pay counts as earnings. That means the employer still has to take out PAYG withholding — the tax an employer holds back from pay and sends to the ATO — on the back payment.

Working out how much tax to withhold on a back payment is not the same as a normal pay. The ATO has specific rules and tax tables for back payments, because the amount relates to more than one period. You do not need to do this maths by hand — the ATO rules and your payroll software work it out.

For accountants & bookkeepers

A back payment is not one single payment type, so it is not always reported the same way in STP. In most cases it is reported under the payment type it relates to (for example ordinary earnings or overtime). Amounts that relate to a period well in the past can fall under a separate lump sum category with its own reporting rule. The ATO publishes a dedicated tax table for back payments; myaccountant applies the correct withholding for you.

Example¶

A business agrees to give Priya a pay rise, backdated to start four weeks ago. For those four weeks, Priya was paid at her old, lower rate. The business owes her the difference between the old rate and the new rate for those weeks. That difference is back pay. It is added to her next pay as earnings, tax is worked out on it using the ATO rules, and the payslip shows the back pay amount.

Common mistakes¶

Paying back pay "tax free" — it is earnings, so tax still applies.
Using a normal pay's tax calculation on a large back payment — the ATO has its own rules for back payments, and the software applies them.
Forgetting to pay back pay at all after agreeing to a backdated pay rise.

How this works in myaccountant¶

In the app — you add the back pay to a pay run as a pay item, and myaccountant works out the PAYG withholding for you using the ATO rules. The back pay appears on the payslip you can email to the employee, alongside their normal earnings.

Key points¶

Back pay is money owed to an employee from an earlier period.
It happens with backdated pay rises, corrections to underpayments, or missed hours.
Back pay is still earnings, so it is taxed.
The ATO sets specific rules for the tax on a back payment.
You do not calculate the withholding by hand — the software applies the ATO rules.

Learn next¶

General information only — not tax, super or financial advice.

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