What Is Annual Income? How To Calculate It

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Your 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.

How To Calculate Annual Income: A Step-by-Step Guide

Calculating your annual income takes just a few steps.

Step 1: Inventory All Your Income Sources

Create a list of your income sources to ensure you’ve included all of them — you may be surprised to learn how many income streams you have. You can write this by hand or enter it into a spreadsheet or online annual income calculator or worksheet.

Income sources might include any or all of the following:

• Salary
• Freelance payments
• Bonuses
• Rental income
• Interest from savings
• Social Security and other government benefits
• Pensions
• Investment income, such as from assets you sell or dividends you withdraw rather than reinvest
• Alimony
• Child support

Also note how often you’re paid, or the time period on which pay is based. For example, you might earn freelance income on an hourly basis, wages on a weekly or biweekly basis and Social Security on a monthly basis.

Step 2: TurnYour Earnings Into a Yearly Figure

Now that you’ve listed all of your income sources and how often you receive them, you can use simple multiplication to convert each one to an annual amount.

Here’s an example of what that might look like:

Step 3: Add It All Up for Your Total Annual Income

After you’ve converted each income source to its annual equivalent using the multipliers, simply add all those annual amounts together. The total is your annual income.

Annual Income Example

Here’s an annual income example to illustrate how the calculation works.

Say you earn $25 per hour at your job, and you work 40 hours per week.

To figure out your annual income:

• $25 per hour x 40 hours per week x 52 weeks = $52,000 per year

If you are paid daily and want to figure out annual income:

• $200 per day x 260 work days = $52,000 per year

Here’s another scenario. Say your annual salary is $144,000 per year. You can divide that by 12 to get your monthly earnings, before tax withholding.

To convert annual income to monthly, if your salary is $144,000:

• $144,000 / 12 = $12,000 per month

To convert that to an hourly rate:

• $144,000 / 2,080 hours = $75 per hour

Good To Know

Most people usually follow the calendar year, which begins on Jan. 1 and goes until Dec. 31, to calculate 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.

Gross Income vs. Annual Income

Gross income is the amount of money you receive before taking out taxes. If you’re employed by someone else, your gross income is equal to your salary or wages. Freelance payments, rental income, investment income and the other income sources listed above also count as gross income.

Put simply, gross income is a category of annual income. While either can trickle in weekly or monthly, both terms refer to the amount you bring in over the course of a year.

Here’s an example:

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. Her gross income is$100,000. Her annual income is also $100,000.

If your reason for calculating annual income — as opposed to gross income specifically — is to evaluate your spending and saving habits, you might include a tax refund as annual income for the year you received it.

For example, if Sara received a $2,000 federal tax refund, she could include it in her annual income for the sake of adding up all the money that came into her household that year. In that case, her annual income would be $102,000 but her gross income would remain at $100,000.

The reason is that in most cases, a refund is income from the previous year that you essentially loaned to the IRS — the refund returns your own money to you. However, it can be helpful to look at how you use refunds and other windfalls to make sure you’re not squandering them.

Net Income vs. Annual Income

Net income is another category of annual income. It’s the amount of money you have left over after federal and state taxes, mandatory Social Security and Medicare taxes, retirement contributions and other withholdings. Some people refer to net income as take-home pay because it’s the amount deposited into their accounts or written on their paychecks.

Here’s an example: Sara’s employer pays her biweekly. Her gross pay is $2,885, based on her $75,000 salary), and her employer withholds 30% from each paycheck to cover taxes, retirement contributions and a health savings account. This leaves her with $2,019.50 in net income for the pay period.

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 certain expenses and adjustments from your gross income. Common deductions include student loan interest and contributions you make to your retirement accounts. They lower your tax liability by reducing your taxable income.

If, for example, Sara pays $2,000 per year in student loan interest, she can deduct that amount from her gross income. This leaves her with an adjusted gross income of $98,000. The IRS will tax her that on amount instead of on her $100,000 gross income.

Is Annual Income Monthly or Yearly?

The word annual refers to things that happen once per year, so annual income is yearly income. Most people receive the bulk of their income on a weekly, biweekly or monthly basis, but applying the formulas described earlier aggregate those payments on an annual, or yearly, basis. Annual income is the one most often used for financial reporting and planning.

How To Put Your Annual Income to Work

Whether you’re an hourly or salaried employee or a business owner, knowing your annual income is important because it gives you a high-level view of your finances.

Monitor it regularly — and not just at tax time — so you can identify spending trends and saving and investing opportunities to build wealth faster.

This practice can help you maintain control over your finances and stay on track to reach your goals.

Allison Hache contributed to the reporting for this article.

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