What is Annual Income?
Key Points About: What is Annual Income and How to Calculate It
Annual income is roughly the amount of money that you earn in a year.
Annual income can be gross (the amount of money you earn before taxes are taken out) or net (the amount of money you take home after taxes).
Knowing your annual income is useful when you fill out credit applications or set your budget.
In the most basic terms, your annual income is the amount of money that you make in a year. But it can be more complicated than that. For one thing, the definition of a “year” can change. (The calendar year is January through December, but many businesses go by the fiscal year, which can vary but is typically October through September.) Not only that, your income isn’t just the money that you make from your job: it can include other sources, like your rental income or child support.
It’s important to know what your yearly income is and how to calculate for when you file taxes, set your budget, or apply for a credit card or loan.
Types of annual income
When it comes to annual income, you may be asked for your gross income or your net income, and sometimes you’ll be asked for both.
Gross Annual Income: Your gross income is the total income that you earn during the year before taxes. If your yearly salary is $60,000 before taxes, then $60,000 would be your gross income. (Gross income is what you’ll be quoted when given the base salary for a job.)
Net Annual Income: Your net income is the amount of money you earn yearly after taxes and other deductions. So, if your annual salary is $60,000 but you only take home $45,000 after taxes deductions, then $45,000 is your net income. (Deductions can be things like 401K contributions and healthcare premiums, for example.)
If you’re filling out a credit card application, you may be asked for your gross or net income, so it’s important that you know the difference and can give the correct number when asked.
Sometimes a credit application won’t specify if they want your net or gross income. It’s a good idea to call the credit company just to be sure.
Did you know?
Your gross annual income is mostly useful for reporting purposes, such as reporting taxes to the Internal Revenue Service (IRS) or getting a loan. But your net yearly income can be useful to help you with budgeting and planning for big purchases.
Streams of revenue that count toward your annual income
Your annual income can be more than just the paycheck that you receive from your job every week or month. There are other sources of income that you should take into consideration when calculating your annual income.
Non-salary payments from your employer: Non-salary payments include your tips, overtime pay, and bonuses. You should include these payments in your annual income number.
Self-employment income: If you have a side hustle or gig where you make money, you should also count that toward your annual income.
Business income: If you make money from a business as a part owner, should include this in your calculations as well. But only include what you’re actually paid (individually) after income tax, not the total amount your business brings in.
Rental income: If you own property that you rent to tenants, the rent you’re paid is considered income and should go in your annual earnings as well.
Social security: Any cash you receive from a social security benefit is also a form of income, so keep track of that as well.
Welfare, disability, or unemployment assistance: If you’re getting unemployment, disability, or any other assistance, this also counts toward your total annual income.
Alimony or child support: If you’re paid child support or alimony, any money you receive from that is a part of your annual income.
How to calculate your annual income
How you calculate your yearly income depends on how you get paid. For example, if you’re paid weekly, biweekly, or monthly, the way you calculate your annual pay will differ. But, no matter how much or when you’re paid by your employer, you will multiply your payment amount by how many times per year you get paid.
So, if you get paid monthly, you’ll multiply your monthly income by 12 pay periods. And if you get paid a weekly wage, then you’ll multiply by 52 pay periods.
Gross annual income = monthly gross income x 12
Gross annual income = weekly gross income pay x 52
What if you need your net income? If you know how much your paycheck is after deductions (you can usually find this on your paystub), you can find your net income through the same process.
Net annual income = net monthly pay x 12
Net annual income = net weekly pay x 52
Note: you should adjust the equation if you work fewer than 12 months or 52 weeks per year.
If you earn additional income, you should add it through the same method. For example, if you own a rental property and receive monthly payments, then you’ll add your annual rental revenue to the equation.
Why calculating your annual income is useful
Your annual income is not only useful when you’re filling out a credit application, you can also use it in daily life too.
Your gross pay is mostly for reporting. For example, when you file your taxes, need to get a loan, or need to pay child support, you’ll report your annual gross income.
But as you know, your gross income is not the same as the amount that you have in your bank account. That’s why your annual net income is useful for budgeting and planning purchases. Since your net annual income shows the actual amount of money you take home after deductions, you’ll have a better idea of your spending power versus using your gross income.
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