Annual Income: What It Is and How To Calculate It

Updated July 17, 2023

Illustration of a scale with money weighed against time as represented by a clock.

Whether you’re reporting your taxes, applying for a new loan or creating a personal budget, you might be interested in knowing your annual income. This figure includes all the money you earn in one year from your salary and other sources. Learning what this amount includes and how to calculate it can ensure you better understand your financial health.

In this article, we define annual income, including the difference between gross and net income, explain income and share steps for calculating your yearly income.

What is annual income?

Annual income is the total amount of money you earn during one year. It includes your salary and other payment sources such as Social Security checks and welfare assistance. In some cases, your annual income might be for a calendar year, which is from January 1 to December 31 of the same year.

Annual incomes can also account for the money you earn during a fiscal year, which runs from October 1 to September 30. Individuals and businesses may calculate either calendar year or fiscal year income depending on the entity’s requirements for annual income information. The majority of annual income calculations rely on the fiscal year calculation.

Related: Salary vs. Hourly Earnings: What Are the Differences?

Gross versus net annual income

Gross income is your annual income before taxes and deductions. Banks often use this figure to determine whether they can approve you for a loan or credit card. Net income is your annual income after taxes and deductions. An individual’s net income is the income that’s available for living expenses, making it an important figure when determining your personal budget.

Related: Gross Pay vs. Net Pay: Definitions and Examples

What does annual income include?

Annual income includes a variety of types of income. Lenders, credit companies or government institutions might require your annual income calculation. Here are the various types of income you can include as your annual income:

  • Salary and employment income: Employment income includes your salary, paid wages, overtime pay, tips and bonuses. All the income that you generate through the work you do throughout the year is part of your annual income.

  • Self-employment income: Self-employment income includes any income that you generate from businesses you own. Self-employment income can come from contract work, sales commissions and the money generated from a business separate from your employment with another person or company.

  • Social Security and pensions: Your annual income includes any money you receive from Social Security and pensions. Social Security and pensions are typically for retirees, individuals with disabilities and the families of retired or deceased individuals.

  • Welfare and disability assistance: Welfare and disability assistance include any money that you receive from government programs.

  • Court-ordered alimony and child support: Money you receive from spousal support and child support is part of your annual income as long as it was court-ordered for at least three years.

  • Gained interest and income from investments: Income from the sale of stocks, properties or other income-generating investments is part of annual income. Your yearly income also includes any interest earned from savings accounts.

  • Capital gains before tax: Capital gains are any monetary gains you make from selling an asset. Your yearly income includes profits you make from selling a car, home, stock or product.

  • Rental income: Your annual income may include any collected rental income from a property you’ve owned for at least six months.

Related: How To Share Your Salary History

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How to calculate annual income

While some parts of your annual income are easy to calculate with simple addition, other income may require extra calculations. For instance, If you start a new job part-way through the year, you would factor only part of that salary into your yearly income. Here’s how to calculate your annual income.

1. Make a list of all income sources

Write a list of all the types of income from the list above that are relevant to you. Be sure to include how much you make from each source. If you’re unsure whether a source qualifies, consider asking the entity requesting your annual income.

Related: What Is Earned Income?

2. Yearly income calculation

You can add any income you’ve received for a full year. For example, if you’ve made $100 from interest payments, $1,000 from capital gains and $12,000 from child support, you can add these figures together for a total of $13,100.

Related: 5 Common Examples of Taxable Earned Income

3. Monthly income calculation

Any new income you receive monthly but haven’t yet reached a full year requires a simple calculation. To find your estimated annual income, multiply your monthly income by 12 since there are 12 months in a year.

For example, if you make $2,000 per month from rental income and $500 per month from self-employment income, add both together for a sum of $2,500 per month. Then, multiply your $2,500 per month by 12 months to get an estimated yearly income of $30,000.

Related: Gross Income vs. Adjusted Gross Income: What’s the Difference?

4. Hourly wage calculation

For income that you receive from employment that began less than a month ago, you can use a calculation based on your hourly wage and weekly work hours. First, make a note of your hourly wage.

You must receive at least one paycheck to determine your true hourly wage. The money you receive from your paycheck represents your net income. Make a note of the money you receive from one paycheck.

On your pay stub, determine how many hours you worked to obtain that amount of money. Divide your payment by the number of hours worked in that period. This gives you your true hourly wage.

For example, you make $12 per hour before taxes and work 40 hours per week. You received a paycheck for two weeks of work worth $672 and worked 80 hours. You divide $672 by 80 hours to determine that your true hourly wage after taxes is $8.40.

Related: Income Tax, Tax Brackets and Deductions Explained

5. Hourly income calculation

Using your hourly wage, you can then determine your annual employment income. Depending on the circumstance and information required, you will use either your adjusted hourly wage or your gross hourly wage.

You might use your adjusted hourly wage when you need to show proof of take-home money. However, you might use your gross hourly wage when providing your salary history to a future employer since that’s the amount of money your previous employer paid you.

Your adjusted hourly wage provides a better representation of what money you take home from each paycheck. Multiply your hourly wage by the number of hours you work per week.

Then, multiply that number by 52 to represent fifty-two workweeks in a year. For example, you make $8.40 per hour and work 40 hours per week. Your calculation would be $8.40 times 40 hours times 52 weeks for a total of $17,472 of annual employment income.

Related: Earned Income vs. Gross Income: Definitions, Calculations and Differences

6. Final annual income calculation

The final step is adding your yearly, monthly and hourly income calculations together to get your annual income. For example, you add your yearly income sum of $13,100 to your monthly income calculations of $30,000 and your hourly income calculation of $17,472 for a total of $60,572 of gross annual income. Ensure all the calculations perform either consider your gross or net annual income to maintain consistency.

Related: Understanding the W-2 Form for Taxes (Plus How To Read It)

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