A young woman sits on her sofa and works on calculating her income with pen and paper.

What is Annual Income?

5 min read

Last Updated: October 4, 2024

Table of contents

Key Takeaways

Annual income is the amount of money that you earn in a year.
Annual income can be gross (the amount of money you earn before your employer takes out taxes or insurance) 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.

It’s important to know what your yearly income is and how to calculate it. You’ll need this information when you file taxes, set your budget, or apply for a credit card or loan.

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. According to the Internal Revenue Service (IRS), the tax years you can use are either a calendar year (January 1 through December 31) or a fiscal year (typically October through September but it varies).

Not only that, but your income isn’t just the money that you make from your job. Income can include other sources, like your rental income or child support.

Types of annual income

When it comes to annual income, a lender may ask for your gross income or your net income. Sometimes a lender will ask for both.

If you’re filling out a credit card application, you’ll need either your gross or net income. It’s important that you know the difference. If the credit application doesn’t’ specify net or gross income, it’s a good idea to call the credit company just to be sure.

Gross Annual Income: Your gross income is the total income that you earn during the year before income tax and deductions. If your yearly salary is $60,000 before taxes, then $60,000 would be your gross income. Gross income is what your employer will quote you when given the base salary for a job.

Net Annual Income: Your net pay or 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 tax deductions, then $45,000 is your net income. Deductions can be things like 401K contributions and healthcare premiums, for example.

Adjusted Gross Income: You might have heard of this term when it comes to filing your federal income tax. You won’t usually need to use this number anywhere else. According to the IRS, this number is your gross income minus things like “half of the self-employment taxes you pay; self-employed health insurance premiums; contributions to certain retirement accounts (such as a traditional IRA); student loan interest paid; educator expenses” and more.

Did you know?

Even if you just want to know whether you’d be pre-approved for a credit card, your annual income is one of the factors used to determine whether you may qualify. You can find out when you use the Discover Credit Card Pre-Approval tool.

See if you're pre-approved

Your gross annual income is mostly useful for reporting purposes, such as reporting taxes to the IRS or getting a loan. But your net yearly income can be useful to help you with budgeting and planning for big purchases.

Other income sources 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.
Self-employment income	If you have a side hustle or gig where you make money.
Business income	If you make money from a business as an owner or part owner. Only include what you’re actually paid (individually), not the total amount your business brings in.
Rental income	If you own property that you rent out, the rent you collect is income.
Social Security	Any cash you receive from a Social Security benefit is a form of income.
Government assistance	Include unemployment, disability, welfare, or any other assistance.
Alimony or child support	If you receive child support or alimony, any money you get 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, the way you calculate your annual pay will differ if you’re paid weekly, biweekly, or monthly. But no matter how much or when you’re paid by your employer, you should multiply your payment amount by how many times per year you get paid.

So, if your employer pays you one check per month, you’ll multiply your monthly income by 12 pay periods. And if your employer pays you once every week, then you’ll multiply by 52 pay periods.

Gross annual income = monthly gross income x 12

Gross annual income = weekly gross income 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 annual 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 accordingly 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 useful when you’re filling out a credit application, but 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 different from the amount that you have in your bank account.

That’s why your annual net income is more useful for budgeting and planning purchases than your gross income. Since your net annual income shows the actual amount of money you take home after deductions, it gives you a better idea of your spending power.

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