What is annual income? (+ Calculation example)

January 08, 2023  •  Reading Time: 8 min.

Annual income refers to the total amount of money that somebody earns in a year.

It is a common way to measure and compare financial stability and wealth, and it is often used in the process of obtaining loans, credit cards, and other financial products. In this article, we will:

  • Explain 🔍 in detail what annual income is (we will take a look at the difference between annual gross income and annual net income),
  • look at 🧐 how to calculate annual income in general, and
  • provide an 💲 example of an annual income calculation, so you can get a better idea of the concept.

What does annual income include?

To begin, let’s define annual income more precisely.

At its most basic level, annual income is the sum of all the money a person earns in a year. This includes any salary or wages that they receive from their job, as well as additional income they may earn through other sources such as investments, dividends, or rental properties.

📝 Note: In the United States, annual income is typically reported in terms of gross income.

Concept of annual salaries with banknotes

What is gross annual income?

Gross annual income refers to the total amount of money earned in a fiscal year before taxes and deductions are taken out. It includes salary, wages, commissions, bonuses, rental income, and investment income.

Gross annual income calculation example

To calculate gross annual income, you simply need to add up all the money you receive from all your sources over the course of a year.

For example, if you work a full-time job that pays $50,000 per year, and you also receive $5,000 in rental income and $1,000 in investment income, your gross annual income would be $50,000 + $5,000 + $1,000 = $56,000.

📝 Note: It’s important to always keep in mind that gross income does not take into account any taxes or deductions that may be taken out of your paycheck.

Employee using an annual income calculator to see how much will end up in their bank account

What is net annual income?

Net annual income is the amount of money a person earns in a year after taxes and other deductions.

📝 Note: This is the actual monetary sum available to a person to cover their living expenses and financial obligations.

Annual net income calculation example

To calculate your annual income, you need to first determine your gross annual income.

Then, you have to subtract any taxes and deductions that are taken out of your paycheck. These generally include federal and state income taxes, Social Security and Medicare taxes, and other subtractions such as health insurance premiums or 401(k) contributions.

For example, let’s say that you have a gross annual income of $50,000, and you pay $10,000 in taxes and $2,000 in other deductions over the course of a year. Your net annual income would be $50,000 – $10,000 – $2,000 = $38,000.

📝 Note: The annual net income is a more accurate representation of a person’s financial situation than gross annual income, as it takes into account the actual monetary amount available to them after taxes and deductions.

Wage earner who is checking her retirement funds and savings accounts

Let’s now take a closer look at how to calculate your annual income:

How can you calculate annual income?

There are actually several different ways to calculate annual income, depending on the context and the type of income being considered.

Some of the most common methods include:

  1. Salary or hourly wages: For most people, their primary source of annual income is the salary they receive from their job. To calculate this type of income, you simply need to multiply the number of hours worked in a year by the hourly wage. For example, if you work 40 hours per week and make $20 per hour, your annual income from wages would be 40 hours/week * $20/hour * 52 weeks/year = $41,600 per year.
  2. Commission or bonuses: Some jobs pay a portion of their employee’s income in the form of commissions or bonuses. These additional payments can significantly increase a person’s annual income, and they are calculated by multiplying the commission rate or bonus amount by the total amount of sales or other performance metric that the employee achieved. For example, if you work in sales, earn a 5% commission, and you make $100,000 in sales in a year, your annual income from commissions would be $100,000 * 5% = $5,000.
  3. Rental income: If you own rental properties, the income you receive from these properties is also considered part of your annual income. To calculate this type of income, you simply need to add up all the money you receive in rent payments over the course of a year. For example, if you have a rental property that generates $1,000 in rent per month, your annual rental income would be $1,000/month * 12 months/year = $12,000 per year.
  4. Investment income: Many people also earn income from investments such as stocks, bonds, or other financial instruments. This type of income can include dividends, interest payments, and capital gains. To calculate your annual investment income, you need to add up all the money you receive from these sources over the course of a year. For example, if you receive $500 in dividends from your stocks and $1,000 in interest from your bonds, your annual investment income would be $500 + $1,000 = $1,500.
Business man who is counting his investment income

Now that we have a better understanding of what annual income is and how it is calculated, let’s look at an example to help illustrate these concepts.

Calculation example of annual income

Let’s say that Maria is a teacher who makes $50,000 per year in salary and also earns $5,000 a year in rental income from a property she owns. In addition, Maria has a small investment portfolio that generates $1,000 in dividends and $2,000 in interest payments each year. To calculate Maria’s annual income, we are adding up all these sources of income:

  • Salary: $50,000
  • Rental income: $5,000
  • Dividends: $1,000
  • Interest: $2,000

Total annual income: $58,000

Now let’s say that Maria is married and her husband, Alex, is a software engineer who makes $90,000 per year. Together, Maria and Alex have a combined annual income of $148,000 ($58,000 + $90,000). This number is often used by lenders and other financial institutions to determine their creditworthiness and their ability to make loan payments.

Why is it worth calculating your annual income?

Calculating your annual income is worthwhile for a number of reasons.

Some of the key benefits include:

  1. Financial planning: Knowing your annual income is an essential step in creating a budget and planning for your financial future. It can help you understand how much money you have available to cover your living expenses, save for retirement, and pursue other financial goals.
  2. Creditworthiness: By calculating your annual income, you can get a better sense of whether you are likely to be approved for a loan or credit card, and at what interest rate.
  3. Comparison: Calculating your annual income can also be useful for comparing your financial situation to others, such as industry standards. This can help you gauge your relative financial stability and identify areas where you may need to improve.
  4. Tax planning: Understanding your annual income can also be helpful for tax planning purposes. By knowing how much money you earn in a year, you can determine how much you may owe in taxes and plan accordingly.

📝 Note: Calculating your annual income is a truly valuable practice that can help you better understand your financial situation and make informed financial decisions. It can also be useful for creditworthiness, tax planning purposes, or to prove alimony or child support.

Illustration of tax planning concept

What is annual income? – Conclusion

Annual income is an important financial concept that refers to the total amount of money earned in a year.

It is calculated by adding up all sources of income, including salary, wages, commissions, bonuses, rental income, and investment income. Knowing your annual income can help you make informed financial decisions and plan for your future.

💡 Tip: We’ve put together a complete guide that covers important financial topics for your job. For example, check out “how to pay taxes as a freelancer” or our “salary history” article.

This information is especially useful for those just starting their careers!

Blue envelope with cash

What is annual income? – FAQ

What is an annual base salary?

An annual base salary is the amount of money that an employee is paid by their employer on an annual basis, not including bonuses, commissions, or other additional forms of compensation.

What is meant by annual income?

Your annual income consists of your yearly salary plus any bonuses, commissions, overtime pay, and tips.

What does median annual salary mean?

The median annual salary is the midpoint of all salaries, meaning that half of all salaries are above the median and half are below.

What is an example of annual income?

An example of annual income is the salary a person receives from their job. For example, if someone works 40 hours per week at an hourly wage of $20, their annual income would be 40 hours/week * $20/hour * 52 weeks/year = $41,600 per year.

How do you calculate an annual salary from the monthly income?

Simply multiply the monthly salary by the number of months in a year. For example, if someone’s monthly salary is $2,000, their yearly income would be $2,000/month * 12 months/year = $24,000/year.

How long do you have to work if you want to earn $100,000 a year?

You need to divide your annual salary goal by your hourly wage. So if you want to earn $100,000 per year, and you make $50 per hour, you would need to work 2,000 hours per year to reach your goal.