Fixing an underpayment¶

Underpayments happen. Maybe you missed some hours, used the wrong pay rate, or forgot an allowance. It is a common mistake, and it is fixable. The important thing is to fix it promptly and keep a record of what you did.

An underpayment means an employee was paid less than they should have been. You fix it by paying the difference — this extra payment is called a back payment — and by making sure the amount reported to the Australian Taxation Office (ATO) is corrected too.

In one line

Pay the missing amount as a back payment as soon as you can, correct what was reported to the ATO, and keep a record of what happened.

Why this matters¶

Paying people correctly is one of your core duties as an employer. When an underpayment is found, sorting it out quickly is the right thing to do and keeps trust with your employee. Fair Work encourages employers to explain what happened, fix it, and record the back payment in the employee's pay records.

What you will learn¶

What causes an underpayment
How to fix one by paying the difference as a back payment
How to correct the ATO report and keep a record

Understanding the concept¶

An underpayment is simply a pay that came out too low. Common causes are missed hours, the wrong hourly rate, a forgotten allowance or penalty rate, or a mistake in how the pay was worked out.

Fair Work's guidance for employers is to pay the underpaid amount as soon as possible — either as part of the next pay cycle or as a separate payment. This catch-up amount is the back payment. Fair Work also suggests you explain to the employee what caused the underpayment and how you worked out the amount owing, and that you record the back payment in the employee's pay records.

When you pay a back payment, it still gets reported to the ATO like any other pay. The ATO explains that a back payment is reported through Single Touch Payroll based on what it is for — for example, ordinary earnings, overtime or an allowance — so the employee's income information stays accurate.

One thing this lesson can't tell you is the correct rate for your employee. Pay rates come from the relevant award, agreement or contract. If you are unsure what the right rate or entitlement is, check the award or ask Fair Work before you calculate the back payment.

For accountants & bookkeepers

Fair Work notes that in some cases an employer correcting an underpayment may also have to pay interest on the underpaid amount, and that a court can order this. Treatment depends on the facts. For reporting, the ATO does not give back payments a single catch-all category — most are reported as the relevant payment type (gross, overtime, allowance and so on), while certain older amounts that accrued more than 12 months earlier are reported as lump sum E. Confirm the correct treatment for the specific case before finalising.

Example¶

A small cafe pays Priya for a week, but the roster shows she worked two extra hours that were never entered. Her pay was too low by those two hours.

The owner works out the two hours at Priya's correct ordinary rate, explains to Priya what happened, and pays the difference as a back payment in the next pay. That back payment flows through to the ATO as part of Priya's earnings, so her income information is corrected. The owner keeps a note of what was missed, how it was worked out, and when it was paid.

Common mistakes¶

Delaying the fix — Fair Work's guidance is to pay it as soon as possible.
Guessing the correct rate instead of checking the award or asking Fair Work.
Paying the difference quietly but never correcting what was reported to the ATO.
Not keeping a record of the underpayment and how it was fixed.

How this works in myaccountant¶

In the app — you add the catch-up amount to a pay using a back-pay or adjustment pay item, then run the pay as normal. When you finalise the pay, myaccountant reports the updated amounts to the ATO through Single Touch Payroll, so the employee's income information is corrected. The payslip and pay records keep a record of the back payment for you.

Key points¶

An underpayment is a pay that came out too low — a common, fixable mistake.
Fix it by paying the difference as a back payment as soon as you can.
The back payment is reported to the ATO like any other pay.
Keep a record of what was missed, how you worked it out, and when you paid it.
The correct rate comes from the award, agreement or contract — check it.
If you are unsure of the right rate or entitlement, ask Fair Work.

Learn next¶

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

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