What is Annual Income? How to Calculate Your Salary

Real Money Talk close-up-man-working

Annual income is the amount of income you earn in one fiscal year. Your annual income includes everything from your yearly salary to bonuses, commissions, overtime, and tips earned.

You may hear it referred to in two different ways: gross annual income and net annual income. Gross annual income is your earnings before tax, while net annual income is the amount you’re left with after deductions. This topic is important if you’re a wage earner or a business owner, particularly when it comes to filing your taxes and applying for loans.

In this article, we’ll break down what annual income is, how to calculate your income, and why understanding your annual income is important.

What is Annual Income?

high-angle-shot-team-working

Annual income refers to how much income you earn in one year before deductions. It’s helpful to remember the definition of annual income by simply breaking it down by word–annual means year and income means money earned. You’ll need your net annual income and household income in situations such as creating a budget, applying for a loan, or to prove child support and alimony.

What Does Annual Income Include?

Annual income includes:

  • Wages, salary, overtime pay, commissions, and tips or bonuses before deductions
  • Any social security, retirement funds, or pensions
  • Welfare or disability assistance
  • Court-ordered alimony or child support payments
  • Net income from operating a business or a second job
  • Interest, dividends, and any other net income from properties

Net Annual Income

Net annual income is your annual income after taxes and deductions. This is what you’d use to make a budget, since it’s what you have available for essentials or living expenses, such as housing, utilities, food, or transportation.

In business, net income is referred to as profit, the money a company has left after they’ve paid all operating costs.

Household Income

Household income is the total gross income of all members in a household. It includes any person 15 years or older, and individuals don’t need to be related to makeup your household income. It’s typically used as an indicator of an area or city’s standard of living. Lenders assess risks and base how much they will lend you off your household income.

What is Gross Annual Income?

high-angle-shot-designers-working-together

Personal gross annual income is the amount on your paycheck before taxes and deductions. When you accept a job offer, this is what’s listed on your offer letter or contract.

When preparing and filing your income tax return, gross annual income is the base number you should start with. If you know your gross income, you’ll have a better idea of what taxes you will either owe or be returned. Your gross annual income is also the number that’s used to qualify you for a loan or a credit card.  

Gross business income is listed on your business tax return. Gross income in business is calculated as the total company sales minus the cost of goods sold. This number is what investors look at when assessing a potential company.

How to Calculate Annual Income

close-up-female-accountant

Generally, you can calculate your annual income with a very simple formula. Convert your hourly, daily, weekly, or monthly wages with the formula below to get your annual income.

annual-income-calculator
*This formula assumes you work an average of 40 hours per week and 50 weeks per year.

For example, if John earns an hourly wage of $25.00 and works 8 hours per day, 5 days per week, and 50 weeks per year, this equates to an annual salary of $50,000.

Why is Calculating Your Annual Income Useful?

young-couple-relaxing

Your annual income and household income are good indicators of your financial health. Your financial state impacts your way of living and purchase decisions. You can identify your expenses, create a budget, and better understand where and what you spend your money on if you have a clear picture of your annual income.

When it comes to your mortgage, lenders not only focus on your annual income, but that you’ve earned a steady consistent income for at least 2 years. The consistency of your income along with your debt-to-income ratio tells lenders how able you are to make regular payments. What is debt-to-income ratio? This number compares your monthly debt payment to your monthly gross income. The lower your ratio, the more likely you are to be approved for a loan.

Whether it’s applying for a personal loan, a new credit card, or preparing your annual tax return, knowing your annual income can save you both time and stress. It’s important to understand your annual income and how to calculate it when evaluating the health and future of your personal or business finances.

Sources: Accounting Tools | Investopedia | CFPB

Tags:

Leave a Reply

Your email address will not be published. Required fields are marked *