Sometimes it is unclear how much money you will accumulate by the end of each year, but it can be easy to determine your annual income using a few simple calculations. It’s helpful to consider the wide variety of incomes that you might include in your annual income calculations. Below, we will look at the definition of annual income, the difference between gross and net income, and how to calculate your annual salary and income using straightforward calculations.
The Definition of Annual Income
Annual income is the total pay that you earn over the course of one year. There are two different definitions of which calendar dates to use as the start and end to one year, calendar year and fiscal year. A calendar year is defined as January 1st to December 31st of the same year. A fiscal year starts on October 1st and ends on September 30th of the following year. Fiscal year is what the U.S. government often goes by, so if you have a job within the government or one that contracts with the government it is likely that your companies follows the fiscal year definition in regards to pay periods.
Individuals and businesses may use either calendar year or fiscal year to calculate total income depending on the requirements of the entity requesting the annual income information. Most annual income calculations rely on the fiscal year calculation, however it’s good to check with your employer or the entity requesting the information which dates they would like included in your calculation.
Gross vs net income
Sometimes you will need to provide your annual gross income and net income when it comes to determining your annual income. Here is the difference between gross and net income:
Gross income is your annual income before you pay taxes and consider deductions. The highest number you see on your pay statement is usually your gross pay. This amount is the agreed-upon salary or hourly wage that your employer pays you. When reporting annual income it is common to provide your gross income, unless net income information is specified.
Net income is the final amount of pay received after taxes and deductions. This is the amount deposited into your bank account if payroll taxes are taken out by your employer. Your net pay usually appears in a large font on your pay statement and might be bolded to appear darker to make it easy to distinguish your net income from your gross income. A business's net income is the profit that the company makes once it removes all operating costs, including taxes and deductions.
What is included in annual income?
When going to file taxes, apply for a loan or welfare service, or submit information to a credit company or the government, you will probably be asked to calculate your annual income which includes a variety of types of income. Here are the various types of income you would need to include as your annual income:
- Salaried income: Salary or employment income includes your annual salary as agreed upon with your employer, any paid wages, overtime pay, tips and bonuses before deductions. Your salaried income is any pay that you generate through the work you do throughout the year, including your salary and any other monetary benefits that you receive from your employer.
- Self-employment or business income: Self-employment and business income include pay that you generate from a business you own and pay yourself through. Self-employment income includes online or direct sales, commissions, contract work, and the money generated from your business apart from your employment with another person or company.
- Social security and pensions: Social security is a government system that provides monetary assistance to people with inadequate or no income; it is reserved for retirees, disabled workers and their families. Pension plans are often offered by employers as a regular payment made during a person's retirement from an investment fund that the person or their employer has contributed while they were working. If you receive social security or pensions you will need to include those amounts when calculating your annual income.
- Welfare and disability assistance: Welfare is money offered through government assistance to any U.S. Citizens that need help meeting basic human needs. Disability is offered for those that have been disabled from birth or on the job and require government assistance to meet their basic needs. When calculating your annual income you will need to include any government assistance you receive.
- Child support and court-ordered alimony: If you receive any money from spousal or child support that is court-ordered for three years or more it is considered part of your annual income. Child support is not deductible by the payer and is not considered taxable income to the recipient, however it is still considered in the recipient’s gross income.
- Gained interest from investments: Any income you make from the sale of stocks, properties, or other investments is considered part of your annual income. Take a look at your savings accounts as well, because any interest gained from savings accounts is included in your yearly income.
- Capital gains: Capital gains include any income you make from the sale of an asset like a car, home, stock or product. Your profits before tax on any capital sale is considered part of your total annual income.
- Rental income: If you have owned a rental property for at least six months within the year, any rent collected from your property is considered as annual income. Don’t forget to add these extra forms of income to your annual income before you calculate the taxes you owe.
How to calculate your annual income
Your annual income is simply calculated by adding all of your pay for the year before taxes, however some of your income may require extra calculations in order to determine the total. For example if you work an hourly job part time for some of the year and then switch to a salary based job halfway through the year your annual income will change depending on the job and how much time is left in the year. Use the following steps to help calculate your annual income.
1. List all sources of income for the year
Make a list of all the types of income you receive. Some might be cash sources which you will need to keep track of as you receive pay, others might be one time gigs that you were paid for as a freelancer. One good way to see what your income sources were is to look at your bank statements and see what money was received and from which establishment. Next to each source of income include how much you made within the calendar year, or if you don’t know write how much you made per hour or per month.
2. Calculate yearly income
Whatever income is a full sum amount for the entire year add those amounts up first:
So if you know you received $5,000 in child support for the entire year, you sold a car at $14,000 and your salary job gave you $56,000 for the year then add those amounts to get a total of $75,000. If that was all the income you received you are done.
3. Calculate monthly income
Your monthly income might be received in the form of rental payments, or interest on savings or investment accounts, and can be calculated by multiplying the total you receive each month by the number of months in the year you received the income.
So if you opened up a savings account that receives $10 a month in interest at the beginning of the year and went up to $11 a month in June then you would multiply the first 5 months by $10 and multiply the following 7 months by $11, bringing your total to $127 for that source of income for the year.
Let’s say you also collect $2,000 a month in profit for a rental property you have owned for the entire year, multiply $2,000 by 12 months to total $24,000. So your total income for monthly sources was $24,127 for the year.
4. Calculate hourly income
For hourly income you might use your gross hourly wage when providing your salary history to a future employer since that is the amount of money your previous employer agreed to pay you. However your adjusted hourly wage provides a better representation of what money you take home from each paycheck.
To calculate your true hourly wage take the amount you receive on your paycheck and divide it by the number of hours worked within the pay period. So if you get $12 an hour before taxes, your paycheck might say $785 for a two week period, and you worked exactly 40 hours each week. Divide $785 by 80 hours (the total number of hours for both weeks), to get a true hourly wage of $9.81. This is the amount you receive per hour after taxes are taken out.
There are 52 workweeks in a year, so multiply your true hourly wage by the number of hours you work per week and multiply that by 52 weeks to calculate your annual income. For example, you make $9.81 per hour and work 40 hours per week. Your calculation would be $9.81 times 40 hours times 52 weeks for a rounded total of $20,405 of annual employment income.
6. Calculate your final annual income
The last step is to add all of the totals for your different types of income; annual, monthly, and hourly to calculate your total annual income.
For example if you received a yearly salary of $30,000 from your employer at a gym, but had rental income coming in at $24,000 for the year, and also had time for a part time job as a personal trainer outside of the gym making $12,000 for the year, then your annual income would be $66,000 for the year before taxes.
You will need to know your annual income when applying for loans, paying taxes, and calculating your budget. So be sure to take a look at what you made annually this year so that you can plan ahead and make good use of your time in the future.