What Is Annual Income? Definition And How To Calculate Your Income


Your annual income will be required for your paperwork when you’re paying your taxes or applying for a credit card. Yes! That’s how important an annual income is, and the more reason you should know how to calculate it. Still, there are different types of income, and knowing them would make your calculations easier and more accurate.

So, in this article, we’ll be exploring what annual income is, how to calculate your annual income, and every other thing you need to know about annual income. 

Everyone with a job has an annual income. You may or may not know the total amount of money you make each year (which sums up to be your annual income). But that doesn’t matter because you can figure out your annual income using simple calculations. If you don’t know how to calculate your annual income, then keep reading. 

What Is Annual Income?

Annual income means the total amount of money you earn in a year before deductions. To remember this definition in simple terms, remember that the word annual means year and the word income means money earned. So, putting them together gives you – money earned in a year.

This type of income is usually calculated based on a calendar year, that is, from 1st January of a year to 31st December of the same year. However, the United States government calculates annual income based on a fiscal year, that is, from 1st October of a year to 30th September of the next year. 

SEE ALSO: Salary Vs Hourly Employees: Difference And Similarities

Gross Vs Net Income

Under the annual income, we have two other incomes – gross income and net income. You may need to provide your gross and net income when calculating your annual income. See their difference below. 

Gross income

Gross income refers to your annual income before taxes and other deductions are made. Therefore, your gross income is just all the money you’ve made in a year before you pay your taxes and other deductions are made. So, if you are paid $5,000 every fortnight, your gross income remains $5,000 (the amount you earn before taxes and deductions).

Related Post: What Is Discretionary Income? All You Need To Know

Net income

Net income refers to your annual income after your taxes and deductions have been made. For instance, if you earn $5,000 every fortnight and your taxes and deductions sum up to $1,000, it means your net income every fortnight will be $4,000. Your net income can be used for your living expenses.

What Is Included In Annual Income?

There are other types of income that can be included in your annual income. We’ll be discussing them below.

1. Employment income and salary

Your employment income includes your wages, salary, tips, bonuses, and overtime pay. Whether you work just a salary job or an hourly job, or even both, all the earnings are included. All your earned income for the year is included as your annual income. 

2. Self-employment income 

If you’re self-employed or you own a business, all the money you generate from them is also part of your annual income. Self-employment income could be from self-owned business, freelance business, contract work, or commissions made from sales of a product.

3. Capital gains

Capital gains are the proceeds you get or the money you make from selling an asset (car, home, etc). The money generated from here is considered part of your annual income. 

4. Pensions and social security

Pensions and social security are given by your previous employer and the government. It is also considered as part of your annual income. Pensions and social security are only given to retirees, disabled, families of retired employees, deceased, and disabled workers. 

SEE ALSO: How Much Can You Earn While on Social Security in 2022

5. Court-ordered alimony and child support 

The alimony and child support you receive from your previous or current spouse is also part of your yearly income.

6. Welfare and disability

If you receive money from the government for welfare and disability, this money will be added to your annual income. Welfare and disability assistance are given by the government to aid with basic human needs. 

7. Income and interest earned from investments

If you earn money from your investments (properties, bonds, stocks, etc), it will be included when calculating your yearly income. The interest gotten from your savings are also part of your yearly income.

8. Rental properties income 

If you rent out your property, the income you earn contributes to your annual income. The only exception to this is if you’ve owned the property for six months or less.

How To Calculate Annual Income

Calculating your annual income might not be as simple as you think, you may need to do more calculations. But you’ll be shown how to do so. So check out how to calculate your annual income below.

Firstly, write out a list of all your sources of income (the above list should guide you). Ensure you specify the amount you earn from each source. 

SEE ALSO: What is Net Investment Income tax? Overview and How it works

Calculating your yearly income

This involves summing up all your income for the year. For example, if you earned $2,000 from rental properties, $12,000 from pensions and social security, and $500 from capital gains. If you add them together, you will get $14,500.

Calculating your monthly income

If your monthly income is not up to a complete year, then calculating it wouldn’t be difficult. All you have to do is this since a complete year has 12 months, then multiply your monthly income by 12. Here’s a practical example, if you have the following monthly earnings – $6,000 from self-employment income and $10,000 from income gained from investments. Then sum them up, you will get $16,000. Multiply $16,000 by 12, you will get $192,000. This is your estimated annual income.

Calculating your hourly wage

If you earn an income from a job that you started (not up to a month), you can calculate it. You can calculate it based on your weekly work hours and hourly wage. First things first, put down your hourly wage, and to ascertain your hourly wage, you ought to receive a paycheck (your paycheck contains your net income).

Figure out the number of hours you worked to receive that amount of money. Then divide your income by how many hours you worked. The answer you get is your hourly wage. 

Here’s an example, let’s say you earn $20 per hour (gross income) and you work 40 hours each week. You’re given a paycheck for two weeks which contains a total amount of $700 and you worked 80 hours. Now divide $700 by 80 hours to figure out your actual hourly wage. Therefore your hourly wage is $8.75.

Read Also: How to Earn Free Money Quickly with no Stress

Calculating your hourly income

You can calculate your annual income from your hourly income. There are two ways you can calculate your annual income using your hourly income – your gross hourly wage, and your adjusted hourly wage. However, this is determined by the information required. If you’re to present to your future employer your salary history, you may want to use your gross hourly wage in calculating. But if you’re asked to present proof of the money you take home, you may want to use your adjusted hourly wage in calculating. 

So multiply how many hours you work each week by your hourly wage, then you will get an answer. Now, multiply that answer you got by 52 (based on a 52-week year). Therefore, if you earn $8.75 per hour and you work 40 hours per week, you will calculate it by multiplying $8.75 and 40 hours and 52 weeks. That is, 8.75 x 40 x 52 = $18,200

Calculating your final annual income

Lastly, add your hourly, monthly, and yearly income calculations together. The total is your annual income. For instance, if you sum up your hourly income of $18,200 and your monthly income of $192,000, and your yearly income of $14,500, you will get $224,700. This is your total gross annual income. 

Frequently Asked Questions On Annual Income

Annual income can be classified in two ways – gross annual income and net annual income. Your gross annual income is your annual income before your taxes and other deductions are taken out, while your net annual income is your annual income after taxes and other deductions are taken out.

Household income refers to the total amount of gross income of every member in a household. These persons must not be related by blood. If you’re 15 years of age and above, you’ll be considered when calculating a household income. Household income shows the standard of living of a city/area. 

Business gross income is the difference between the total income amount of a business and the cost of goods (sold). That is the total income earned minus the cost of goods (sold). Investors will require this information when checking out potential companies. 

It could be difficult to calculate your annual income if you’re between the ages of 18 and 21. However, it can be calculated using the stipend you receive from scholarship(s) and the money your parents deposit into your account for your expenses. 

Annual income is your total income over a year, hence it is called annual. 

Final thoughts

There’s a whole lot involved when it comes to calculating or knowing your annual income. Although it may seem difficult, certain circumstances demand that you provide your annual income. You will be required to provide it when applying for a credit card; when paying your taxes; when a future employer requests it. That’s how important your gross annual income is.

Meanwhile, you can sort out other personal and financial needs using your net annual income. 

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