What Is Annual Income and How Do You Calculate It?
Knowing how much you make is helpful when you’re creating a budget, paying taxes or taking out a loan. One metric to consider when making these financial decisions is your annual income. This figure provides valuable insight into your financial health so you’re better prepared to evaluate your finances and set goals.
See: How To Build Your Savings From Scratch
What Is Annual Income?
Annual income is the total amount of money a person or a business earns during the year. This includes all money generated through all income sources, such as salaries and wages, rental properties, interest and dividends, business profits and retirement account distributions.
Individuals usually follow the calendar year (from Jan. 1 through Dec. 31) when calculating their annual income. Businesses may have a different fiscal year that can end on the last day of any month. For example, the fiscal year for one company may be July 1 through June 30, while another business may choose Oct. 1 as the start of the fiscal year.
To understand what annual income is and how it’s calculated, it helps to compare the metric to other terms used to describe income.
Gross Income vs. Annual Income
Gross income is the amount of money you earn before taking out deductions. If you’re employed by someone else, your gross income is equal to your salary or wages. The term can be easily confused with annual income because they are similar concepts. However, there is a key distinction between them. Gross income is what you report on your tax return and does not include forms of income that cannot be taxed.
Since annual income includes the money you bring in from all sources, it is possible for this figure to differ from gross income. The following example illustrates how this works:
Sara earns $75,000 through her employment at a local business. She also runs a small business on the weekends, which brings in an additional $25,000 each year. In this case, her gross income and annual income are the same: $100,000. If Sara also receives a $10,000 tax refund, her annual income is $110,000, but her gross income remains $100,000 because that’s what she earned through wages.
Net Income vs. Annual Income
The difference between net income and annual income is easier to see. Net income is the amount of money you have left over after deducting federal and state taxes, mandatory Social Security and Medicare taxes, retirement contributions and more. Some people refer to net income as take-home pay because it’s the amount deposited into their accounts or written on their paychecks.
Let’s say Sara’s employer deducts 30% from her bimonthly paycheck to cover taxes, retirement contributions and a health savings account. This leaves $2,187.50, her net income for the pay period. Her gross income for the period is $3,125.
Adjusted Gross Income vs. Annual Income
Like the term indicates, adjusted gross income is your gross income adjusted for tax purposes. The IRS lets you deduct from your gross income certain expenses, such as qualified educator expenses, loan interest, and contributions you make to your retirement accounts. This lowers your tax liability by reducing the amount the government can tax, and your AGI will never be greater than your gross income.
If Sara pays her student loan servicer $2,000 per year in interest, she can deduct that amount from her gross income. This leaves her with an adjusted gross income of $80,000. The IRS will calculate her income tax based on this figure instead of her gross income.
What Counts Toward Annual Income?
When calculating your annual income, it’s important to consider and include all income sources. This includes the following for an individual:
Salary or wages (money received from an employer or self-owned business)
Tips and overtime (including what is paid to you through a paycheck and cash)
Social Security and disability distributions
Alimony and child support ordered by a court
Interest and dividends earned through investments (stocks, bank accounts, certificates of deposit)
Capital gains (money earned when you sell an asset like a stock, vehicle or house)
Income from rental properties (before deducting maintenance expenses)
Income from businesses and side hustles
Tax refunds
How Do I Find My Annual Income?
To find your annual income, start by taking an inventory of all your income sources. Note how often you receive money from these sources.
It’s important to create a list of your income sources to ensure you’ve included all of them, and you may be surprised to learn how many income streams you have. You may choose to write this by hand or type the information into a spreadsheet (which can do the calculations for you). Working in a spreadsheet can also be more convenient since you can easily sort the information you enter, and it doesn’t leave a paper trail.
The formula for calculating annual income is simple. Multiply the amount of money you receive from each source by the following numbers:
Daily payments: 200
Hourly payments: 2,000
Monthly payments: 12
Weekly payments: 50
Example
Let’s say you earn $25 per hour at your job. To figure out your annual income, multiply $25 by 2,000. The result is $50,000. If you earn $25 per day, your annual income is $5,000 ($25 x 200).
This formula is also a quick way to determine how much money you expect to receive per pay period. For example, if you receive a job offer with an annual salary of $150,000, you can divide the total amount by 12 to figure out your monthly rate ($12,500 before deductions) and hourly rate ($75).
Final Take
Whether you’re an hourly or salaried employee or a business owner, knowing your annual income is important. This is why it’s a good idea to monitor this metric regularly (and not just at tax time). You’ll be able to notice trends and changes in your income stream and make adjustments to your budget as needed. This practice can help you maintain control over your finances and stay on track to reach your goals.
This article originally appeared on GOBankingRates.com: What Is Annual Income and How Do You Calculate It?
